VANGUARD/WINDSOR FUNDS INC, 485APOS, 1997-02-21

VANGUARD/WINDSOR FUNDS INC
485APOS, 1997-02-21

Previous: WHITEHALL CORP, DEFS14A, 1997-02-21

Next: PROVIDENT NATIONAL ASSURANCE CO SEPARATE ACCOUNT B, N-30D, 1997-02-21

<PAGE> 1

================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A
REGISTRATION STATEMENT (NO. 2-14336) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [X]
POST-EFFECTIVE AMENDMENT NO. 88 [X]
AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940

AMENDMENT NO. 91

VANGUARD/WINDSOR FUNDS, INC.
(FORMERLY, THE WINDSOR FUNDS, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
IT IS PROPOSED THAT THIS REGISTRATION STATEMENT BECOME EFFECTIVE:

on February 28, 1997 pursuant to paragraph (a) of Rule 485.

REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24(f)(2) NOTICE FOR THE YEAR ENDED OCTOBER 31, 1996, ON DECEMBER 30, 1996.

================================================================================
<PAGE> 2

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................. Cover Page
Item 2. Synopsis.................................... Not Applicable
Item 3. Condensed Financial Information............. Financial Highlights
Item 4. General Description of Registrant........... The Fund's Objectives; Who Should
Invest; Investment
Strategies; Investment Policies;
Investment Limitations; Investment
Performance; General Information
Item 5. Management of the Fund...................... The Fund and Vanguard
Item 6. Capital Stock and Other Securities.......... Buying Shares; Redeeming Shares; Share
Price; Dividends, Capital Gains and
Taxes; Distribution Options; General
Information
Item 7. Purchase of Securities Being Offered........ Cover Page; Buying Shares
Item 8. Redemption or Repurchase.................... Redeeming Shares
Item 9. Legal Proceedings........................... Not Applicable
</TABLE>

<TABLE>
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................. Cover Page
Item 11. Table of Contents........................... Cover Page
Item 12. General Information and History............. Investment Objectives and Policies;
Item 13. Investment Objective and Policies........... Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Fund...................... Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities...............................
Management of the Company
Item 16. Investment Advisory and Other Services...... Management of the Company
Item 17. Brokerage Allocation........................ Not Applicable
Item 18. Capital Stock and Other Securities.......... Financial Statements
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered.................
Purchase of Shares; Redemption of
Shares, Dividends, Capital Gains and
Taxes
Item 20. Tax Status.................................. (Prospectus)
Item 21. Underwriters................................ Not Applicable
Item 22. Calculations of Performance Data............
Item 23. Financial Statements........................ Financial Statements
</TABLE>
<PAGE> 3

VANGUARD/
WINDSOR FUND

Prospectus
February 28, 1997

This prospectus contains financial data for the Fund through the
fiscal year ended
October 31, 1996.

[Graphic]

[Vanguard Logo]
<PAGE> 4
Vanguard/Windsor Fund A Growth and Income Stock Mutual Fund

INVESTMENT OBJECTIVES AND POLICIES

Vanguard/Windsor Fund (the "Fund") is a diversified mutual fund, a part of
Vanguard/Windsor Funds, Inc., an open-end investment company.

The Fund seeks to provide long-term growth of capital by investing mainly in
the equity securities of large and medium-size companies whose stocks are
considered to be undervalued by the Fund's adviser and out of favor with
investors. The Fund's secondary objective is to provide some dividend income.

The Fund is currently closed to new investors. Existing shareholders may
purchase additional Fund shares, but may not invest more than $25,000 each year.

IT IS IMPORTANT TO NOTE THAT THE FUND'S SHARES ARE NOT GUARANTEED OR INSURED
BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT. AS WITH ANY INVESTMENT
IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE FLUCTUATIONS IN MARKET VALUE, YOU
COULD LOSE MONEY BY INVESTING IN THE FUND.

FEES AND EXPENSES

Vanguard/Windsor Fund is offered on a no-load basis, which means that you pay no
sales commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.

ADDITIONAL INFORMATION ABOUT THE FUND

A Statement of Additional Information (dated February 28, 1997) containing more
information about the Fund is, by reference, part of this prospectus and may be
obtained without charge by writing to Vanguard or by calling our Investor
Information Department at 1-800-662-7447.

WHY READING THIS PROSPECTUS IS IMPORTANT

This prospectus explains the objectives, risks, and strategies of
Vanguard/Windsor Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk" explanations along the way. Reading the
prospectus will help you to decide whether the Fund is the right investment for
you. We suggest that you keep it for future reference.

These securities have not been approved or disapproved by the Securities and
Exchange Commission or any other state securities commission, nor has the
Securities and Exchange Commission or any state commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.

CONTENTS

Fund Expenses 2

Financial Highlights 3

A Word About Risk 4

The Fund's Objectives 4

Who Should Invest 4

Investment Strategies 5

Investment Policies 7

Investment Limitations 8

Investment
Performance 9

Share Price 9

Dividends, Capital
Gains, and Taxes 10

The Fund and
Vanguard 10

Investment Adviser 11

General Information 12

Investing with
Vanguard 13

Services and
Account Features 13

Types of Accounts 14

Distribution Options 15

Buying Shares 15

Redeeming Shares 17

Fund and Account
Updates 19

Glossary Inside Back Cover

<PAGE> 5
Fund Profile Vanguard/Windsor Fund

WHO SHOULD INVEST (PAGE 4)

- Investors seeking a growth and income stock mutual fund as part of a
balanced and diversified investment program.

- Investors seeking growth of their capital over the long term -- at
least five years.

- Investors seeking some dividend income.

WHO SHOULD NOT INVEST

- Investors unwilling to accept significant fluctuations in share price.

RISKS OF THE FUND (pages 4 - 8)

The Fund's total return will fluctuate within a wide range, so an investor could
lose money over short or even extended periods. The Fund is subject to manager
risk (the chance that poor security selection will cause it to lag the stock
market as a whole) and objective risk (the chance that returns from the types of
stocks that the Fund invests in -- attractively priced or "value" stocks -- will
trail returns from the overall stock market). Because the Fund can invest a
portion of its assets in companies based outside the United States, it is
exposed to several risks unique to foreign securities; see page 7 for details.

DIVIDENDS AND CAPITAL GAINS (page 10)

Dividends are paid in June and December. Capital gains, if any, are paid in
December.

INVESTMENT ADVISER (page 11)
Wellington Management Company, LLP, Boston, MA.

MINIMUM INITIAL INVESTMENT: The Fund is not open to new investors.

INCEPTION DATE: October 23, 1958

NET ASSETS AS OF 10/31/96: $15.8 billion

FUND'S EXPENSE RATIO FOR THE YEAR ENDED 10/31/96: 0.31%

LOADS, 12B-1 MARKETING FEES: None

SUITABLE FOR IRAS: Yes

NEWSPAPER ABBREVIATION: Wndsr

VANGUARD FUND NUMBER: 022

ACCOUNT FEATURES (page 13)
- - Telephone Redemption
- - Vanguard Direct Deposit Service(sm)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)

AVERAGE ANNUAL TOTAL RETURNS --
PERIODS ENDED OCTOBER 31, 1996

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
----------------------------
<S> <C> <C> <C>
Vanguard/Windsor Fund 23.2% 16.7% 13.4%
S&P 500 Index 24.1 15.5 14.7
</TABLE>

QUARTERLY RETURNS (%) 1987 - 1996 (intended to show volatility of returns)

In evaluating past performance, remember that it is not indicative of future
performance and that returns from stocks were high during the periods shown
relative to longer-term historical averages. Performance figures include the
reinvestment of any dividends and capital gains distributions. The returns are
net of expenses, but they do not reflect income taxes a taxable investor would
have incurred. Note, too, that both the return and principal value of an
investment will fluctuate so that investors' shares, when redeemed, may be worth
more or less than their original cost.

1
<PAGE> 6
PLAIN TALK ABOUT
The Costs of Investing

Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.

PLAIN TALK ABOUT
Fund Expenses

All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard/Windsor Fund's expense ratio in fiscal year 1996 was 0.31%,
or $3.10 per $1,000 of average net assets. The average growth and income equity
fund had expenses in 1996 of 1.23%, or $12.30 per $1,000 of average net assets,
according to Lipper Analytical Services, Inc., which reports on the mutual fund
industry.

FUND EXPENSES

The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Fund.
As noted in this table, you do not pay fees of any kind when you buy, sell, or
exchange shares of the Fund:

SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None

The next table illustrates the operating expenses that you would incur as a
shareholder of the Fund. These expenses are deducted from the Fund's income
before it is paid to you. Expenses include investment advisory fees as well as
the costs of administering the Fund, maintaining accounts, providing shareholder
services, and other activities. The expenses shown in the table are for the
fiscal year ended October 31, 1996.

ANNUAL FUND OPERATING EXPENSES

<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.18%
Investment Advisory Expenses: 0.10%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.01%
Total Other Expenses: 0.03%
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.31%
</TABLE>

1 YEAR 3 YEARS 5 YEARS 10 YEARS
$3 $10 $17 $39

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.

2
<PAGE> 7
FINANCIAL HIGHLIGHTS

PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Fund began fiscal 1996 with a net asset value (price) of $15.55 per share.
During the year, the Fund earned $.43 per share from investment income (interest
and dividends) and $2.85 per share from investments that had appreciated in
value or that were sold for higher prices than the Fund paid for them. Of those
total earnings of $3.28 per share, $1.84 was returned to shareholders in the
form of distributions ($.46 in dividends, $1.38 in capital gains). The earnings
($3.28 per share) less total distributions ($1.84 per share) resulted in a share
price of $16.99 at the end of the fiscal year, an increase of $1.44 per share
(from $15.55 at the beginning of the period to $16.99 at the end of the period).
Assuming that the shareholder had reinvested the distributions in the purchase
of more shares, the total return from the Fund was 23.16% for the year.
As of October 31, 1996, the Fund had $15.8 billion in net assets; an expense
ratio of 0.31% ($3.10 per $1,000 of net assets); and net investment income
amounting to 2.75% of its average net assets. It sold and replaced securities
valued at 34% of its total net assets.

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 15.55 $ 14.55 $ 14.95 $ 12.37 $12.79 $9.72 $15.17 $14.13 $14.22 $13.85
INVESTMENT OPERATIONS
Net Investment Income .43 .44 .44 .37 .49 .58 .74 .71 .66 .78
Net Realized and
Unrealized Gain (Loss)
on Investments 2.85 1.86 .42 2.98 .50 3.55 (4.59) 1.51 2.33 (.11)
--------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 3.28 2.30 .86 3.35 .99 4.13 (3.85) 2.22 2.99 .67
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.46) (.44) (.37) (.39) (.57) (.74) (.75) (.63) (.87) (.30)
Distributions from
Realized Capital Gains (1.38) (.86) (.89) (.38) (.84) (.32) (.85) (.55) (2.21) --
--------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.84) (1.30) (1.26) (.77) (1.41) (1.06) (1.60) (1.18) (3.08) (.30)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 16.99 $ 15.55 $ 14.55 $ 14.95 $12.37 $12.79 $ 9.72 $15.17 $14.13 $14.22
============================================================================================================================
TOTAL RETURN 23.16% 17.80% 6.35% 28.29% 9.30% 44.69% -27.93% 17.05% 27.01% 4.62%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $15,841 $13,008 $11,406 $10,537 $8,250 $7,859 $5,841 $8,313 $5,920 $4,848
Ratio of Expenses to
Average Net Assets 0.31% 0.45% 0.45% 0.40% 0.26% 0.30% 0.37% 0.41% 0.46% 0.43%
Ratio of Net Investment
Income to Average
Net Assets 2.75% 3.01% 3.11% 2.68% 3.89% 4.84% 5.82% 5.07% 5.08% 4.86%
Portfolio Turnover Rate 34% 32% 34% 25% 32% 36% 21% 34% 24% 46%
Average Commission
Rate Paid $0.0579 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>

From time to time, the Vanguard funds advertise yield and total return figures.
Yield is an historical measure of dividend income, and total return is a measure
of past dividend income (assuming that it has been reinvested) and capital
appreciation. Neither yield nor total return should be used to predict the
future performance of a fund.

3
<PAGE> 8
PLAIN TALK ABOUT
VALUE FUNDS AND
GROWTH FUNDS

Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize companies that, considering their
assets and earnings history, are attractively priced; these companies often pay
regular dividend income to shareholders. Growth funds focus on companies that,
due to their strong earnings and revenue potential, offer above-average
prospects for capital growth, with less emphasis on dividend income. Value and
growth stocks have, in the past, produced similar long-term returns, though each
has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains but are less tolerant of share-price fluctuations, while growth
funds appeal to investors who will accept more volatility in hope of a greater
increase in share price or who prefer a higher portion of the Fund's returns to
come as capital gains, which may be taxed at lower rates than dividend income.

PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM

Vanguard/Windsor Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.

A WORD ABOUT RISK

This prospectus describes the risks that you will face as an investor in
Vanguard/Windsor Fund. It is important to keep in mind one of the main axioms of
investing: the higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in Windsor Fund, you
should also take into account your own tolerance for the daily fluctuations of
the stock market.

Look for this "warning flag" symbol [Warning Flag Icon] throughout the
prospectus. It is used to mark detailed information about each type of risk that
you, as a shareholder of the Fund, will confront.

THE FUND'S OBJECTIVES

Vanguard/Windsor Fund seeks to provide long-term growth of capital and, as a
secondary objective, some dividend income. These objectives are fundamental,
which means that they cannot be changed unless a majority of shareholders vote
to do so.

[Warning Flag Icon] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE
FOLLOWING PAGES, YOUR INVESTMENT IN THE FUND, AS WITH
ANY INVESTMENT IN COMMON STOCKS, COULD LOSE MONEY.

WHO SHOULD INVEST

Vanguard/Windsor Fund may be suitable for you if:

- You wish to add a growth and income mutual fund to your existing
holdings, which could include other stock -- as well as bond, money
market, and tax-exempt -- investments.

- You want a value-oriented investment that seeks to provide long-term
growth as well as some dividend income.

This Fund is not an appropriate investment if you are a market-timer. Investors
who engage in excessive in-and-out trading activity generate additional costs
that are borne by all of the Fund's shareholders. To minimize such costs, which
reduce the ultimate returns achieved by you and other shareholders, the Fund has
adopted the following policies:

- The Fund reserves the right to reject any purchase request -- including
exchanges from other Vanguard funds -- that it regards as disruptive to
the efficient management of the Fund. This could be because of the
timing of the investment or because of a history of excessive trading
by the investor.

4
<PAGE> 9
- There is a limit on the number of times you can exchange into or out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD
section).

- The Fund reserves the right to stop offering shares at any time.

INVESTMENT STRATEGIES

This section explains how Vanguard/Windsor Fund's adviser pursues the objectives
of long-term capital growth and some dividend income. It also explains several
important risks -- market risk, objective risk, manager risk, country risk, and
currency risk -- faced by investors in the Fund. Unlike the Fund's investment
objectives, these investment strategies are not fundamental and can be changed
by the Fund's board of directors without shareholder approval. However, before
making any important change in its strategies, the Fund will give shareholders
30-days notice, in writing.

MARKET EXPOSURE

The Fund is a value-oriented growth and income fund that invests mainly in
large- and mid-capitalization common stocks that offer favorable prospects for
capital growth and dividend income. At times, the Fund may also invest in
preferred stock and in securities that are convertible into common stock.

[Warning Flag Icon] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE
POSSIBILITY THAT STOCK PRICES OVERALL WILL DECLINE OVER
SHORT OR EVEN EXTENDED PERIODS. STOCK MARKETS TEND TO MOVE
IN CYCLES, WITH PERIODS OF RISING STOCK PRICES AND PERIODS
OF FALLING STOCK PRICES.

U.S. STOCK MARKET RETURNS (1926 - 1996)

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst - 43.3 - 12.5 - 0.9 3.1
Average 12.7 10.4 10.8 10.8
</TABLE>

PLAIN TALK ABOUT
COSTS AND MARKET TIMING

Some investors try to profit from "market timing" -- switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who did not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.

PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND
SMALL-CAP STOCKS

Stocks of publicly traded companies -- and mutual funds that hold these stocks
- -- can be classified by the companies' market value, or capitalization. Vanguard
defines large-capitalization, or large-cap, funds as those holding stocks of
companies with a median total market value of their outstanding shares exceeding
$5 billion. Mid-cap funds hold stocks of companies with a median market value
between $1 billion and $5 billion. Small-cap funds hold stocks of companies with
a median market value of up to $1 billion. Historically, large-cap funds have
exhibited lower volatility than mid-cap and small-cap funds.

5
<PAGE> 10
PLAIN TALK ABOUT
PRICE/EARNINGS RATIOS

A widely used measure of common-stock valuation is the price/earnings (P/E)
ratio. The P/E ratio is simply a stock's current price divided by its earnings
per share from the past year (or sometimes its projected earnings for the coming
year). In general, a lower P/E ratio indicates that a stock is out of favor with
investors and is expected to have slow future growth in profits. A higher P/E
ratio indicates that investors expect rapid growth in a company's profits. Keep
in mind, however, that these expectations can sometimes prove incorrect, and
that there is no "ideal" P/E ratio.

PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION

In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund has
about 25% of its assets invested in its ten largest holdings, while some less
diversified mutual funds have 40% or more of their assets invested in the stocks
of just ten companies.

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
1996. For example, while the average return on stocks for all of the 5-year
periods was 10.4%, returns for these 5-year periods ranged from a - 12.5%
average (from 1928 through 1932), to 23.9% (from 1950 through 1954). These
average returns reflect past performance and should not be regarded as an
indication of future returns from either the stock market as a whole or this
Fund in particular.

Finally, because Vanguard/Windsor Fund does not hold the same securities held
in the S&P 500 Index or any other market index, the performance of the Fund will
not mirror the returns of any particular index.

[Warning Flag Icon] THE FUND IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE
POSSIBILITY THAT RETURNS FROM THE TYPE OF STOCKS THAT THE
FUND INVESTS IN -- ATTRACTIVELY PRICED OR "VALUE" STOCKS --
WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. DIFFERENT
TYPES OF STOCKS TEND TO GO THROUGH CYCLES OF OUTPERFORMANCE
AND UNDERPERFORMANCE IN COMPARISON TO COMMON STOCKS IN
GENERAL. THESE CYCLES HAVE, IN THE PAST, LASTED FOR AS LONG
AS SEVERAL YEARS.

SECURITY SELECTION

Wellington Management Company, LLP (WMC), adviser to the Fund, selects what it
considers to be undervalued securities of large- and mid-capitalization
companies. Undervalued stocks are generally those that are out of favor with
investors and currently trading at prices that, the adviser feels, are below
what the stocks are worth in relation to their earnings. These stocks typically
- -- but not always - - have lower-than-average price/earnings (P/E) ratios and
higher-than-average dividend yields.

A stock's value is the key element in WMC's selection process. WMC considers
several fundamental factors, including the stock's projected growth rate,
earnings potential, dividend yield, and P/E ratio. WMC then selects the stock if
it has strong prospects for capital appreciation, but is currently trading at a
price that is lower than what is expected of a stock with such potential. WMC
sets a price that it feels more accurately reflects the stock's overall worth
and, when the stock reaches that predetermined price, it will be sold. This
strategy is known as "buying into weakness and selling into strength."

The Fund's top ten holdings (which amounted to 38% of the Fund's total net
assets) as of October 31, 1996, follow.

1. Chrysler Corp.
2. Citicorp
3. Seagate Technology
4. Ford Motor Co.
5. Burlington Resources, Inc.
6. Georgia-Pacific Corp.
7. USX-Marathon Group
8. Compaq Computer Corp.
9. Golden West Financial Corp.
10. Reynolds Metals Co.

6
<PAGE> 11
Keep in mind that, because the makeup of the Fund changes daily, this listing
is only a "snapshot" at one point in time. Note, too, that the Fund's relatively
low level of diversification means that there is a greater chance that the poor
performance of a single stock could hurt the Fund.

The Fund is run by WMC according to traditional methods of active investment
management, which means securities are bought and sold according to WMC's
judgments about companies and their financial prospects, and about the stock
market and the economy in general.

[Warning Flag Icon] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE
POSSIBILITY THAT WMC MAY DO A POOR JOB OF SELECTING STOCKS.

PORTFOLIO TURNOVER

Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long they have been held. The Fund's
average turnover rate for the past ten years has been about 32%. (A turnover
rate of 100% would occur, for example, if the Fund sold and replaced securities
valued at 100% of its total net assets within a one-year period.)

INVESTMENT POLICIES

Besides investing in undervalued common stocks, the Fund may follow a number of
investment policies to achieve its objectives.

The Fund may invest as much as 20% of its assets in securities of companies
based outside the United States and may engage in currency transactions. These
securities can be traded in either U.S. or foreign markets.

[Warning Flag Icon] THE FUND IS SUBJECT TO COUNTRY RISK AND CURRENCY RISK.
COUNTRY RISK IS THE POSSIBILITY THAT POLITICAL EVENTS (SUCH
AS A WAR), FINANCIAL PROBLEMS (SUCH AS GOVERNMENT DEFAULT),
OR NATURAL DISASTERS (SUCH AS AN EARTHQUAKE) WILL WEAKEN A
COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT COUNTRY TO
LOSE MONEY. CURRENCY RISK IS THE POSSIBILITY THAT A
"STRONGER" U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS
INVESTING OVERSEAS. GENERALLY, WHEN THE DOLLAR RISES IN
VALUE AGAINST A FOREIGN CURRENCY, YOUR INVESTMENT IN THAT
COUNTRY LOSES VALUE BECAUSE ITS CURRENCY IS WORTH FEWER
U.S. DOLLARS. ON THE OTHER HAND, A "WEAKER" DOLLAR
GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING
FOREIGN INVESTMENTS.

The Fund may invest in money market instruments, fixed-income securities,
convertible securities and other equity securities, such as pre-ferred stock.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or other illiquid securities.

PLAIN TALK ABOUT
PORTFOLIO TURNOVER

Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
actively managed funds investing in common stocks is 78%.

PLAIN TALK ABOUT
THE RISKS OF
INTERNATIONAL INVESTING

Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than in the U.S. These
factors, among others, could negatively impact the returns Americans receive
from a foreign investment. For more information, see the Statement of Additional
Information.

7
<PAGE> 12
PLAIN TALK ABOUT
DERIVATIVES

A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives -- some of which
can carry considerable risks.

PLAIN TALK ABOUT
CASH RESERVES

With mutual funds, holding cash reserves -- or "cash" -- does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash, such as those described in the prospectus glossary. (Most mutual funds
keep at least a small percentage of assets in cash to accommodate shareholder
redemptions.) While some funds strive to keep cash levels at a minimum and to
always remain fully invested in stocks, other funds allow investment advisers to
hold up to 20% of a fund's assets in cash reserves.

The Fund may also invest in derivatives.

[Warning Flag Icon] THE FUND RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT,
IN STOCK FUTURES AND OPTIONS CONTRACTS, WHICH ARE
TRADITIONAL TYPES OF DERIVATIVES.

Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a portfolio. The Fund will not use
futures and options for speculative purposes or as leveraged investments that
magnify the gains or losses of an investment. Rather, the Fund will keep
separate cash reserves or other liquid portfolio securities in the amount of the
obligation underlying the futures or options contract. Only a limited percentage
of the Fund's assets -- 5% -- may be applied to futures contract deposits and no
more than 20% of total assets may be committed to such contracts.

The reasons for which the Fund will invest in futures and options are:

- To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in stocks.

- To make it easier to trade.

- To reduce costs by buying futures instead of actual stocks when futures
are cheaper.

The Fund will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Fund may hold cash reserves without
limit. No more than 35% of the Fund's assets may be invested in short-term
fixed-income securities for purposes other than taking a temporary defensive
position.

INVESTMENT LIMITATIONS

To reduce risk and maintain diversification, the Fund has adopted limits on some
of its investment policies. Specifically, the Fund will not:

- Invest more than 25% of its assets in any one industry.

- Borrow money, except for the purpose of meeting shareholder requests to
redeem shares.

With respect to 75% of its assets, the Fund will not:

- Invest more than 5% in the securities of any one company.

- Buy more than 10% of the outstanding voting shares of any company.

The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Fund's shareholders.

8
<PAGE> 13
INVESTMENT PERFORMANCE

Vanguard/Windsor Fund invests primarily in common stocks, so its performance is
closely correlated to the performance of the overall stock market. Historically,
stock market performance, both domestic and foreign, has been characterized by
sharp up-and-down swings in the short term and by more stable growth over the
long term.

AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED OCTOBER 31, 1996

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS 20 YEARS 25 YEARS
<S> <C> <C> <C> <C> <C> <C>
VANGUARD/WINDSOR FUND 23.2% 15.6% 16.7% 13.4% 16.7% 15.0%
S&P 500 INDEX 24.1% 17.7% 15.5% 14.7% 14.5% 12.7%
</TABLE>

The results shown above represent the Fund's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information on the unmanaged Standard & Poor's 500 Composite Stock Price Index.
The chart does not make any allowances for federal, state, or local income taxes
that shareholders must pay on a current basis.

SHARE PRICE

The Fund's share price, also called its net asset value, is calculated each
business day after the close of trading (generally 4 p.m. Eastern time) of the
New York Stock Exchange. The net asset value per share is calculated by adding
up the total assets of the Fund, subtracting all of its liabilities, or debts,
and then dividing by the total number of Fund shares outstanding:

TOTAL ASSETS - LIABILITIES
NET ASSET VALUE =_______________________________________
NUMBER OF SHARES OUTSTANDING

The daily net asset value, or NAV, is useful to you as a shareholder because
the NAV, multiplied by the number of Fund shares you own, gives you the dollar
amount you would have received had you sold all of your shares back to the Fund
that day.

The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading Vanguard Group. Different newspapers use
different abbreviations of the Fund's name, but the most common is WNDSR.

PLAIN TALK ABOUT
Past Performance

Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.

9
<PAGE> 14
PLAIN TALK ABOUT
Distributions

As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that a fund earns from its holdings as well as
interest it receives from its money market and bond investments. Capital gains
are realized whenever the fund sells securities for higher prices than it paid
for them. These capital gains are either short-term or long-term depending on
whether the fund held the securities for less than or more than one year.

PLAIN TALK ABOUT
"Buying a Dividend"

Unless you are investing in a tax-deferred retirement account (such as an IRA),
it is not to your advantage to buy shares of a fund shortly before it makes a
distribution, because part of your investment will come back to you as a taxable
distribution. This is known as "buying a dividend." For example: on December 15,
you invest $5,000, buying 250 shares for $20 each. If the fund pays a
distribution of $1 per share on December 16, its share price would drop to $19
(not counting market change). You would still have only $5,000 (250 shares x $19
= $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
would owe tax on the $250 distribution you received, even if you had reinvested
the dividends in more shares. To avoid "buying a dividend," check a fund's
distribution schedule before you invest.

DIVIDENDS, CAPITAL GAINS, AND TAXES

Each June and December, the Fund distributes to its shareholders virtually all
of its income from interest and dividends. Any capital gains realized from the
sale of securities are distributed in December. Your distributions of income and
capital gains will be automatically invested in more shares of the Fund, unless
you elect to receive these distributions in cash. In either case, distributions
of dividends and capital gains that are declared in December -- even if paid to
you in January -- are taxed as if they had been paid to you in December.
Vanguard will process your dividend distribution and send you a statement each
year showing the tax status of all your distributions.

- The dividends and short-term capital gains that you receive are taxable
to you as ordinary dividend income. Any distributions of net long-term
capital gains by the Fund are taxable to you as long-term capital
gains, no matter how long you've owned shares in the Fund. Both
dividends and capital gains distributions are taxable to you whether
received in cash or reinvested in additional shares. Although the Fund
does not seek to realize any particular amount of capital gains during
a year, such gains are realized from time to time as byproducts of the
ordinary investment activities of the Fund. Consequently, distributions
may vary considerably from year to year.

- If you sell or exchange your shares, any gain or loss you have is a
taxable event, which means that you may have a capital gain to report
as income, or a capital loss to report as a deduction, when you
complete your federal income tax return.

- Distributions of dividends or capital gains, and capital gains or
losses from your sale or exchange of Fund shares, may be subject to
state and local income taxes as well.

The tax information in this prospectus is provided as general information and
will not apply to you if you are investing in a tax-deferred retirement account,
such as an IRA. You should consult your own tax adviser about the tax
consequences of an investment in the Fund.

THE FUND AND VANGUARD

Vanguard/Windsor Fund is a member of The Vanguard Group, a family of more than
30 investment companies with more than 90 distinct investment portfolios and
total net assets of more than $240 billion. All the Vanguard funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.

Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each fund pays its
allocated share of The Vanguard Group's costs.

A list of the Fund's directors and officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.

10
<PAGE> 15
PLAIN TALK ABOUT
Vanguard's Unique Corporate Structure

The Vanguard Group, Inc. is the only MUTUAL mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.

PLAIN TALK ABOUT
The Fund's Adviser

Wellington Management Company, LLP, is an investment counseling firm that was
founded in 1931; it currently manages more than $130 billion in assets. The
manager responsible for WMC's strategy for Vanguard/Windsor Fund is:

CHARLES T. FREEMAN, Senior Vice President and Partner of WMC; 30 years
investment experience, 28 years with WMC and Vanguard/Windsor Fund; B.S. and
M.B.A. from the University of Pennsylvania.

Mr. Freeman was appointed Fund manager in January 1996, following the
retirement of John C. Neff, who had managed the Fund since 1964.

INVESTMENT ADVISER

The Fund employs Wellington Management Company, LLP (WMC), 75 State Street,
Boston, MA 02109, as its investment adviser. WMC manages the Fund subject to the
control of the officers and directors of the Fund.

WMC is paid a quarterly advisory fee based on an average of the Fund's
month-end net assets during that quarter:

<TABLE>
<CAPTION>
------------------------------------------------
AVERAGE ASSETS MANAGED BASIC FEE
------------------------------------------------
<S> <C>
First $17.5 billion 0.125%
Over $17.5 billion 0.100
</TABLE>

Beginning April 30, 1999, WMC's basic advisory fee may be adjusted based on the
total return performance of the Fund as compared to that of the Standard &
Poor's 500 Index. Under the fee schedule, WMC's basic fee may be increased or
decreased by as much as 67% for the first $17.5 billion of average net assets
managed during the period and by 90% for average net assets over $17.5 billion.
Until this new schedule goes into effect, WMC's basic fee will follow transition
rules set forth by the Securities and Exchange Commission and described in the
Fund's Statement of Additional Information.

For the fiscal year ended October 31, 1996, the total fee paid by
Vanguard/Windsor Fund to its adviser was approximately $13 million, which
included a base fee of more than $18 million and a decrease, based on adviser
performance, of $4.42 million. (These fees were calculated under WMC's former
advisory agreement with Vanguard/Windsor Fund, which was replaced on June 1,
1996.)

The current fee agreement with WMC authorizes it to choose brokers and dealers
to handle the purchase and sale of the Fund's securities, and directs WMC
to get the best available price and most favorable execution from these
brokers with respect to all transactions. At times, WMC may choose brokers who
charge higher commissions in the interest of obtaining better execution of a
transaction. If more than one broker can obtain the best available price and
favorable execution of a transaction, then WMC is authorized to choose a broker
who, in addition to executing the transaction, will provide research services
to WMC or the Fund. However, WMC will not pay higher commissions specifically
for the purpose of obtaining research services. The Fund may direct WMC to use
a particular broker for certain transactions in exchange for commission rebates
or research services provided to the Fund.

The board of directors may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser as either a
replacement for WMC or as an additional adviser. However, no such change would
be made before giving shareholders 30-days notice, in writing.

GENERAL INFORMATION

Vanguard/Windsor Fund is one of two Funds of Vanguard/Windsor Funds, Inc., which
is organized under the laws of the state of Maryland. The other Fund is
Vanguard/Windsor II (which is open to all investors). The two Funds are combined
under one corporation for administrative purposes, but for investment management
purposes operate like separate companies.

Shareholders of Vanguard/Windsor Fund have rights and privileges similar to
those enjoyed by other corporate shareholders. For

11
<PAGE> 16
example, shareholders will not be responsible for any liabilities of the
corporation. If any matters are to be voted on by shareholders (such as a change
in a fundamental investment objective or the election of directors), each share
outstanding at that point would be entitled to one vote. Annual meetings will
not be held by the Fund except as required by the Investment Company Act of
1940. A meeting will be scheduled (for example, to vote on the removal of a
director) if the holders of at least 10% of the Fund's shares request a meeting
in writing.

12
<PAGE> 17
INVESTING WITH VANGUARD

At this time, shares of Vanguard/Windsor Fund are not being offered or sold to
new investors. As a result, many of the services described on the following
pages are for current shareholders only. Current shareholders may make
additional investments, but the total amount made during a calendar year may not
exceed $25,000.

The following sections of the prospectus briefly explain the many services we
offer you as a Vanguard/Windsor Fund shareholder. Booklets providing detailed
information are available on the services marked with a [Book Icon]. Please call
us to request copies.

SERVICES AND ACCOUNT FEATURES

Vanguard offers many services that make it convenient to buy, sell, or exchange
shares.

TELEPHONE REDEMPTIONS Automatically set up for this Fund
(SALES AND EXCHANGES) unless you notify us otherwise.

VANGUARD DIRECT DEPOSIT Automatic method for depositing
SERVICE your paycheck or U.S. government
[Book Icon] payment (including Social Security
and government pension checks) into
your account.

VANGUARD AUTOMATIC EXCHANGE Automatic method for moving a fixed
SERVICE amount of money from one Vanguard
[Book Icon] fund account to another.*

VANGUARD FUND EXPRESS Electronic method for buying or
[Book Icon] selling shares. You can transfer
money between your Vanguard fund
account and an account at your
bank, savings and loan, or credit
union on a systematic schedule or
whenever you wish.*

VANGUARD DIVIDEND EXPRESS Electronic method for transferring
[Book Icon] dividends and/or capital gains
distributions directly from your
Vanguard fund account to your bank,
savings and loan, or credit union
account or to another Vanguard fund
account.

VANGUARD BROKERAGE SERVICES
(VBS) A cost-effective way to trade
[Book Icon] stocks, bonds, and options on major
exchanges, Nasdaq, and other
domestic over-the-counter markets
at reduced rates, and to buy and
sell shares of non-Vanguard mutual
funds. Call VBS (1-800-992-8327)
for additional information and the
appropriate forms.

*Can be used to "dollar-cost average" [Book Icon] or to contribute to an
IRA or other retirement plan.

Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
13
<PAGE> 18
TYPES OF ACCOUNTS

INDIVIDUAL OR OTHER ENTITY

Currently, shares of Vanguard/Windsor Fund are not being offered or sold to new
investors; however, the following accounts may be established through a transfer
of Windsor Fund shares. Call Client Services for more information.

FOR ONE OR MORE PEOPLE To open an account in the name of
[Book Icon] one (individual) or more (joint
tenants) people. $3,000 minimum
initial investment.

FOR A MINOR CHILD To open an account as an UGMA/UTMA
[Book Icon] (Uniform Gifts/Transfers to Minors
Act). Age of majority and other
requirements are set by state law.
$1,000 minimum initial investment.

FOR HOLDING TRUST ASSETS To invest assets held in an
[Book Icon] existing trust. $3,000 minimum
initial investment.

FOR THIRD-PARTY TRUSTEE To open an account as a retirement
RETIREMENT INVESTMENTS trust or plan based on an existing
(Vanguard is not the custodian corporate or institutional plan.
or trustee.) These accounts are established by
the custodian or trustee of the
existing plan.

FOR AN ORGANIZATION To open an account as a
corporation, partnership, or other
entity. These accounts may require
a corporate resolution or other
documents to name the individuals
authorized to act. $3,000 minimum
initial investment.

RETIREMENT

FOR AN INDIVIDUAL RETIREMENT To open a retirement account in the
ACCOUNT (IRA) name of an individual. IRAs can be
(Vanguard Fiduciary Trust established with a contribution, a
Company is the custodian.) direct roll-over from an
employer's plan, such as a 401(k),
or an asset transfer or rollover
from another financial institution,
such as a bank or mutual fund
company. $1,000 minimum initial
investment.

FOR A SIMPLIFIED EMPLOYEE To open a retirement account in the
PENSION PLAN ACCOUNT (SEP-IRA) name of an employee. SEPs allow
(Vanguard Fiduciary Trust employers to make deductible
Company is the custodian.) contributions directly to IRAs
established by their employees. A
SEP can be established by people
who are self-employed,
small-business owners,
partnerships, or corporations.

FOR A QUALIFIED RETIREMENT To open a retirement account that
PROGRAM ACCOUNT allows small-business owners or
(Vanguard Fiduciary Trust people who are self-employed to
Company can be the trustee.) make tax-deductible retirement
contributions for themselves and
their employees into Profit-Sharing
and Money Purchase Pension (Keogh)
plans.

Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
14
<PAGE> 19

Types of Accounts (continued)

FOR A 403(b)(7) CUSTODIAL ACCOUNT To open a retirement account that allows
(Vanguard Fiduciary Trust employees of tax-exempt institutions
Company is the custodian.) (for example, schools or hospitals) to
make pre-tax retirement contributions.

DISTRIBUTION OPTIONS

You can receive distributions of dividends and/or capital gains in a number of
ways:

REINVESTMENT Dividends and capital gains are
automatically reinvested in additional
shares of the Fund unless you request a
different distribution method.

DIVIDENDS IN CASH Dividends are paid by check and
mailed to your account's address of
record, and capital gains are reinvested
in additional shares of the Fund.

DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains are
IN CASH paid by check and mailed to your
account's address of record.

To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, or to another Vanguard fund
account, see Vanguard Dividend Express under "Services and
Account Features."

BUYING SHARES

At this time, shares of Vanguard/Windsor Fund are not being offered or sold to
new investors. Current shareholders may make additional investments, but the
total amount made during a calendar year may not exceed $25,000.

You buy your shares at the Fund's next-determined net asset value after
Vanguard receives your request, provided we receive your request before 4 p.m.
Eastern time (the close of trading on the New York Stock Exchange). The Fund is
offered on a no-load basis, meaning that you do not pay sales commissions or
12b-1 marketing fees.

ADD TO AN EXISTING ACCOUNT

MINIMUM INVESTMENT $100 by mail or exchange; $1,000 by wire.

BY MAIL Mail your check with an Invest-By-Mail form
[Envelope Icon] detached from your confirmation statement to
FIRST-CLASS mail to: the address listed on the form.
The Vanguard Group
P.O. Box 2600 Make your check payable to: The Vanguard
Valley Forge, PA 19482 Group-22

All purchases must be made in U.S. dollars,
and checks must be drawn on U.S. banks.

EXPRESS or REGISTERED mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087

IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.

Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273

15
<PAGE> 20
Buying Shares (continued)

ADD TO AN EXISTING ACCOUNT

BY TELEPHONE Call Vanguard Tele-Account* 24 hours a
[Telephone Icon] day--or Client Services during business
1-800-662-6273 hours--to exchange from another Vanguard
Vanguard Tele-Account(R) fund account with the same registration
(name, address, taxpayer I.D., and
account type).

1-800-662-2739 Use Vanguard Fund Express (see "Services
Client Services and Account Features") to transfer
assets from your bank account. Call
Client Services before your first use to
verify that this option is in place.

*You must obtain a Personal
Identification Number through
Tele-Account at least seven days before
you request your first exchange.

IMPORTANT NOTE: Once a telephone transaction has been approved by you and a
confirmation number assigned, it cannot be revoked. We reserve the right to
refuse any purchase.

BY WIRE Call Client Services to arrange your
[Wire Icon] wire transaction.
Wire to:
CoreStates Bank, N.A. Wire transactions are not available for
ABA 031000011 retirement accounts.
CoreStates No 01019897
[Temporary Account Number]
Vanguard/Windsor Fund
[Account Registration]
Attention: Vanguard

AUTOMATICALLY Vanguard offers a variety of ways that
[Automatic Icon] you can add to your account
automatically. See "Services and Account
Features."

You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, your redemption proceeds will not be paid to
you until payment for your purchase is collected, which may take up to ten
calendar days.

NOTE: If you buy Fund shares through a registered broker-dealer or investment
adviser, the broker-dealer or adviser may charge you a service fee.

Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273

16
<PAGE> 21
REDEEMING SHARES

IMPORTANT TAX NOTE: Any sale or exchange of shares in a non-retirement account
could result in a taxable gain or a loss.

The ability to redeem (that is, sell or exchange) Fund shares by telephone is
automatically established for your account unless you tell us in writing that
you do not want this option.

To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:

- Fund name.

- 10-digit account number.

- Name and address exactly as registered on that account.

- Social Security or Employer Identification number as registered on that
account.

If you call to sell shares, the sale proceeds will be made payable to you, as
the registered shareholder, and mailed to your account's address of record.

If we follow reasonable security procedures, neither the Fund nor Vanguard
will be responsible for the authenticity of transaction instructions received by
telephone. We believe that these procedures are reasonable and that, if we
follow them, you bear the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account.

HOW TO SELL SHARES

You may withdraw any part of your account, at any time, by selling shares. Sale
proceeds are normally mailed within two business days after Vanguard receives
your request. The sale price of your shares will be the Fund's next-determined
net asset value after Vanguard receives all required documents in good order.

Good order means that the request includes:

- Fund name and account number.

- Amount of the transaction (in dollars or shares).

- Signatures of all owners exactly as registered on the account.

- Signature guarantees (if required).

- Any supporting legal documentation that may be required.

- Any certificates you are holding for the account.

Sales or exchange requests received after the close of trading on the New York
Stock Exchange (generally 4 p.m. Eastern time) are processed at the next
business day's net asset value.

The Fund reserves the right to close any non-retirement or UGMA/UTMA account
whose balance falls below the minimum initial investment. The Fund will deduct a
$10 annual fee if your non-retirement account balance falls below $2,500 or if
your UGMA/UTMA account balance falls below $500. The fee is waived if your total
Vanguard account assets are $50,000 or more.

Some written requests require a signature guarantee from a bank, broker, or
other acceptable institution. A notary public cannot provide a signature
guarantee.

Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273

17
<PAGE> 22
Redeeming Shares (continued)

HOW TO EXCHANGE SHARES

An exchange is the selling of shares of one Vanguard fund to purchase shares of
another.

Although we make every effort to maintain the exchange privilege, Vanguard
reserves the right to revise or terminate the exchange privilege, limit the
amount of an exchange, or reject any exchange, at any time, without notice.

Because excessive exchanges can potentially disrupt the management of the
Fund and increase transaction costs, Vanguard limits exchange activity to two
substantive exchange redemptions (at least 30 days apart) from the Fund during
any 12-month period. "Substantive" means either a dollar amount large enough to
have a negative impact on the Fund or a series of movements between Vanguard
funds.

Before you exchange into a new Vanguard fund, be sure to read its prospectus.
For a copy and for answers to questions you might have, call Investor
Information.

<TABLE>
<CAPTION>
SELLING OR
EXCHANGING SHARES ACCOUNT TYPE
<S> <C>
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[Telephone Icon] Call Vanguard Tele-Account* 24 hours a day--or
1-800-662-6273 Client Services during business hours--to sell
Vanguard Tele-Account or exchange shares. You can exchange shares
1-800-662-2739 from this Fund to open an account in another
Client Services Vanguard fund or to add to an existing Vanguard
fund account with an identical registration.

RETIREMENT:
You can exchange--but not sell--shares by calling
Tele-Account or Client Services.

*You must obtain a Personal Identification Number
through Tele-Account at least seven days before you
request your first redemption.

BY MAIL ALL TYPES EXCEPT RETIREMENT:
[Envelope Icon] Send a letter of instruction signed by all
FIRST-CLASS mail to: registered account holders. Include the fund
The Vanguard Group name and account number and (if you are
Vanguard/Windsor Fund selling) a dollar amount or number of shares OR
P.O. Box 1120 (if you are exchanging) the name of the fund
Valley Forge, PA 19482 you want to exchange into and a dollar amount
EXPRESS OR REGISTERED mail to: or number of shares.
The Vanguard Group
Vanguard/Windsor Fund RETIREMENT:
455 Devon Park Drive For information on how to request distributions from . .
Wayne, PA 19087 - IRAs, call Client Services.
- SEP-IRAs, 403(b)(7) custodial accounts, and
Profit-Sharing and Money Purchase Pension
(Keogh) Plans, call Individual Retirement
Services at 1-800-662-2003.
Depending on your account registration type,
additional documentation may be required.

AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
[Automatic Icon] Vanguard offers several ways to sell or
exchange shares automatically (see "Services
and Account Features"). Call Investor
Information for the appropriate booklet and
application if you did not elect a feature when
you opened your account.
</TABLE>

Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273

18
<PAGE> 23
Redeeming Shares (continued)

It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Fund shareholders and so reserve
the right to delay your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.

A NOTE ON UNUSUAL CIRCUMSTANCES

Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the United States
Securities and Exchange Commission. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions
on selling or exchanging shares by mail in the "Redeeming Shares" section.

Fund and Account Updates

STATEMENTS AND REPORTS

We will send you clear, concise account and tax statements to help you keep
track of your Vanguard/Windsor Fund account throughout the year as well as when
you are preparing your income tax returns.

In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the adviser, as well as a listing of its holdings and other financial
statements.

CONFIRMATION STATEMENT Sent each time you buy, sell, or
exchange shares; confirms the date and the
amount of your transaction.

PORTFOLIO SUMMARY Mailed quarterly; shows the market
value of your account at the close of the
statement period, as well as distributions,
purchases, sales, and exchanges for the current
calendar year.

FUND FINANCIAL REPORTS Mailed in June and December for this Fund.

TAX STATEMENTS Generally mailed in January; report
previous year's dividend distributions,
proceeds from the sale of shares, and
distributions from IRAs or other retirement
accounts.

AVERAGE COST STATEMENT Issued quarterly for taxable
[Book Icon] accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you
redeemed during the previous quarter, using the
average cost single category method.

Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273

19
<PAGE> 24
Fund and Account Updates (continued)

AUTOMATED TELEPHONE ACCESS

VANGUARD TELE-ACCOUNT Toll-free access to Vanguard fund and
1-800-662-6273 account information--as well as some
Any time, seven days a transactions--through any TouchTone(TM)
week, from anywhere in telephone. Tele-Account provides total
the continental United return, share price, price change, and
States and Canada. yield quotations for all Vanguard funds;
[Book Icon] gives your account balances and history
(e.g., last transaction, latest dividend
distribution); and allows you to sell or
exchange fund shares.

COMPUTER ACCESS

VANGUARD ONLINE(sm) Use your personal computer to learn more
Keyword: Vanguard about Vanguard funds and services; keep
in touch with your Vanguard accounts;
map out a long-term investment strategy;
and ask questions, make suggestions, and
send messages to Vanguard. Vanguard
Online is offered through America
Online(R) (AOL). To establish an AOL
account, call 1-800-238-6336.

VANGUARD ON THE Use your personal computer to visit
WORLD WIDE WEB Vanguard's education- oriented website,
http://www.vanguard.com which provides timely news and infor-
mation about Vanguard funds and
services; an on-line "university" that
offers a variety of mutual fund classes;
and easy-to-use, interactive tools to
help you create your own investment and
retirement strategies.

SHARES OF THE FUND MAY ONLY BE SOLD IN THOSE STATES IN WHICH THEY ARE
REGISTERED. THE FUND'S SHARES ARE CURRENTLY REGISTERED FOR SALE IN ALL 50
STATES, AND THE FUND INTENDS TO MAINTAIN SUCH REGISTRATION.

Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273

20
<PAGE> 25
GLOSSARY OF INVESTMENT TERMS

CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.

CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, bank CDs, repurchase agreements, commercial paper, and
bankers acceptances.

COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.

COUNTRY RISK
The possibility that events within a country such as changes in regulation,
political or financial troubles, or natural disasters will adversely affect the
market value of securities issued by companies or governments in that country.

CURRENCY RISK
The possibility that an American's foreign investment will lose money because of
unfavorable exchange rate movements.

DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.

EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.

FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.

GROWTH AND INCOME STOCK FUND
A mutual fund that seek moderate capital appreciation and some dividend income
by investing primarily in stocks.

INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.

MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an attempt to achieve a specific objective over time.

NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.

PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security, industry, or country.

PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.

TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.

VALUE STOCK FUND
A mutual fund that focuses on stocks of companies that, considering their
earnings and dividends, are attractively priced; these companies often pay
regular dividend income to shareholders.

VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low share
prices.

YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.

<PAGE> 26
[Vanguard Logo]
THE VANGUARD GROUP(R)

Post Office Box 2600
Valley Forge, PA 19482

INVESTOR INFORMATION
DEPARTMENT
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
For information on our
Funds, Fund services, and
retirement accounts;
requests for literature

CLIENT SERVICES DEPARTMENT
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-662-2738
For information on your
account, account
transactions, account
statements

VANGUARD BROKERAGE
SERVICES
1-800-992-8327
For information on
trading stocks, bonds,
and options at reduced
commissions

VANGUARD TELE-ACCOUNT(R)
1-800-662-6273 (ON-BOARD)
For 24-hour automated
access to price and
yield, information on
your account, certain
transactions

ELECTRONIC ACCESS TO THE
VANGUARD MUTUAL FUND
EDUCATION AND INFORMATION
CENTER
On America Online(R)
Keyword: Vanguard

On the World Wide Web
http://www.vanguard.com

To send e-mail to Vanguard
[email protected]

P022N

<PAGE> 27

VANGUARD/
WINDSOR FUND

Institutional Prospectus
February 28, 1997

This prospectus contains financial data for the Fund through the fiscal year
ended October 31, 1996.

A member of THE VANGUARD GROUP

[GRAPHIC]
<PAGE> 28

VANGUARD/WINDSOR FUND A Growth and Income Stock Mutual Fund

<TABLE>
<CAPTION>
CONTENTS

<S> <C>
Fund Expenses 2

Financial Highlights 3

A Word About Risk 4

The Fund's Objective 4

Who Should Invest 4

Investment Strategies 5

Investment Policies 7

Investment Limitations 8

Investment
Performance 9

Share Price 9

Dividends, Capital
Gains, and Taxes 10

The Fund and
Vanguard 10

Investment Adviser 11

General Information 12

Investing
with Vanguard

- - For Plan Participants 13

- - For Other
Institutional Investors 13

Accessing Fund
Information
By Computer 14

Prospectus Postscript 15

Risk Quiz 16

Glossary Inside Back Cover
</TABLE>

INVESTMENT OBJECTIVES AND POLICIES

Vanguard/Windsor Fund (the "Fund") is a diversified mutual fund, a part of
Vanguard/Windsor Funds, Inc., an open-end investment company.

The Fund is currently closed to new investors. Existing shareholders may
purchase additional Fund shares, but may not invest more than $25,000 each year.

FEES AND EXPENSES

IMPORTANT NOTE

This prospectus is intended for institutional clients and for participants in
employer-sponsored retirement or savings plans.

ADDITIONAL INFORMATION ABOUT THE FUND

WHY READING THIS PROSPECTUS IS IMPORTANT

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<PAGE> 29

FUND PROFILE Vanguard/Windsor Fund

WHO SHOULD INVEST (page 4)

- - Investors seeking a growth and income stock mutual fund as part of a
balanced and diversified investment program.

- - Investors seeking growth of their capital over the long term -- at
least five years.

WHO SHOULD NOT INVEST

- - Investors unwilling to accept significant fluctuations in share price.

RISKS OF THE FUND (pages 4 - 8)

The Fund's total return will fluctuate within a wide range, so an investor could
lose money over short or even extended periods. The Fund is subject to manager
risk (the chance that poor security selection will cause it to lag the stock
market as a whole) and objective risk (the chance that returns from the types of
stock that the Fund invests in -- attractively priced or "value" stocks -- will
trail returns from the overall stock market). Because the Fund can invest a
portion of its assets in companies based outside the United States, it is
exposed to several risks unique to foreign securities; see page 7 for details.

DIVIDENDS AND CAPITAL GAINS (page 10)

Dividends are paid in June and December. Capital gains, if any, are paid in
December. In participant accounts, all distributions are automatically
reinvested.

INVESTMENT ADVISER (page 11)

Wellington Management Company, LLP, Boston, MA.

INCEPTION DATE: October 23, 1958

NET ASSETS AS OF 10/31/96: $15.8 billion

FUND'S EXPENSE RATIO FOR THE
YEAR ENDED 10/31/96: 0.31%

NEWSPAPER ABBREVIATION: Wndsr

VANGUARD FUND NUMBER: 022

AVERAGE ANNUAL TOTAL RETURNS --
PERIODS ENDED OCTOBER 31, 1996

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
---------------------------
<S> <C> <C> <C>
Vanguard/Windsor Fund 23.2% 16.7% 13.4%
S&P 500 Index 24.1 15.5 14.7
</TABLE>

QUARTERLY RETURNS (%) 1987 - 1996 (intended to show volatility of returns)

[GRAPH]

[PLOT POINTS TO COME]

1
<PAGE> 30

PLAIN TALK ABOUT
THE COSTS OF INVESTING

PLAIN TALK ABOUT
FUND EXPENSES

FUND EXPENSES

The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Fund.

As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Fund:

SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>

The next table illustrates the operating expenses that you would incur as
a shareholder of the Fund. These expenses are deducted from the Fund's income
before it is paid to you. Expenses include investment advisory fees as well as
the costs of administering the Fund, maintaining accounts, providing shareholder
services, and other activities. The expenses shown in the table are for the
fiscal year ended October 31, 1996.

<TABLE>
<CAPTION>
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
Management and Administrative Expenses: 0.18%
Investment Advisory Expenses: 0.10%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.01%
----
Total Other Expenses: 0.03%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.31%
====
</TABLE>

The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Fund provides a return of 5% a year and (2) that you redeem your investment
at the end of each period.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------
<S> <C> <C> <C>
$3 $10 $17 $39
- ------------------------------------------------------------------------
</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.

2
<PAGE> 31

FINANCIAL HIGHLIGHTS

The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended October 31, 1996. The financial
highlights were audited by Price Waterhouse LLP, independent accountants. You
should read this information in conjunction with the Fund's financial statements
and accompanying notes, which appear, along with the audit report from Price
Waterhouse, in the Fund's most recent Annual Report to shareholders. The Annual
Report is incorporated by reference in the Statement of Additional Information
and in this prospectus, and contains a more complete discussion of the Fund's
performance. You may have the report sent to you without charge by contacting
Vanguard.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 15.55 $ 14.55 $ 14.95 $ 12.37 $ 12.79 $ 9.72 $ 15.17 $ 14.13 $ 14.22
-------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .43 .44 .44 .37 .49 .58 .74 .71 .66
Net Realized and
Unrealized Gain (Loss)
on Investments 2.85 1.86 .42 2.98 .50 3.55 (4.59) 1.51 2.33
-------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 3.28 2.30 .86 3.35 .99 4.13 (3.85) 2.22 2.99
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.46) (.44) (.37) (.39) (.57) (.74) (.75) (.63) (.87)
Distributions from
Realized Capital Gains (1.38) (.86) (.89) (.38) (.84) (.32) (.85) (.55) (2.21)
-------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.84) (1.30) (1.26) (.77) (1.41) (1.06) (1.60) (1.18) (3.08)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 16.99 $ 15.55 $ 14.55 $ 14.95 $ 12.37 $ 12.79 $ 9.72 $ 15.17 $ 14.13
=================================================================================================================================
TOTAL RETURN 23.16% 17.80% 6.35% 28.29% 9.30% 44.69% -27.93% 17.05% 27.01%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 15,841 $ 13,008 $ 11,406 $ 10,537 $ 8,250 $ 7,859 $ 5,841 $ 8,313 $ 5,920
Ratio of Expenses to
Average Net Assets 0.31% 0.45% 0.45% 0.40% 0.26% 0.30% 0.37% 0.41% 0.46%
Ratio of Net Investment
Income to Average
Net Assets 2.75% 3.01% 3.11% 2.68% 3.89% 4.84% 5.82% 5.07% 5.08%
Portfolio Turnover Rate 34% 32% 34% 25% 32% 36% 21% 34% 24%
Average Commission
Rate Paid $ 0.0579 N/A N/A N/A N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>

YEAR ENDED OCTOBER 31,
----------------------
1987
-----------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.85

INVESTMENT OPERATIONS
Net Investment Income .78
Net Realized and
Unrealized Gain (Loss)
on Investments (.11)
-----------------
TOTAL FROM INVESTMENT
OPERATIONS .67
- --------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.30)
Distributions from
Realized Capital Gains --
-----------------
TOTAL DISTRIBUTIONS (.30)
- --------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 14.22
============================================
TOTAL RETURN 4.62%
============================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 4,848
Ratio of Expenses to
Average Net Assets 0.43%
Ratio of Net Investment
Income to Average
Net Assets 4.86%
Portfolio Turnover Rate 46%
Average Commission
Rate Paid N/A
</TABLE>

From time to time, the Vanguard funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a fund.

PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Fund began fiscal 1996 with a net asset value (price) of $15.55 per share.
During the year, the Fund earned $.43 per share from investment income (interest
and dividends) and $2.85 per share from investments that had appreciated in
value or that were sold for higher prices than the Fund paid for them. Of those
total earnings of $3.28 per share, $1.84 was returned to shareholders in the
form of distributions ($.46 in dividends, $1.38 in capital gains). The
earnings $3.28 per share) less total distributions ($1.84 per share) resulted in
a share price of $16.99 at the end of the fiscal year, an increase of $1.44 per
share (from $15.55 at the beginning of the period to $16.99 at the end of the
period). Assuming that the shareholder had re-invested the distributions in the
purchase of more shares, the total return from the Fund was 23.16% for the year.

As of October 31, 1996, the Fund had $15.8 billion in net assets; an expense
ratio of 0.31% ($3.10 per $1,000 of net assets); and net investment income
amounting to 2.75% of its average net assets. It sold and replaced securities
valued at 34% of its total net assets.

3
<PAGE> 32
PLAIN TALK ABOUT
VALUE FUNDS AND
GROWTH FUNDS

PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM

Vanguard/Windsor Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.

A WORD ABOUT RISK

This prospectus describes the risks you will face as an investor in
Vanguard/Windsor Fund. It is important to keep in mind one of the main axioms of
investing: the higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in Windsor Fund, you
should also take into account your own tolerance for the daily fluctuations of
the stock market.

Look for this "warning flag" symbol [FLAG] throughout the prospectus. It is
used to mark detailed information about each type of risk that you, as a
shareholder of the Fund, will confront.

THE FUND'S OBJECTIVE

[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE FUND, AS WITH ANY INVESTMENT IN COMMON STOCKS,
COULD LOSE MONEY.

WHO SHOULD INVEST

Vanguard/Windsor Fund may be suitable for you if:

- - You wish to add a growth and income mutual fund to your existing
holdings, which could include other stock -- as well as bond, money
market, and tax-exempt -- investments.

- - You want a value-oriented investment that seeks to provide long-term
growth.

This Fund is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all the Fund's shareholders. To minimize such
costs, which reduce the ultimate returns achieved by you and other shareholders,
the Fund has adopted the following policies:

- - The Fund reserves the right to reject any purchase request --
including exchanges from other Vanguard funds -- that it regards as
disruptive to the efficient management of the Fund. This could be
because of the timing of the investment or because of a history of
excessive trading by the investor.

- - There is a limit on the number of times you can exchange into or out of
the Fund. If you own shares of the Fund as an investment

4
<PAGE> 33
option in an employer-sponsored retirement or savings plan, your
plan dictates the rules governing exchanges. Contact your plan
administrator for details.

- - The Fund reserves the right to stop offering shares at any time.

INVESTMENT STRATEGIES

MARKET EXPOSURE

[FLAG] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT
STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS.
STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK
PRICES AND PERIODS OF FALLING STOCK PRICES.

To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of
stock market activity. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between the best and worst
returns tends to narrow over the long term.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926 - 1996)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst - 43.3 - 12.5 - 0.9 3.1

Average 12.7 10.4 10.8 10.8
- --------------------------------------------------------------------------------
</TABLE>

PLAIN TALK ABOUT
COSTS AND MARKET TIMING

PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS

5
<PAGE> 34
PLAIN TALK ABOUT
PRICE/EARNINGS RATIOS

PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1996. For example, while the average return on stocks for all of the
5-year periods was 10.4%, returns for these 5-year periods ranged from a - 12.5%
average (from 1928 through 1932), to 23.9% (from 1950 through 1954). These
average returns reflect past performance and should not be regarded as an
indication of future returns from either the stock market as a whole or this
Fund in particular.

[FLAG] THE FUND IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY THAT
RETURNS FROM THE TYPE OF STOCK THAT THE FUND INVESTS IN --
ATTRACTIVELY PRICED OR "VALUE" STOCKS -- WILL TRAIL RETURNS FROM THE
OVERALL STOCK MARKET. DIFFERENT TYPES OF STOCKS TEND TO GO THROUGH
CYCLES OF OUTPERFORMANCE AND UNDERPERFORMANCE IN COMPARISON TO COMMON
STOCKS IN GENERAL. THESE CYCLES HAVE, IN THE PAST, LASTED FOR AS LONG
AS SEVERAL YEARS.

SECURITY SELECTION

Wellington Management Company, LLP (WMC), adviser to the Fund, selects what it
considers to be undervalued securities of large- and mid-capitalization
companies. Undervalued stocks are generally those that are out of favor with
investors and currently trading at prices that, the adviser feels, are below
what the stocks are worth in relation to their earnings. These stocks typically
- -- but not always -- have lower-than-average price/earnings (P/E) ratios and
higher-than-average dividend yields.

The Fund's top ten holdings (which amounted to 38% of the Fund's total net
assets) as of October 31, 1996, follow.

6
<PAGE> 35
Keep in mind that, because the makeup of the Fund changes daily, this listing
is only a "snapshot" at one point in time. Note, too, that the Fund's relatively
low level of diversification means that there is a greater chance that the poor
performance of a single stock could hurt the Fund.

[ FLAG ] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT WMC
MAY DO A POOR JOB OF SELECTING STOCKS.

PORTFOLIO TURNOVER

INVESTMENT POLICIES

Besides investing in undervalued common stocks, the Fund may follow a number of
investment policies to achieve its objectives.

[ FLAG ] THE FUND IS SUBJECT TO COUNTRY RISK AND CURRENCY RISK. COUNTRY RISK IS
THE POSSIBILITY THAT POLITICAL EVENTS (SUCH AS A WAR), FINANCIAL
PROBLEMS (SUCH AS GOVERNMENT DEFAULT), OR NATURAL DISASTERS (SUCH AS
AN EARTHQUAKE) WILL WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS
IN THAT COUNTRY TO LOSE MONEY. CURRENCY RISK IS THE POSSIBILITY THAT A
"STRONGER" U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING
OVERSEAS. GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST A FOREIGN
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS
CURRENCY IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A "WEAKER"
DOLLAR GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.

The Fund may invest in money market instruments, fixed-income securities,
convertible securities and other equity securities,

PLAIN TALK ABOUT
PORTFOLIO TURNOVER

PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING

7
<PAGE> 36
PLAIN TALK ABOUT
DERIVATIVES

PLAIN TALK ABOUT
CASH RESERVES

such as preferred stock. The Fund may invest up to 15% of its assets in
restricted securities with limited marketability or other illiquid securities.

The Fund may also invest in derivatives.

[ FLAG ] THE FUND RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK
FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES OF
DERIVATIVES.

Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a portfolio. The Fund will not use
futures and options for speculative purposes or as leveraged investments that
magnify the gains or losses of an investment. Rather, the Fund will keep
separate cash reserves or other liquid portfolio securities in the amount of the
obligation underlying the futures or options contract. Only a limited percentage
of the Fund's assets--5%--may be applied to futures contract deposits, and
no more than 20% of total assets may be committed to such contracts.

The reasons for which the Fund will invest in futures and options are:

- - To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in stocks.

- - To make it easier to trade.

- - To reduce costs by buying futures instead of actual stocks when futures
are cheaper.

INVESTMENT LIMITATIONS

To reduce risk and maintain diversification, the Fund has adopted limits on some
of its investment policies. Specifically, the Fund will not:

- - Invest more than 25% of its assets in any one industry.

- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares. With respect to 75% of its assets, the Fund will not:

- - Invest more than 5% in the securities of any one company.

- - Buy more than 10% of the outstanding voting shares of any company.

The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Fund's shareholders.

<PAGE> 37
INVESTMENT PERFORMANCE

- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED OCTOBER 31, 1996
- --------------------------------------------------------------------------------

[BAR GRAPH]

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS 20 YEARS 25 YEARS
<S> <C> <C> <C> <C> <C> <C>
VANGUARD/WINDSOR FUND 23.2% 15.6% 16.7% 13.4% 16.7% 15.0%
S&P 500 24.1% 17.7% 15.5% 14.7% 14.5% 12.7%
</TABLE>

- --------------------------------------------------------------------------------

SHARE PRICE

The Fund's share price, also called its net asset value, is calculated each
business day after the close of trading (generally 4 p.m. Eastern time) of the
New York Stock Exchange. The net asset value per share is calculated by adding
up the total assets of the Fund, subtracting all its liabilities, or debts, and
then dividing by the total number of Fund shares outstanding:

TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ----------------------------
NUMBER OF SHARES OUTSTANDING

PLAIN TALK ABOUT

PAST PERFORMANCE

9
<PAGE> 38
PLAIN TALK ABOUT

DISTRIBUTIONS

As a shareholder, you are entitled to your share of a fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that a fund earns from its holdings as well as
interest it receives from money market and bond investments. Capital gains are
realized whenever the fund sells securities for higher prices than it paid for
them. The capital gains are either short-term or long-term depending on whether
the fund held the securities for less than or more than one year.

PLAIN TALK ABOUT

VANGUARD'S UNIQUE CORPORATE STRUCTURE

DIVIDENDS, CAPITAL GAINS, AND TAXES

If you own shares of the Fund as an investment option in an
employer-sponsored retirement or savings plan, these dividend and capital gains
distributions will be reinvested in additional Fund shares and accumulate on a
tax-deferred basis. You will not owe taxes on these distributions until you
begin withdrawals. You should consult your plan administrator, your plan's
Summary Plan Document, or your own tax adviser about the tax consequences of an
investment in the Portfolio and of any plan withdrawals.

If your Vanguard/Windsor Fund investment is not part of an employer-sponsored
plan, you can receive distributions of income or capital gains in cash, or you
may have them automatically reinvested in more shares of the Fund. Both dividend
and capital gains distributions--whether received in cash or reinvested in
additional shares--are subject to federal (and possibly state and local) income
taxes, no matter how long you have held the shares in the Fund. You should
consult your own tax adviser about other tax consequences of an investment in
the Fund.

THE FUND AND VANGUARD

Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each fund pays its
allocated share of The Vanguard Group's costs.

A list of the Fund's directors and officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.

10
<PAGE> 39
INVESTMENT ADVISER

WMC is paid a quarterly advisory fee based on an average of the Fund's
month-end net assets during that quarter:

<TABLE>
<CAPTION>
---------------------------------------
AVERAGE ASSETS MANAGED BASIC FEE
---------------------------------------
<S> <C>
First $17.5 billion 0.125%
Over $17.5 billion 0.100
---------------------------------------
</TABLE>

Beginning April 30, 1999, WMC's basic advisory fee may be adjusted based on
the total return performance of the Fund as compared to that of the Standard &
Poor's 500 Index. Under the fee schedule, WMC's basic fee may be increased or
decreased by as much as 67% for the first $17.5 billion of average net assets
managed during the period and by 90% for average net assets over $17.5 billion.
Until this new schedule goes into effect, WMC's basic fee will follow transition
rules set forth by the Securities and Exchange Commission and described in the
Fund's Statement of Additional Information.

The current fee agreement with WMC authorizes it to choose brokers and
dealers to handle the purchase and sale of the Fund's securities, and directs
WMC to get the best available price and most favorable execution from these
brokers with respect to all transactions. At times, WMC may choose brokers who
charge higher commissions in the interests of obtaining better execution of a
transaction. If more than one broker can obtain the best available price and
favorable execution of a transaction, then WMC is authorized to choose a broker
who, in addition to executing the transaction, will provide research services
to WMC or the Fund. However, WMC will not pay higher commissions specifically
for the purpose of obtaining research services. The Fund may direct WMC to use
a particular broker for certain transactions in exchange for commission rebates
or research services provided to the Fund.

PLAIN TALK ABOUT

THE FUND'S ADVISER

CHARLES T. FREEMAN, Senior Vice President and Partner of WMC; 30 years
investment experience, 28 years with WMC and Vanguard/Windsor Fund; B.S. and
M.B.A. from the University of Pennsylvania.

Mr. Freeman was appointed Fund manager in January 1996, following the
retirement of John C. Neff, who had managed the Fund since 1964.

11
<PAGE> 40
GENERAL INFORMATION

Vanguard/Windsor Fund is one of two Funds of Vanguard/ Windsor Funds, Inc.,
which is organized under the laws of the state of Maryland. The other Fund is
Vanguard/Windsor II (which is open to all investors). The two Funds are combined
under one corporation for administrative purposes, but for investment management
purposes operate like separate companies.

Shareholders of Vanguard/Windsor Fund have rights and privileges similar to
those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of directors), each share outstanding at that point
would be entitled to one vote. Annual meetings will not be held by the Fund
except as required by the Investment Company Act of 1940. A meeting will be
scheduled (for example, to vote on the removal of a director) if the holders of
at least 10% of the Fund's shares request a meeting in writing.

12
<PAGE> 41
INVESTING WITH VANGUARD

FOR PLAN PARTICIPANTS

Vanguard/Windsor Fund is an investment option in your retirement or savings
plan. Your plan administrator or your employee benefits office can provide you
with detailed information on how to participate in your plan and how to elect
the Fund as an investment option.

- - If you have any questions about the Fund or Vanguard, including the Fund's
investment objective, strategies, or risks, contact Vanguard's Participant
Services Department, toll-free, at 1-800-523-1188.

- - If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.

INVESTMENT OPTIONS AND ALLOCATIONS

Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.

TRANSACTIONS

Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.

EXCHANGES

The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. However,
because excessive exchanges can potentially disrupt the management of the Fund
and increase its transaction costs, Vanguard reserves the right to refuse any
exchange request. In addition, certain investment options, particularly funds
made up of company stock or investment contracts, may be subject to unique
restrictions. Contact your plan administrator for details on the exchange
policies that apply to your plan.

Before making an exchange, you should consider the following:

- - Before you exchange to another Vanguard fund available in your plan, you
should read that fund's prospectus. Contact Participant Services, toll-free,
at 1-800-523-1188 for a copy.

- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.

FOR OTHER INSTITUTIONAL INVESTORS

AT THIS TIME, SHARES OF VANGUARD/WINDSOR FUND ARE NOT BEING OFFERED OR SOLD TO
NEW INVESTORS. Current shareholders may make additional investments, but the
total amount of purchases during a calendar year may not exceed $25,000.

If you have questions about an existing account, contact your Vanguard
account administrator.

TRANSACTIONS

Purchases, exchanges, or redemptions of the Fund's shares are processed as soon
as they have been received by Vanguard in good order. Good order means that your
request

13
<PAGE> 42
INVESTING WITH VANGUARD (continued)

includes complete information on your purchase, exchange, or redemption, and
that Vanguard has received the appropriate assets. The price of shares bought,
exchanged, or sold will be the Fund's next-determined net asset value after
Vanguard has processed your request, provided your request has been received
before 4 p.m. Eastern time.

Vanguard must consider the interests of all Fund shareholders and so reserves
the right to . . .

- - Delay or reject any purchase or exchange request that may disrupt the Fund's
operation or performance.

- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at any time, without notice.

- - Take up to seven days to deliver your redemption proceeds.

- - Pay redemption proceeds--in whole or in part--through a distribution in kind
of readily marketable securities.

ACCESSING FUND INFORMATION BY COMPUTER

VANGUARD ONLINE(sm) Use your personal computer to learn more
KEYWORD: Vanguard about Vanguard funds and services; map out a
long-term investment strategy; and ask
questions, make suggestions, and send
messages to Vanguard. Vanguard Online is
offered through America Online(R) (AOL). To
establish an AOL account, call
1-800-238-6336.

VANGUARD ON THE Use your personal computer to visit
WORLD WIDE WEB Vanguard's education-oriented website, which
http://www.vanguard.com provides timely news and information about
Vanguard funds and services; an on-line
"university" that offers a variety of mutual
fund classes; and easy-to-use, interactive
tools to help you create your own investment
and retirement strategies.

14
<PAGE> 43
PROSPECTUS POSTSCRIPT

This prospectus is designed to provide you with pertinent information about
Vanguard/Windsor Fund, including its investment objective, risks, strategies,
and expenses, as well as services available to you as a shareholder.

It is important that you understand these facts so that you can decide
whether an investment in this Fund is right for you. The following questions
offer a quick review of some of the subjects covered by this prospectus.

IN READING THE PROSPECTUS, DID YOU LEARN . . .

/ / The Fund's objective? (page 4)

/ / The Fund's investment strategies? (page 5)

/ / Who should invest in the Fund? (page 4)

/ / The risks associated with the Fund? (pages 4-8)

/ / Whether the Fund is federally insured? (inside front cover)

/ / The Fund's expenses? (page 2)

/ / The background of the Fund's investment manager? (page 11)

PLAIN TALK ABOUT

KEEPING YOUR PROSPECTUS

Reading this prospectus will help you to decide whether Vanguard/Windsor Fund is
suitable for your investment goals. If you decide to invest, don't throw the
prospectus out; you will no doubt need it for future reference.

15
<PAGE> 44
ABOUT THE QUIZ

Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to accurately gauge your risk
tolerance. Scoring for the quiz is below.

HOW TO SCORE THE QUIZ

Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: if you chose answer #1
or #2 to Question C, subtract five points from your total score.)

- - If you scored between 0 and 25 points, you are considered a conservative
investor.

- - If you scored between 26 and 32 points, you are considered a moderate
investor.

- - If you scored between 33 and 35 points, you are considered an aggressive
investor.

A SIMPLE RISK QUIZ

A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL
STOCKS OR BONDS) FOR . . .

1. Less than a year
2. 1-2 years
3. 3-4 years
4. 5-9 years
5. 10 years or more

B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M . . .

1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor

C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.

1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree

D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.

1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree

E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE-HOME PAY.

1. Zero
2. One
3. Two
4. Three
5. Four or more

F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.

1. I strong disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree

G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.

1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree

16
<PAGE> 45
GLOSSARY OF INVESTMENT TERMS

CAPITAL GAINS DISTRIBUTION

Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.

CASH RESERVES

Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, bank CDs, repurchase agreements, commercial paper, and
bankers acceptances.

COMMON STOCK

A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.

COUNTRY RISK

The possibility that events within a country such as changes in regulation,
political or financial troubles, or natural disasters will adversely affect the
market value of securities issued by companies or governments in that country.

CURRENCY RISK

The possibility that an American's foreign investment will lose money because of
unfavorable exchange rate movements.

DIVIDEND INCOME

Payment to shareholders of income from interest or dividends generated by a
fund's investments.

EXPENSE RATIO

The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.

FIXED-INCOME SECURITIES

Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.

GROWTH AND INCOME STOCK FUND

A mutual fund that seek moderate capital appreciation and some dividend income
by investing primarily in stocks.

INVESTMENT ADVISER

An organization that makes the day-to-day decisions regarding a portfolio's
investments.

MUTUAL FUND

An investment company that pools the money of many people and invests it in a
variety of securities in an attempt to achieve a specific objective over time.

NET ASSET VALUE (NAV)

The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.

PORTFOLIO DIVERSIFICATION

Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security, industry, or country.

PRICE/EARNINGS (P/E) RATIO

The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.

TOTAL RETURN

A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.

VALUE STOCK FUND

A mutual fund that focuses on stocks of companies that, considering their
earnings and dividends, are attractively priced; these companies often pay
regular dividend income to shareholders.

VOLATILITY

The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low share
prices.

YIELD

Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 46
[TALL SHIP GRAPHIC]

THE VANGUARD GROUP(R)

Institutional Division
Post Office Box 2900
Valley Forge, PA 19482

FOR PARTICIPANTS IN EMPLOYER-SPONSORED PLANS

PARTICIPANT SERVICES DEPARTMENT

1-800-523-1188

TEXT TELEPHONE:

1-800-523-8004

For information on the Vanguard Funds in your plan, Monday through Friday 8:30
a.m. to 7:00 p.m., Eastern time

FOR OTHER INSTITUTIONAL INVESTORS

1-800-523-1036
For information on Vanguard Funds and services

ELECTRONIC ACCESS TO THE VANGUARD MUTUAL FUND EDUCATION AND INFORMATION CENTER

On America Online(R) Keyword: Vanguard

On the World Wide Web
http://www.vanguard.com

To send e-mail to Vanguard
[email protected]

I022N
<PAGE> 47
VANGUARD/
WINDSOR II

Prospectus
February 28, 1997

- ----------------
This prospectus contains
financial data for the Fund
through the fiscal year ended
October 31, 1996.

A member of
THE VANGUARD GROUP
<PAGE> 48
Vanguard/Windsor II

<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Fund Expenses 2

Financial Highlights 3

A Word About Risk 4

The Fund's Objectives 4

Who Should Invest 4

Investment Strategies 5

Investment Policies 7

Investment Limitations 8

Investment
Performance 8

Share Price 9

Dividends, Capital
Gains, and Taxes 9

The Fund and
Vanguard 10

Investment Advisers 10

General Information 12

Investing with
Vanguard 13

Services and
Account Features 13

Types of Accounts 14

Distribution Options 15

Buying Shares 15

Redeeming Shares 17

Fund and Account
Updates 19

Glossary Inside Back Cover
</TABLE>

A Growth and Income Stock Mutual Fund

INVESTMENT OBJECTIVES AND POLICIES
Vanguard/Windsor II (the "Fund") is a diversified mutual fund, a part of
Vanguard/Windsor Funds, Inc., an open-end investment company.

The Fund seeks to provide long-term growth of capital by investing mainly in
the equity securities of large and medium-size companies whose stocks are
considered by the Fund's advisers to be undervalued and out of favor with
investors. The Fund's secondary objective is to provide some dividend income.

FEES AND EXPENSES
Vanguard/Windsor II is offered on a no-load basis, which means that you pay no
sales commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the Fund's expense ratio.

ADDITIONAL INFORMATION ABOUT THE FUND
A Statement of Additional Information (dated February 28, 1997) containing more
information about the Fund is, by reference, part of this prospectus and may be
obtained without charge by writing to Vanguard or by calling our Investor
Information Department at 1-800-662-7447.

WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategies of
Vanguard/Windsor II. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk" explanations along the way. Reading the
prospectus will help you to decide whether the Fund is the right investment for
you. We suggest that you keep it for future reference.

WHO SHOULD INVEST (page 4)
- - Investors seeking a growth and income stock mutual fund as part of a balanced
and diversified investment program.

- - Investors seeking growth of capital over the long term -- at least five
years.

- - Investors seeking some dividend income.

WHO SHOULD NOT INVEST
- - Investors unwilling to accept significant fluctuations in share price.

RISKS OF THE FUND (pages 4 - 8)
The Fund's total return will fluctuate within a wide range, so an investor could
lose money over short or even extended periods. The Fund is subject to manager
risk (the chance that poor security selection will cause it to lag the stock
market as a whole) and objective risk (the chance that returns from the type of
stocks that the Fund invests in -- attractively priced or "value" stocks -- will
trail returns from the overall stock market).

DIVIDENDS AND CAPITAL GAINS (page 9)
Dividends are paid in June and December. Capital gains, if any, are paid in
December.

INVESTMENT ADVISERS (page 10)
Vanguard/Windsor II follows a multi-adviser approach:

- - Barrow, Hanley, Mewhinney & Strauss, Inc., Dallas, TX.

Vanguard/Windsor II

- - Equinox Capital Management, Inc., New York City, NY.

- - Tukman Capital Management, Inc., Larkspur, CA.

- - Vanguard Core Management Group, Valley Forge, PA.

MINIMUM INITIAL INVESTMENT: $3,000; $1,000 for IRAs and custodial accounts for
minors

INCEPTION DATE: June 24, 1985

NET ASSETS AS OF 10/31/96: $14.8 billion

FUND'S EXPENSE RATIO FOR THE YEAR ENDED 10/31/96: 0.39%

LOADS, 12b-1 MARKETING FEES: None

SUITABLE FOR IRAS: Yes

NEWSPAPER ABBREVIATION: Wnds II

VANGUARD FUND NUMBER: 073

ACCOUNT FEATURES (page 13)

- - Telephone Redemption

- - Vanguard Direct Deposit Service(sm)

- - Vanguard Automatic Exchange Service(sm)

- - Vanguard Fund Express(R)

- - Vanguard Dividend Express(sm)

AVERAGE ANNUAL TOTAL RETURNS --
PERIODS ENDED OCTOBER 31, 1996

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
-----------------------------
<S> <C> <C> <C>
Vanguard/Windsor II 27.2% 16.6% 13.9%
S&P 500 Index 24.1 15.5 14.7
</TABLE>

QUARTERLY RETURNS (%) 1987 - 1996 (intended to show volatility of returns)

[BAR GRAPH]

PLAIN TALK ABOUT
FUND EXPENSES

All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard/Windsor II's expense ratio in fiscal year 1996 was 0.39%, or
$3.90 per $1,000 of average net assets. The average growth and income equity
fund had expenses in 1996 of 1.23%, or $12.30 per $1,000 of average net assets,
according to Lipper Analytical Services, Inc., which reports on the mutual fund
industry.

FUND EXPENSES

The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Fund.

As noted in this table, you do not pay fees of any kind when you buy, sell, or
exchange shares of the Fund:

<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C> <C>
Management and Administrative Expenses: 0.22%
Investment Advisory Expenses: 0.14%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.01%
----
Total Other Expenses: 0.03%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.39%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
$4 $13 $22 $49
</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 51
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $20.06 $17.33 $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48
----------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .62 .58 .55 .50 .56 .62 .67 .73 .60 .52
Net Realized and
Unrealized Gain (Loss)
on Investments 4.63 3.17 (.19) 2.47 1.17 3.55 (3.22) 2.42 1.63 (.39)
----------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 5.25 3.75 .36 2.97 1.73 4.17 (2.55) 3.15 2.23 .13
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.58) (.55) (.51) (.52) (.61) (.73) (.74) (.57) (.61) (.20)
Distributions from
Realized Capital Gains (.69) (.47) (.50) (.22) (.44) (.28) (.61) -- (.80) --
----------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.27) (1.02) (1.01) (.74) (1.05) (1.01) (1.35) (.57) (1.41) (.20)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $24.04 $20.06 $17.33 $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41
===============================================================================================================================
TOTAL RETURN 27.17% 23.08% 2.22% 19.51% 12.50% 36.61% - 17.48% 24.68% 20.54% .90%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $14,758 $10,272 $8,246 $7,486 $4,878 $3,298 $2,087 $2,162 $1,485 $1,323
Ratio of Expenses to
Average Net Assets 0.39% 0.40% 0.39% 0.39% 0.41% 0.48% 0.52% 0.53% 0.58% 0.49%
Ratio of Net Investment
Income to Average
Net Assets 2.92% 3.27% 3.26% 3.11% 3.72% 4.51% 4.93% 5.29% 4.94% 4.11%
Portfolio Turnover Rate 32% 30% 24% 26% 23% 41% 20% 22% 25% 46%
Average Commission
Rate Paid $0.483 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>

From time to time, the Vanguard funds advertise yield and total return figures.
Yield is an historical measure of dividend income, and total return is a measure
of past dividend income (assuming that it has been reinvested) plus capital
appreciation. Neither yield nor total return should be used to predict the
future performance of a fund.

PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Fund began fiscal 1996 with a net asset value (price) of $20.06 per share.
During the year, the Fund earned $.62 per share from investment income (interest
and dividends) and $4.63 per share from investments that had appreciated in
value or that were sold for higher prices than the Fund paid for them. Of those
total earnings of $5.25 per share, $1.27 was returned to shareholders in the
form of distributions ($.58 in dividends, $.69 in capital gains). The earnings
($5.25 per share) less total distributions ($1.27 per share) resulted in a share
price of $24.04 at the end of the fiscal year, an increase of $3.98 per share
(from $20.06 at the beginning of the period to $24.04 at the end of the period).
Assuming that the shareholder had reinvested the distributions in the purchase
of more shares, the total return from the Fund was 27.17% for the year.

As of October 31, 1996, the Fund had $14.8 billion in net assets; an expense
ratio of 0.39% ($3.90 per $1,000 of net assets); and net investment income
amounting to 2.92% of its average net assets. It sold and replaced securities
valued at 32% of its total net assets.

3
<PAGE> 52
PLAIN TALK ABOUT
VALUE FUNDS AND
GROWTH FUNDS

PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM

Vanguard/Windsor II is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.

A WORD ABOUT RISK

This prospectus discusses the risks that you will face as an investor in
Vanguard/Windsor II. It is important to keep in mind one of the main axioms of
investing: the higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in Windsor II, you
should also take into account your own tolerance for the daily fluctuations of
the stock market.

Look for this "warning flag" symbol [FLAG] throughout the prospectus. It is
used to mark detailed information about each type of risk that you, as a
shareholder of the Fund, will confront.

THE FUND'S OBJECTIVES

Vanguard/Windsor II seeks to provide long-term growth of capital and, as a
secondary objective, some dividend income. These objectives are fundamental,
which means that they cannot be changed unless a majority of shareholders vote
to do so.

[FLAG]
BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE FUND, AS WITH ANY INVESTMENT IN COMMON STOCKS,
COULD LOSE MONEY.

WHO SHOULD INVEST

Vanguard/Windsor II may be suitable for you if:
- - You wish to add a growth and income stock mutual fund to your existing
holdings, which could include other stock -- as well as bond, money market,
and tax-exempt -- investments.

- - You want a value-oriented investment that seeks to provide long-term growth
as well as some dividend income.

This Fund is not an appropriate investment if you are a market-timer. Investors
who engage in excessive in-and-out trading activity generate additional costs
that are borne by all the Fund's shareholders. To minimize such costs, which
reduce the ultimate returns achieved by you and the other shareholders, the Fund
has adopted the following policies:

- - The Fund reserves the right to reject any purchase request -- including
exchanges from other Vanguard funds -- that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.

- - There is a limit on the number of times you can exchange into or out of the
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).

- - The Fund reserves the right to stop offering shares at any time.

4
<PAGE> 53
INVESTMENT STRATEGIES

This section explains how Vanguard/Windsor II's advisers pursue the objectives
of long-term capital growth and some dividend income. It also explains three
important risks -- market risk, objective risk, and manager risk -- faced by
investors in the Fund. Unlike the Fund's investment objectives, these investment
strategies are not fundamental and can be changed by the Fund's board of
directors without shareholder approval. However, before making any important
change in its strategies, the Fund will give shareholders 30-days notice, in
writing.

MARKET EXPOSURE

[FLAG]
THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS. STOCK
MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK PRICES AND
PERIODS OF FALLING STOCK PRICES.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926 - 1996)
- -----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst - 43.3 - 12.5 - 0.9 3.1
Average 12.7 10.4 10.8 10.8
- -----------------------------------------------------------------
</TABLE>

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
1996. For example, while the average return on stocks for all of the 5-year
periods was 10.4%, returns for these 5-year periods ranged from a - 12.5%
average (from 1928 through 1932), to 23.9% (from 1950 through 1954). These
average returns reflect past performance on common stocks and should not be
regarded as an indication of future returns from either the stock market as a
whole or this Fund in particular.

PLAIN TALK ABOUT
COSTS AND MARKET TIMING

PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS

Stocks of publicly traded companies -- and mutual funds that hold these stocks
- -- can be classified by the companies' market value, or capitalization. Vanguard
defines large-capitalization, or large-cap, funds as those holding stocks of
companies with a median market value exceeding $5 billion. Mid-cap funds hold
stocks of companies with a median market value between $1 billion and $5
billion. Small-cap funds hold stocks of companies with a median market value of
up to $1 billion. Historically, large-cap funds have exhibited lower volatility
than mid-cap and small-cap funds.

5
<PAGE> 54
PLAIN TALK ABOUT
PRICE/EARNINGS RATIOS

A widely used measure of common-stock valuation is the price/earnings (P/E)
ratio. The P/E ratio is simply a stock's current price divided by its earnings
per share from the past year (or sometimes its projected earnings for the coming
year). In general, a lower P/E ratio indicates that a stock is out of favor with
investors and is expected to have slow future growth in profits. A higher P/E
ratio indicates that investors expect rapid growth in a company's profits. Keep
in mind, however, that these expectations sometimes prove incorrect, and that
there is no "ideal" P/E ratio.

Finally, because Vanguard/Windsor II does not hold the same securities held in
the S&P 500 Index or any other market index, the performance of the Fund will
not mirror the returns of any particular index.

[FLAG]
THE FUND IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY THAT THE
RETURNS FROM THE TYPES OF STOCKS THAT THE FUND INVESTS IN -- ATTRACTIVELY
PRICED OR "VALUE" STOCKS -- WILL TRAIL RETURNS FROM THE OVERALL STOCK
MARKET. DIFFERENT TYPES OF STOCKS TEND TO GO THROUGH CYCLES OF
OUTPERFORMANCE AND UNDERPERFORMANCE IN COMPARISON TO COMMON STOCKS IN
GENERAL. THESE CYCLES HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.

SECURITY SELECTION
Vanguard/Windsor II employs four investment advisers, each of whom independently
chooses and maintains a portfolio of common stocks for the Fund.

Each adviser is responsible for a specific percentage of the Fund's assets.
Before the Fund makes a significant change in an adviser's percentage,
shareholders will receive 30-days notice, in writing.

The four investment advisers employ active investment management methods, which
means securities are bought and sold according to the advisers' judgments about
companies and their financial prospects, and about the stock market and the
economy in general.

While the advisers use different processes to select securities for their
portfolios, all four are committed to investing in large- and mid-cap stocks
that, in their opinion, are undervalued. Undervalued stocks are generally those
that are out of favor with investors and currently trading at prices that, the
adviser feels, are below what the stocks are worth in relation to their
earnings. These stocks typically -- but not always -- have lower-than-average
price/earnings (P/E) ratios and higher-than-average dividend yields.

Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S), which is responsible for
about 72% of the Fund's assets, uses traditional methods of stock selection --
research and analysis -- to identify undervalued securities. A security will be
sold when, in BHM&S's opinion, its share price accurately reflects the
security's overall worth. At that point, another undervalued security will be
chosen. No more than 15% of BHM&S's portfolio is devoted to a single industry.

Like BHM&S, Tukman Capital Management, Inc. (Tukman), which manages about 10%
of the Fund's assets, uses traditional research methods to select undervalued
securities. Tukman typically buys stocks of financially sound companies in
growing business sectors only and holds them for three to five years.

Equinox Capital Management, Inc. (Equinox), which manages about 10% of the
Fund's assets, uses its own fundamental research and proprietary software to
identify undervalued securities with attractive growth and dividend prospects.
Like BHM&S, it avoids large concentrations in a single industry.

Vanguard Core Management Group, which is responsible for about 8% of the Fund's
assets, selects stocks from a "universe" of about 550
6
<PAGE> 55
companies. Vanguard Core Management Group evaluates the stocks using several
fundamental factors, such as a stock's price in relation to its projected growth
rate. All of the stocks selected are expected, as a group, to outperform the
Russell 1000 Value Index, a benchmark of undervalued large- and mid-cap stocks.

The top ten holdings (which amounted to 27% of the Fund's total net assets) as
of October 31, 1996, follow.

1. The Chase Manhattan Corp.
2. Philip Morris Cos., Inc.
3. Allstate Corp.
4. International Business Machines Corp.
5. Exxon Corp.
6. Travelers Group, Inc.
7. Texaco, Inc.
8. PNC Bank Corp.
9. BankAmerica Corp.
10. First Chicago NBD Corp.

Keep in mind that, because the makeup of the Fund changes daily, this listing
is only a "snapshot" at one point in time.

[FLAG]
THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT ONE OR
MORE OF THE FUND'S ADVISERS MAY DO A POOR JOB OF SELECTING STOCKS.

PORTFOLIO TURNOVER
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long they have been held. The Fund's
average turnover rate for the past ten years has been about 30%. (A turnover
rate of 100% would occur, for example, if the Fund sold and replaced securities
valued at 100% of its total net assets within a one-year period.)

INVESTMENT POLICIES

Besides investing in undervalued common stocks, the Fund may follow a number of
investment policies to achieve its objectives.

[FLAG]
THE FUND RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK
FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.

PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION

PLAIN TALK ABOUT
PORTFOLIO TURNOVER

PLAIN TALK ABOUT
CASH RESERVES

With mutual funds, holding cash reserves -- or "cash" -- does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash. (Most mutual funds keep at least a small percentage of assets in cash
to accommodate shareholder redemptions.) While some funds strive to keep cash
levels at a minimum and to always remain fully invested in stocks, other funds
allow investment advisers to hold up to 20% of a fund's assets in cash reserves.

PLAIN TALK ABOUT
PAST PERFORMANCE

may be applied to futures contracts deposits and no more than 20% of total
assets may be committed to such contracts.

The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.

- - To make it easier to trade.

- - To reduce costs by buying futures instead of actual stocks when futures are
cheaper.

INVESTMENT LIMITATIONS

To reduce risk and maintain diversification, the Fund has adopted limits on some
of its investment policies. Specifically, the Fund will not:
- - Invest more than 25% of its assets in any one industry.

- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares.

With respect to 75% of its assets, the Fund will not:
- - Invest more than 5% in the securities of any one company.

- - Buy more than 10% of the outstanding voting shares of any company.

The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Fund's shareholders.

INVESTMENT PERFORMANCE

Vanguard/Windsor II invests primarily in common stocks, so its performance is
closely correlated to the performance of the overall stock market. Historically,
stock market performance has been characterized by sharp up-and-down swings in
the short term and by more stable growth over the long term.

AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED OCTOBER 31, 1996

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------

VANGUARD/WINDOSR II 27.2% 17.0% 16.6% 13.9%
S&P 500 INDEX 24.1% 17.7% 15.5% 14.7%

8
<PAGE> 57
The results shown on page 8 represent the Fund's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information on the unmanaged Standard & Poor's 500 Composite Stock Price Index.
The chart does not make any allowances for federal, state, or local income taxes
that shareholders must pay on a current basis.

In weighing these performance figures, note that the Fund has been in operation
since June 24, 1985. BHM&S has been adviser for the majority of Fund assets from
the Fund's inception. Equinox, Tukman, and Vanguard Core Management Group were
added as advisers on November 1, 1991.

SHARE PRICE

The Fund's share price, also called its net asset value, is calculated each
business day after the close of trading (generally 4 p.m. Eastern time) of the
New York Stock Exchange. The net asset value per share is calculated by adding
up the total assets of the Fund, subtracting all its liabilities, or debts, and
then dividing by the total number of Fund shares outstanding:

TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ----------------------------------------------
NUMBER OF SHARES OUTSTANDING

PLAIN TALK ABOUT
DISTRIBUTIONS

DIVIDENDS, CAPITAL GAINS, AND TAXES

- The dividends and short-term capital gains that you receive are taxable to
you as ordinary dividend income. Any distributions of

9
<PAGE> 58
net long-term capital gains by the Fund are taxable to you as long-term capital
gains, no matter how long you've owned shares in the Fund. Both dividends and
capital gains distributions are taxable to you whether received in cash or
reinvested in additional shares. Although the Fund does not seek to realize any
particular amount of capital gains during a year, such gains are realized from
time to time as byproducts of the ordinary investment activities of the Fund.
Consequently, distributions may vary considerably from year to year.

- If you sell or exchange your shares, any gain or loss you have is a taxable
event, which means that you may have a capital gain to report as income, or a
capital loss to report as a deduction, when you complete your federal income tax
return.

- Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Fund shares, may be subject to state and local income
taxes as well.

The tax information in this prospectus is provided as general information and
will not apply to you if you are investing in a tax-deferred retirement account
such as an IRA. You should consult your own tax adviser about the tax
consequences of an investment in the Fund.

PLAIN TALK ABOUT
"BUYING A DIVIDEND"

PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE

The Vanguard Group, Inc. is the only mutual mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.

THE FUND AND VANGUARD

Vanguard/Windsor II is a member of The Vanguard Group, a family of more than 30
investment companies with more than 90 distinct investment portfolios and total
net assets of more than $240 billion. All of the Vanguard funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.

Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each fund pays its
allocated share of The Vanguard Group's costs.

A list of the Fund's directors and officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.

INVESTMENT ADVISERS

The Fund employs four investment advisers. Each manages its percentage of the
Fund's assets subject to the control of the officers and directors of the Fund.

Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S), 3232 McKinney Avenue, 15th
Floor, Dallas, TX 75204, is an investment advisory firm founded in 1979. It
currently manages approximately $19 billion in stock and bond portfolios.

BHM&S is paid a quarterly advisory fee that is based on the average month-end
Fund assets it manages:
10
<PAGE> 59
------------------------------------------------
AVERAGE ASSETS MANAGED FEE (ANNUALIZED)
------------------------------------------------
First $200 million 0.300%
Next $300 million 0.200
Next $500 million 0.150
Assets over $1 billion 0.125
------------------------------------------------

BHM&S's advisory fee may be adjusted based on the total return performance of
its portion of the Fund as compared to that of the Standard & Poor's/BARRA Value
Index, a benchmark of stocks from the S&P 500 Index with lower than average
price/book, and price/earnings ratios. Under the fee schedule, BHM&S's basic fee
may be increased or decreased by as much as 25%.

Equinox Capital Management, Inc., 590 Madison Avenue, 41st Floor, New York
City, NY 10022, is a professional investment advisory firm founded in 1989. It
currently manages approximately $7.5 billion in assets.

Equinox is paid a quarterly advisory fee based on the average month-end
assets of its portion of Windsor II:

------------------------------------------------
AVERAGE ASSETS MANAGED FEE (ANNUALIZED)
------------------------------------------------
First $400 million 0.200%
Next $600 million 0.150
Next $1 billion 0.125
Assets over $2 billion 0.100
------------------------------------------------

Equinox's advisory fee may be adjusted based on the total return performance
of its portion of Windsor II as compared to that of the Russell 1000 Value
Index. Under the fee schedule, Equinox's basic fee may be increased or decreased
by as much as 50%.

Founded in 1980, Tukman Capital Management, Inc., 60 East Sir Francis Drake
Boulevard, Larkspur, CA 94939, is an investment advisory firm that currently
manages $3.8 billion in assets.

Tukman is paid a quarterly advisory fee based on the average month-end assets
of its portion of Windsor II:

------------------------------------------------
AVERAGE ASSETS MANAGED FEE (ANNUALIZED)
------------------------------------------------
First $25 million 0.40%
Next $125 million 0.35
Next $350 million 0.25
Next $500 million 0.20
Assets over $1 billion 0.15
------------------------------------------------

Tukman's basic advisory fee may be adjusted based on the total return
performance of its portion of Windsor II as compared to that of the S&P 500
Index. Under the fee schedule, the basic fee may be increased or decreased by as
much as 50%.

Vanguard Core Management Group, P.O. Box 2600, Valley Forge, PA 19482,
provides investment advisory services to several Vanguard funds, managing more
than $59 billion in total assets at the end of

PLAIN TALK ABOUT
THE FUND'S ADVISERS

Since 1985, the manager responsible for BHM&S's portion of Vanguard/Windsor II
has been JAMES P. BARROW, Partner and Vice President of BHM&S; 35 years
investment experience, 17 years with BHM&S; B.S. from the University of South
Carolina.

RONALD J. ULRICH, President, Director, and founder of Equinox Capital
Management (26 years investment experience; B.S. from Lehigh University, M.B.A.
from New York University), has managed Equinox's portion of the Fund since 1991.

The persons responsible for Tukman's portion of the Fund since 1991 have been
MELVIN T. TUKMAN, President, Director, and founder of Tukman (27 years
investment experience; A.B. from Hunter College, M.B.A. from Harvard Business
School), and DANIEL L. GROSSMAN, Vice President (20 years investment experience;
B.A. from Yale University, M.B.A. from Stanford Graduate School of Business).

GEORGE U. SAUTER, a Principal of Vanguard (12 years investment experience, 10
years portion responsibility for Vanguard Core Management Group; A.B. from
Dartmouth College, M.B.A. from the University of Chicago) has overseen Vanguard
Core Management Group's portion of the Fund's assets since 1991.

11
<PAGE> 60
1996. Vanguard Core Management Group provides advisory services to the Fund on
an at-cost basis.

For fiscal 1996, the total fee paid by the Fund to its advisers was $17.2
million, including a total incentive fee of $935,000 for BHM&S, Equinox, and
Tukman. (BHM&S's incentive fee and Equinox's basic fee were calculated under
their former fee agreements, which were replaced on April 30, 1996, and August
1, 1996, respectively.)

The current fee agreements with the advisers authorize them to choose brokers
or dealers to handle the purchase and sale of the Fund's securities, and direct
the advisers to get the best available price and most favorable execution from
these brokers with respect to all transactions. At times, the advisers may
choose brokers who charge higher commissions in the interests of obtaining
better execution of a transaction. If more than one broker can obtain the best
available price and favorable execution of a transaction, then the advisers are
authorized to choose a broker who, in addition to executing the transaction,
will provide research services to the advisers or the Fund. However, the
advisers will not pay higher commissions specifically for the purpose of
obtaining research services. The Fund may direct the advisers to use a
particular broker for certain transactions in exchange for commission rebates
or research services provided to the Fund.

The board of directors may, without prior approval from shareholders, change
the terms of the advisory agreements or hire a new investment adviser as either
a replacement adviser or as an additional adviser. However, no such change would
be made before giving shareholders 30-days notice, in writing.

GENERAL INFORMATION

Vanguard/Windsor II is one of two Funds of Vanguard/Windsor Funds, Inc., which
is organized under the laws of the state of Maryland. The other Fund is
Vanguard/Windsor Fund (which is not open to new investors). The two Funds are
combined under one corporation for administrative purposes, but for investment
management purposes operate like separate companies.

Shareholders of Vanguard/Windsor II have rights and privileges similar to
those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of directors), each share outstanding at that point
would be entitled to one vote. Annual meetings will not be held by the Fund
except as required by the Investment Company Act of 1940. A meeting will be
scheduled (for example, to vote on the removal of a director) if the holders of
at least 10% of the Fund's shares request a meeting in writing.

12
<PAGE> 61

INVESTING WITH VANGUARD

Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?

Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.

The following sections of the prospectus briefly explain the many services we
offer you as a Vanguard/Windsor II shareholder. Booklets providing detailed
information are available on the services marked with a [BOOK]. Please call us
to request copies.

SERVICES AND ACCOUNT FEATURES

Vanguard offers many services that make it convenient to buy, sell, or exchange
shares.

TELEPHONE REDEMPTIONS
(SALES AND EXCHANGES)

Automatically set up for this Fund unless you notify us otherwise.

VANGUARD DIRECT DEPOSIT
SERVICE
[BOOK]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.

VANGUARD AUTOMATIC EXCHANGE
SERVICE
[BOOK]

Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.*

Vanguard Fund Express
[BOOK]

Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.*

VANGUARD DIVIDEND EXPRESS
[BOOK]

Electronic method for transferring dividends and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account or to another Vanguard fund account.

VANGUARD BROKERAGE SERVICES
(VBS)
[BOOK]

A cost-effective way to trade stocks, bonds, and options on major exchanges,
Nasdaq, and other domestic over-the-counter markets at reduced rates, and to buy
and sell shares of non-Vanguard mutual funds. Call VBS (1-800-992-8327) for
additional information and the appropriate forms.

*Can be used to "dollar-cost average" [BOOK] or to contribute to an IRA or other
retirement plan.

Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273

13
<PAGE> 62

TYPES OF ACCOUNTS

INDIVIDUAL OR OTHER ENTITY

Vanguard's account registration form can be used to establish a variety of
non-retirement accounts.

FOR ONE OR MORE PEOPLE

To open an account in the To open an account in the name of one (individual) or
more (joint tenants) people. $3,000 minimum initial investment.

FOR A MINOR CHILD
[BOOK]

To open an account as an UGMA/UTMA (Uniform Gifts/Transfers to Minors Act). Age
of majority and other requirements are set by state law. $1,000 minimum initial
investment.

FOR HOLDING TRUST ASSETS
[BOOK]

To invest assets held in an existing trust. $3,000 minimum initial investment.

FOR THIRD-PARTY TRUSTEE
RETIREMENT INVESTMENTS
(Vanguard is not the custodian
or trustee.)

To open an account as a retirement trust or plan based on an existing corporate
or institutional plan. These accounts are established by the custodian or
trustee of the existing plan.

FOR AN ORGANIZATION

To open an account as a corporation, partnership, or other entity. These
accounts may require a corporate resolution or other documents to name the
individuals authorized to act. $3,000 minimum initial investment.

RETIREMENT

You establish these accounts with a Vanguard adoption agreement -- not a
Vanguard account registration form. To request the appropriate adoption
agreement and forms, or to ask questions about investing for retirement, call
Investor Information.

FOR AN INDIVIDUAL RETIREMENT
ACCOUNT (IRA)
(Vanguard Fiduciary Trust
Company is the custodian.)

To open a retirement account in the name of an individual. IRAs can be
established with a contribution, a direct roll-over from an employer's plan,
such as a 401(k), or an asset transfer or rollover from another financial
institution, such as a bank or mutual fund company. $1,000 minimum initial
investment.

FOR A SIMPLIFIED EMPLOYEE
PENSION PLAN ACCOUNT (SEP-IRA)
(Vanguard Fiduciary Trust
Company is the custodian.)

To open a retirement account in the name of an employee. SEPs allow employers to
make deductible contributions directly to IRAs established by their employees. A
SEP can be established by people who are self-employed, small-business owners,
partnerships, or corporations.

FOR A QUALIFIED RETIREMENT
PROGRAM ACCOUNT
(Vanguard Fiduciary Trust
Company can be the trustee.)

To open a retirement account that allows small-business owners or people who are
self-employed to make tax-deductible retirement contributions for themselves and
their employees into Profit-Sharing and Money Purchase Pension (Keogh) plans.

Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273

14
<PAGE> 63
TYPES OF ACCOUNTS (continued)

FOR A 403(B)(7) CUSTODIAL ACCOUNT
(Vanguard Fiduciary Trust
Company is the custodian.)

To open a retirement account that allows employees of tax-exempt institutions
(for example, schools or hospitals) to make pre-tax retirement contributions.

DISTRIBUTION OPTIONS

You can receive distributions of dividends and/or capital gains in a number of
ways:

REINVESTMENT

Dividends and capital gains are automatically reinvested in additional shares of
the Fund unless you request a different distribution method.

DIVIDENDS IN CASH

Dividends are paid by check and mailed to your account's address of
record, and capital gains are reinvested in additional shares of the Fund.

DIVIDENDS AND CAPITAL GAINS
IN CASH

Both dividends and capital gains are paid by check and mailed to your account's
address of record.

To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, or to another Vanguard fund account,
see Vanguard Dividend Express under "Services and Account Features."

BUYING SHARES

You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request, provided we receive your request before 4 p.m. Eastern
time (the close of trading on the New York Stock Exchange). The Fund is offered
on a no-load basis, meaning that you do not pay sales commissions or 12b-1
marketing fees.

<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
MINIMUM INVESTMENT $3,000 (regular account); $1,000 $100 by mail or exchange; $1,000
(IRAs and custodial accounts for by wire.
minors).

BY MAIL Complete and sign the applica- Mail your check with an Invest-
[ENVELOPE] tion form. By-Mail form detached from
your confirmation statement to
FIRST-CLASS mail to: the address listed on the form.
The Vanguard Group
P.O. Box 2600 Make your check payable to: Make your check payable to:
Valley Forge, PA 19482 The Vanguard Group - 73 The Vanguard Group - 73

EXPRESS or REGISTERED mail to:
The Vanguard Group All purchases must be made in All purchases must be made in
455 Devon Park Drive U.S. dollars, and checks must be U.S. dollars, and checks must be
Wayne, PA 19087 drawn on U.S. banks. drawn on U.S. banks.
</TABLE>

IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.

15
<PAGE> 64
BUYING SHARES (continued)

<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
BY TELEPHONE Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
[PHONE] hours a day -- or Client Services hours a day -- or Client Services
during business hours -- to during business hours -- to
1-800-662-6273 exchange from another Vanguard exchange from another Vanguard
Vanguard Tele-Account(R) fund account with the same fund account with the same
1-800-662-2739 registration (name, address, taxpay- registration (name, address, taxpay-
Client Services er I.D., and account type). er I.D., and account type).

Use Vanguard Fund Express (see
"Services and Account Features")
to transfer assets from your bank
account. Call Client Services be-
fore your first use to verify that
this option is in place.

*You must obtain a Personal Identification Number through Tele-Account at
least seven days before you request your first exchange.
</TABLE>

IMPORTANT NOTE: Once a telephone transaction has been approved by you and a
confirmation number assigned, it cannot be revoked. We reserve the right to
refuse any purchase.

<TABLE>
<S> <C> <C>
BY WIRE Call Client Services to arrange Call Client Services to arrange
[WIRE] your wire transaction. your wire transaction.

Wire to:
CoreStates Bank, N.A. Wire transactions are not avail- Wire transactions are not avail-
ABA 031000011 able for retirement accounts. able for retirement accounts.
CoreStates No 01019897
[Temporary Account Number]
Vanguard/Windsor II
[Account Registration]
Attention: Vanguard

Automatically -- Vanguard offers a variety of ways
[AUTOMATIC] that you can add to your account
automatically. See "Services and
Account Features."
</TABLE>

You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, your redemption proceeds will not
be paid to you until payment for your purchase is collected, which may take up
to ten calendar days.

NOTE: If you buy Fund shares through a registered broker-dealer or investment
adviser, the broker-dealer or adviser may charge you a service fee.

It is important that you call Vanguard before you invest a large dollar
amount by wire or check. We must consider the interests of all Fund shareholders
and so reserve the right to delay or refuse any purchase that will disrupt the
Fund's operation or performance.

16
<PAGE> 65
REDEEMING SHARES

IMPORTANT TAX NOTE: Any sale or exchange of shares in a non-retirement account
could result in a taxable gain or a loss.

The ability to redeem (that is, sell or exchange) Fund shares by telephone is
automatically established for your account unless you tell us in writing that
you do not want this option.

/X/ Fund name.

/X/ 10-digit account number.

/X/ Name and address exactly as registered on that account.

/X/ Social Security or Employer Identification number as registered on that
account.

If you call to sell shares, the sale proceeds will be made payable to you, as
the registered shareholder, and mailed to your account's address of record.

HOW TO SELL SHARES

Good order means that the request includes:

/X/ Fund name and account number.

/X/ Amount of the transaction (in dollars or shares).

/X/ Signatures of all owners exactly as registered on the account.

/X/ Signature guarantees (if required).

/X/ Any supporting legal documentation that may be required.

/X/ Any certificates you are holding for the account.

Sales or exchange requests received after the close of trading on the New
York Stock Exchange (generally 4 p.m. Eastern time) are processed at the next
business day's net asset value.

Some written requests require a signature guarantee from a bank, broker, or
other acceptable institution. A notary public cannot provide a signature
guarantee.

17
<PAGE> 66
REDEEMING SHARES (CONTINUED)

HOW TO EXCHANGE SHARES

An exchange is the selling of shares of one Vanguard fund to purchase shares of
another.

Because excessive exchanges can potentially disrupt the management of the
Fund and increase transaction costs, Vanguard limits exchange activity to TWO
SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30 days apart) from the Fund during
any 12-month period. "Substantive" means either a dollar amount large enough to
have a negative impact on the Fund or a series of movements between Vanguard
funds.

Before you exchange into a new Vanguard fund, be sure to read its prospectus.
For a copy and for answers to questions you might have, call Investor
Information.

SELLING OR EXCHANGING SHARES

BY TELEPHONE
[PHONE]
1-800-662-6273
Vanguard Tele-Account
1-800-662-2739
Client Services

ACCOUNT TYPE

ALL TYPES EXCEPT RETIREMENT:

Call Vanguard Tele-Account* 24 hours a day -- or
Client Services during business hours -- to sell or exchange shares. You can
exchange shares from this Fund to open an account in another Vanguard fund or to
add to an existing Vanguard fund account with an identical registration.

RETIREMENT:

You can exchange -- but not sell -- shares by calling Tele- Account or Client
Services.

*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first redemption.

SELLING OR EXCHANGING SHARES

BY MAIL
[ENVELOPE]

FIRST-CLASS mail to:
The Vanguard Group
Vanguard/Windsor II
P.O. Box 1120
Valley Forge, PA 19482

EXPRESS or REGISTERED mail to:
The Vanguard Group
Vanguard/Windsor II
455 Devon Park Drive
Wayne, PA 19087

ACCOUNT TYPE

ALL TYPES EXCEPT RETIREMENT:

Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares.

RETIREMENT:

For information on how to request distributions from . . .

- IRAs, call Client Services.

- SEP-IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and Money
Purchase Pension (Keogh) Plans, call Individual Retirement Services at
1-800-662-2003.

Depending on your account registration type, additional documentation may be
required.

SELLING OR EXCHANGING SHARES

AUTOMATICALLY
[AUTOMATIC]

ACCOUNT TYPE

ALL TYPES EXCEPT RETIREMENT:

Vanguard offers several ways to sell or exchange shares automatically (see
"Services and Account Features"). Call Investor Information for the appropriate
booklet and application if you did not elect a feature when you opened your
account.

18
<PAGE> 67
REDEEMING SHARES (continued)

It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Fund shareholders and so reserve
the right to delay your redemption proceeds -- up to seven days -- if the amount
will disrupt the Fund's operation or performance.

A NOTE ON UNUSUAL CIRCUMSTANCES

Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the United States
Securities and Exchange Commission. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions on
selling or exchanging shares by mail in the "Redeeming Shares" section.

FUND AND ACCOUNT UPDATES

STATEMENTS AND REPORTS

We will send you clear, concise account and tax statements to help you keep
track of your Vanguard/Windsor II account throughout the year as well as when
you are preparing your income tax returns.

In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, as well as a listing of its holdings and other financial
statements.

CONFIRMATION STATEMENT

Sent each time you buy, sell, or exchange shares; confirms the date
and the amount of your transaction.

PORTFOLIO SUMMARY

Mailed quarterly; shows the market value of your account at the close of
the statement period, as well as distributions, purchases, sales, and exchanges
for the current calendar year.

FUND FINANCIAL REPORTS

Mailed in June and December for this Fund.

TAX STATEMENTS

Generally mailed in January; report previous year's dividend
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.

AVERAGE COST STATEMENT
[BOOK]

Issued quarterly for taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the previous quarter,
using the average cost single category method.

19
<PAGE> 68
FUND AND ACCOUNT UPDATES (continued)

AUTOMATED TELEPHONE ACCESS

VANGUARD TELE-ACCOUNT
1-800-662-6273
Any time, seven days a week,
from anywhere in the continental
United States and Canada.
[BOOK]

Toll-free access to Vanguard fund and account information -- as well as some
transactions -- through any TouchTone(TM) telephone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.

COMPUTER ACCESS

VANGUARD ONLINE(sm)
KEYWORD: Vanguard

Use your personal computer to learn more about Vanguard funds and services; keep
in touch with your Vanguard accounts; map out a long-term investment strategy;
and ask questions, make suggestions, and send messages to Vanguard. Vanguard
Online is offered through America Online(R) (AOL). To establish an AOL account,
call 1-800-238-6336.

VANGUARD ON THE
WORLD WIDE WEB
http://www.vanguard.com

Use your personal computer to visit Vanguard's education-oriented website,
which provides timely news and information about Vanguard funds and services;
an on-line "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.

20
<PAGE> 69
GLOSSARY OF INVESTMENT TERMS

CAPITAL GAINS DISTRIBUTION

Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.

CASH RESERVES

Cash deposits as well as short-term bank deposits, money market instruments,
bank CDs, repurchase agreements, and U.S. Treasury bills.

COMMON STOCK

A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.

DIVIDEND INCOME

Payment to shareholders of income from interest or dividends generated by a
fund's investments.

EXPENSE RATIO

The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.

FIXED-INCOME SECURITIES

Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.

GROWTH AND INCOME STOCK FUND

A mutual fund that seeks moderate capital appreciation and some dividend income
by investing primarily in stocks.

GROWTH STOCK FUND

A mutual fund that emphasizes stocks of companies whose strong earnings and
revenue potential indicate above-average prospects for capital growth, with less
emphasis on dividend income.

INVESTMENT ADVISER

An organization that makes the day-to-day decisions regarding a portfolio's
investments.

MUTUAL FUND

An investment company that pools the money of many people and invests it in a
variety of securities in an attempt to achieve a specific objective over time.

NET ASSET VALUE (NAV)

The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.

PORTFOLIO DIVERSIFICATION

Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.

PRICE/EARNINGS (P/E) RATIO

The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.

PRINCIPAL

The amount of your own money you put into an investment.

SECURITIES

Stocks, bonds, and other investment vehicles.

TOTAL RETURN

VALUE STOCK FUND

A mutual fund that focuses on stocks of companies that, considering their
earnings and dividends, are attractively priced; these companies often pay
regular dividend income to shareholders.

VOLATILITY

The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low share
prices.

YIELD

Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 70
[THE VANGUARD GROUP LOGO]
THEVANGUARDGROUP(R)

Post Office Box 2600
Valley Forge, PA 19482

<TABLE>
<CAPTION>
<S> <C> <C>
INVESTOR INFORMATION VANGUARD BROKERAGE ELECTRONIC ACCESS TO THE
DEPARTMENT SERVICES VANGUARD MUTUAL FUND
1-800-662-7447 (SHIP) 1-800-992-8327 EDUCATION AND INFORMATION
TEXT TELEPHONE: For information on trading CENTER
1-800-952-3335 stocks, bonds, and options On America Online(R)
For information on our Funds, at reduced commissions Keyword: Vanguard
Fund services, and retirement
accounts; requests for VANGUARD TELE-ACCOUNT(R) On the World Wide Web
literature 1-800-662-6273 (ON-BOARD) http://www.vanguard.com
For 24-hour automated access
CLIENT SERVICES DEPARTMENT to price and yield, information To send e-mail to Vanguard
1-800-662-2739 (CREW) on your account, certain [email protected]
TEXT TELEPHONE: transactions
1-800-662-2738
For information on your
account, account transactions,
account statements
</TABLE>

P073N
<PAGE> 71
VANGUARD/
WINDSOR II

Institutional Prospectus
February 28, 1997

This prospectus contains
financial data for the
Fund through the
fiscal year ended
October 31, 1996.

[LOGO]THE VANGUARD GROUP
<PAGE> 72
VANGUARD/WINDSOR II A Growth and Income Stock Mutual Fund

CONTENTS

Fund Expenses 2

Financial Highlights 3

A Word About Risk 4

The Fund's Objectives 4

Who Should Invest 4

Investment Strategies 5

Investment Policies 7

Investment Limitations 8

Investment
Performance 8

Share Price 9

Dividends, Capital
Gains, and Taxes 10

The Fund and
Vanguard 10

Investment Advisers 10

General Information 12

Investing
with Vanguard

- - For Plan Participants 13

- - For Other
Institutional Investors 13

Accessing Fund
Information
By Computer 14

Prospectus Postscript 15

Risk Quiz 16

Glossary Inside Back Cover

INVESTMENT OBJECTIVES AND POLICIES

Vanguard/Windsor II (the "Fund") is a diversified mutual fund, a part of
Vanguard/Windsor Funds, Inc., an open-end investment company.

The Fund seeks to provide long-term growth of capital by investing mainly in
the equity securities of large and medium-size companies whose stocks are
considered to be undervalued by the Fund's advisers and out of favor with
investors. The Fund's secondary objective is to provide some dividend income.

FEES AND EXPENSES

Vanguard/Windsor II is offered on a no-load basis, which means that you pay no
sales commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the Fund's expense ratio.

IMPORTANT NOTE

This prospectus is intended for institutional clients and for participants in
employer-sponsored retirement or savings plans. Another version -- for
individuals who would like to open a personal account -- can be obtained by
calling Vanguard at 1-800-662-7447.

ADDITIONAL INFORMATION ABOUT THE FUND

WHY READING THIS PROSPECTUS IS IMPORTANT

This prospectus explains the objectives, risks, and strategies of
Vanguard/Windsor II. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk" explanations along the way. Reading the
prospectus will help you to decide whether the Fund is the right investment for
you. We suggest that you keep it for future reference.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 73
FUND PROFILE Vanguard/Windsor II

WHO SHOULD INVEST (PAGE 4)

- - Investors seeking a growth and income stock mutual fund as part of a balanced
and diversified investment program.

- - Investors seeking growth of their capital over the long term -- at least five
years.

WHO SHOULD NOT INVEST

- - Investors unwilling to accept significant fluctuations in share price.

RISKS OF THE FUND (PAGES 4 - 8)

The Fund's total return will fluctuate within a wide range, so an investor could
lose money over short or even extended periods. The Fund is subject to manager
risk (the chance that poor security selection will cause it to lag the stock
market as a whole) and objective risk (the chance that returns from the type of
stocks that the Fund invests in -- attractively priced or "value" stocks -- will
trail returns from the overall stock market).

DIVIDENDS AND CAPITAL GAINS (PAGE 10)
Dividends are paid in June and December. Capital gains, if any, are paid in
December. In participant accounts, all distributions are automatically
reinvested.

INVESTMENT ADVISERS (PAGE 10)
Vanguard/Windsor II follows a multi-adviser approach:

- - Barrow, Hanley, Mewhinney & Strauss, Inc., Dallas, TX.

- - Equinox Capital Management, Inc., New York City, NY.

- - Tukman Capital Management, Inc., Larkspur, CA.

- - Vanguard Core Management Group, Valley Forge, PA.

INCEPTION DATE: June 24, 1985

NET ASSETS AS OF 10/31/96: $14.8 billion

FUND'S EXPENSE RATIO FOR THE YEAR ENDED 10/31/96: 0.39%

NEWSPAPER ABBREVIATION: Wnds II

VANGUARD FUND NUMBER: 073

AVERAGE ANNUAL TOTAL RETURNS --
PERIODS ENDED OCTOBER 31, 1996

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------------------------
<S> <C> <C> <C>
Vanguard/Windsor II 27.2% 16.6% 13.9%
S&P 500 Index 24.1 15.5 14.7
</TABLE>

QUARTERLY RETURNS (%) 1987 - 1996 (intended to show volatility of returns)

[BAR GRAPH]

PLAIN TALK ABOUT
FUND EXPENSES

All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard/Windsor II's expense ratio in fiscal year 1996 was 0.39%, or
$3.90 per $1,000 of average net assets. The average growth and income equity
fund had expenses in 1996 of 1.23%, or $12.30 per $1,000 of average net assets,
according to Lipper Analytical Services, Inc., which reports on the mutual fund
industry.

FUND EXPENSES

The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Fund.

As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Fund:

SHAREHOLDER TRANSACTION EXPENSES

Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None

ANNUAL FUND OPERATING EXPENSES

<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.22%
Investment Advisory Expenses: 0.14%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.01%
----
Total Other Expenses: 0.03%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.39%
====
</TABLE>

<TABLE>
<CAPTION>
---------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------
<S> <C> <C> <C> <C>
$4 $23 $22 $49
---------------------------------------------
</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 75
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF PERIOD $ 20.06 $ 17.33 $ 17.98 $ 15.75 $ 15.07 $ 11.91 $ 15.81

INVESTMENT OPERATIONS
Net Investment Income .62 .58 .55 .50 .56 .62 .67
Net Realized and
Unrealized Gain (Loss)
on Investments 4.63 3.17 (.19) 2.47 1.17 3.55 (3.22)
-----------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 5.25 3.75 .36 2.97 1.73 4.17 (2.55)
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.58) (.55) (.51) (.52) (.61) (.73) (.74)
Distributions from
Realized Capital Gains (.69) (.47) (.50) (.22) (.44) (.28) (.61)
-----------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.27) (1.02) (1.01) (.74) (1.05) (1.01) (1.35)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 24.04 $ 20.06 $ 17.33 $ 17.98 $ 15.75 $ 15.07 $ 11.91

====================================================================================================================================
TOTAL RETURN 27.17% 23.08% 2.22% 19.51% 12.50% 36.61% -17.48%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $14,758 $10,272 $ 8,246 $ 7,486 $ 4,878 $ 3,298 $ 2,087
Ratio of Expenses to
Average Net Assets 0.39% 0.40% 0.39% 0.39% 0.41% 0.48% 0.52%
Ratio of Net Investment
Income to Average
Net Assets 2.92% 3.27% 3.26% 3.11% 3.72% 4.51% 4.93%
Portfolio Turnover Rate 32% 30% 24% 26% 23% 41% 20%
Average Commission
Rate Paid $ 0.483 N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------
1989 1988 1987
- ------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.23 $ 12.41 $ 12.48

INVESTMENT OPERATIONS
Net Investment Income .73 .60 .52
Net Realized and
Unrealized Gain (Loss)
on Investments 2.42 1.63 (.39)
-----------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 3.15 2.23 .13
- ------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.57) (.61) (.20)
Distributions from
Realized Capital Gains -- (.80) --
-----------------------------------------
TOTAL DISTRIBUTIONS (.57) (1.41) (.20)
- ------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 15.81 $ 13.23 $ 12.41

========================================================================
TOTAL RETURN 24.68% 20.54% .90%
========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 2,162 $ 1,485 $ 1,323
Ratio of Expenses to
Average Net Assets 0.53% 0.58% 0.49%
Ratio of Net Investment
Income to Average
Net Assets 5.29% 4.94% 4.11%
Portfolio Turnover Rate 22% 25% 46%
Average Commission
Rate Paid N/A N/A N/A
- ------------------------------------------------------------------------
</TABLE>

From time to time, the Vanguard funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a fund.

PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Fund began fiscal 1996 with a net asset value (price) of $20.06 per share.
During the year, the Fund earned $0.62 per share from investment income
(interest and dividends) and $4.63 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them. Of those total earnings of $5.25 per share, $1.27 was returned to
shareholders in the form of distributions ($.58 in dividends, $.69 in capital
gains). The earnings ($5.25 per share) less total distributions ($1.27 per
share) resulted in a share price of $24.04 at the end of the fiscal year, an
increase of $3.98 per share (from $20.06 at the beginning of the period to
$24.04 at the end of the period). Assuming that the shareholder had reinvested
the distributions in the purchase of more shares, the total return from the Fund
was 27.17% for the year.

3
<PAGE> 76
PLAIN TALK ABOUT
VALUE FUNDS AND
GROWTH FUNDS

PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM

Vanguard/Windsor II is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.

A WORD ABOUT RISK

Look for this "warning flag" symbol [WARNING FLAG] throughout the prospectus.
It is used to mark detailed information about each type of risk that you, as a
shareholder of the Fund, will confront.

THE FUND'S OBJECTIVES

[WARNING FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE
FOLLOWING PAGES, YOUR INVESTMENT IN THE FUND, AS WITH ANY
INVESTMENT IN COMMON STOCKS, COULD LOSE MONEY.

WHO SHOULD INVEST

Vanguard/Windsor II may be suitable for you if:

- - You wish to add a growth and income stock mutual fund to your existing
holdings, which could include other stock -- as well as bond, money market,
and tax-exempt -- investments.

- - You want a value-oriented investment that seeks to provide long-term growth
as well as some dividend income.

This Fund is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all the Fund's shareholders. To minimize such
costs, which reduce the ultimate returns achieved by you and other shareholders,
the Fund has adopted the following policies:

- - The Fund reserves the right to reject any purchase request -- including
exchanges from other Vanguard funds -- that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.

- - There is a limit on the number of times you can exchange into or out of the
Fund. If you own Fund shares as an investment

4
<PAGE> 77
option in an employer-sponsored retirement or savings plan, your plan
dictates the rules governing exchanges. Contact your plan administrator for
details.

- - The Fund reserves the right to stop offering shares at any time.

INVESTMENT STRATEGIES

MARKET EXPOSURE

[WARNING FLAG] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY
THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN
EXTENDED PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH
PERIODS OF RISING STOCK PRICES AND PERIODS OF FALLING STOCK
PRICES.

Average 12.7 10.4 10.8 10.8
- -----------------------------------------------------------------
</TABLE>

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1996. For example, while the average return on stocks

PLAIN TALK ABOUT
COSTS AND MARKET TIMING

Some investors try to profit from "market timing" - switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who did not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
closely monitoring daily transactions.

PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS

Stocks of publicly traded companies -- and mutual funds that hold these stocks
- -- can be classified by the companies' market value, or capitalization. Vanguard
defines large-capitalization, or large-cap, funds as those holding stocks of
companies with a median total market value exceeding $5 billion. Mid-cap funds
hold stocks of companies with a median market value between $1 billion and $5
billion. Small-cap funds hold stocks of companies with a median market value of
up to $1 billion. Historically, large-cap funds have exhibited lower volatility
than mid-cap and small-cap funds.
5
<PAGE> 78
PLAIN TALK ABOUT
PRICE/EARNINGS RATIOS

A widely used measure of common-stock valuation is the price/earnings (P/E)
ratio. The P/E ratio is simply a stock's current price divided by its earnings
per share from the past year (or sometimes its projected earnings for the coming
year). In general, a lower P/E ratio indicates that a stock is out of favor with
investors and is expected to have slow future growth in profits. A higher P/E
ratio indicates that investors expect rapid growth in a company's profits. Keep
in mind, however, that these expectations sometimes prove incorrect, and that
there is no "ideal" P/E ratio.

for all of the 5-year periods was 10.4%, returns for these 5-year periods ranged
from a -12.5% average (from 1928 through 1932), to 23.9% (from 1951 through
1955). These average returns reflect past performance on common stocks and
should not be regarded as an indication of future returns from either the stock
market as a whole or this Fund in particular. Finally, because Vanguard/Windsor
II does not hold the same securities held in the S&P 500 Index or any other
market index, the performance of the Fund will not mirror the returns of any
particular index.

[WARNING FLAG] THE FUND IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY
THAT THE RETURNS FROM THE TYPES OF STOCKS THAT THE FUND INVESTS
IN -- ATTRACTIVELY PRICED OR "VALUE" STOCKS -- WILL TRAIL
RETURNS FROM THE OVERALL STOCK MARKET. DIFFERENT TYPES OF
STOCKS TEND TO GO THROUGH CYCLES OF OUTPERFORMANCE AND
UNDERPERFORMANCE IN COMPARISON TO COMMON STOCKS IN GENERAL.
THESE CYCLES HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.

SECURITY SELECTION

Vanguard/Windsor II employs four investment advisers, each of whom independently
chooses and maintains a portfolio of common stocks for the Fund.

The four investment advisers employ active investment management methods,
which means securities are bought and sold according to the advisers' judgments
about companies and their financial prospects, and about the stock market and
the economy in general.

6
<PAGE> 79

Vanguard Core Management Group, which is responsible for about 8% of the
Fund's assets, selects stocks from a "universe" of about 550 companies. Vanguard
Core Management Group evaluates the stocks using several fundamental factors,
such as a stock's price in relation to its projected growth rate. All of the
stocks selected are expected, as a group, to outperform the Russell 1000 Value
Index, a benchmark of undervalued large- and mid-cap stocks.

The top ten holdings (which amounted to 27% of the Fund's total net assets)
as of October 31, 1996, follow.

Keep in mind that, because the makeup of the Fund changes daily, this listing
is only a "snapshot" at one point in time.

[WARNING FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE
POSSIBILITY THAT ONE OR MORE OF THE FUND'S ADVISERS MAY DO A
POOR JOB OF SELECTING STOCKS.

PORTFOLIO TURNOVER

Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long they have been held. The Fund's
average turnover rate for the past ten years has been about 30%. (A turnover
rate of 100% would occur, for example, if the Fund sold and replaced securities
valued at 100% of its total net assets within a one-year period.)

INVESTMENT POLICIES

Besides investing in undervalued common stocks, the Fund may follow a number of
investment policies to achieve its objectives.

[WARNING FLAG] THE FUND RESERVES THE RIGHT TO INVEST, TO A LIMITED
EXTENT, IN STOCK FUTURES AND OPTIONS CONTRACTS, WHICH ARE
TRADITIONAL TYPES OF DERIVATIVES.

PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION

In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund
has about 25% of its assets invested in its ten largest holdings, while some
less diversified mutual funds have 40% or more of their assets invested in the
stocks of just ten companies.

PLAIN TALK ABOUT
PORTFOLIO TURNOVER

7
<PAGE> 80
PLAIN TALK ABOUT
DERIVATIVES

PLAIN TALK ABOUT
CASH RESERVES

With mutual funds, holding cash reserves -- or "cash" -- does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash. (Most mutual funds keep at least a small percentage of assets in cash
to accommodate shareholder redemptions.) While some funds strive to keep cash
levels at a minimum and to always remain fully invested in stocks, other funds
allow investment advisers to hold up to 20% of a fund's assets in cash reserves.

Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a portfolio. The Fund will not use
futures and options for speculative purposes or as leveraged investments that
magnify the gains or losses of an investment. Rather, the Fund will keep
separate cash reserves or other liquid portfolio securities in the amount of the
obligation underlying the futures or options contract. Only a limited percentage
of the Fund's assets -- 5% -- may be applied to futures contracts deposits and
no more than 20% of total assets may be committed to such contracts.

The reasons for which the Fund will invest in futures and options are:

- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.

- - To make it easier to trade.

- - To reduce costs by buying futures instead of actual stocks when futures are
cheaper.

The Fund will usually hold only a small percentage of its assets in cash
reserves, although if an investment adviser believes that market conditions
warrant a temporary defensive measure, the Fund may hold cash reserves without
limit.

INVESTMENT LIMITATIONS

To reduce risk and maintain diversification, the Fund has adopted limits on some
of its investment policies. Specifically, the Fund will not:

- - Invest more than 25% of its assets in any one industry.

- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares.

With respect to 75% of its assets, the Fund will not:

- - Invest more than 5% in the securities of any one company.

- - Buy more than 10% of the outstanding voting shares of any company.

The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Fund's shareholders.

INVESTMENT PERFORMANCE

Vanguard/Windsor II Fund invests primarily in common stocks, so its performance
is closely correlated to the performance of the overall stock market.
Historically, stock market performance has been characterized by sharp
up-and-down swings in the short term and by more stable growth over the long
term.

8
<PAGE> 81
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED OCTOBER 31, 1996

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------

<S> <C> <C> <C> <C>
VANGUARD/WINDSOR II 27.2% 17.0% 16.6% 13.9%
S&P 500 INDEX 24.1% 17.7% 15.5% 14.7%
</TABLE>

The results shown above represent the Fund's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information on the unmanaged Standard & Poor's 500 Composite Stock Price Index.
The chart does not make any allowances for Federal, state, or local income taxes
that shareholders must pay on a current basis.

In weighing these performance figures, note that the Fund has been in
operation since June 24, 1985. BHM&S has been adviser for the majority of Fund
assets from the Fund's inception. Equinox, Tukman, and Vanguard Core Management
Group were added as advisers on November 1, 1991.

SHARE PRICE

The Fund's share price, also called its net asset value, is calculated each
business day after the close of trading (generally 4 p.m. Eastern time) of the
New York Stock Exchange. The net asset value per share is calculated by adding
up the total assets of the Fund, subtracting all its liabilities, or debts, and
then dividing by the total number of Fund shares outstanding:

TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------------
NUMBER OF SHARES OUTSTANDING

PLAIN TALK ABOUT
PAST PERFORMANCE

9
<PAGE> 82
PLAIN TALK ABOUT
DISTRIBUTIONS

PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE

DIVIDENDS, CAPITAL GAINS, AND TAXES

If your Vanguard/Windsor II investment is not part of an employer-sponsored
plan, you can receive distributions of income or capital gains in cash, or you
may have them automatically reinvested in more shares of the Fund. Both dividend
and capital gains distributions -- whether received in cash or reinvested in
additional shares -- are subject to federal (and possibly state and local)
income taxes, no matter how long you have held the shares in the Fund. You
should consult your own tax adviser about other tax consequences of an
investment in the Fund.

THE FUND AND VANGUARD

Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each fund pays its
allocated share of The Vanguard Group's costs.

A list of the Fund's directors and officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.

INVESTMENT ADVISERS

The Fund employs four investment advisers. Each manages its percentage of the
Fund's assets subject to the control of the officers and directors of the Fund.

10
<PAGE> 83
PLAIN TALK ABOUT
THE FUND'S ADVISERS

The persons responsible for Tukman's portion of the Fund since 1991 have been
MELVIN T. TUKMAN, President, Director, and founder of Tukman; (27 years
investment experience; A.B. from Hunter College, M.B.A. from Harvard Business
School), and DANIEL L. GROSSMAN, Vice President (20 years investment experience;
B.A. from Yale University, M.B.A. from Stanford Graduate School of Business).

GEORGE U. SAUTER, a Principal of Vanguard (12 years investment experience, 10
years primary responsibility for Vanguard Core Management Group; A.B. from
Dartmouth College, M.B.A. from the University of Chicago) has overseen Vanguard
Core Management Group's portion of the Fund's assets since 1991.

BHM&S is paid a quarterly advisory fee that is based on the average month-end
Fund assets it manages:

<TABLE>
<CAPTION>
----------------------------------------
AVERAGE ASSETS MANAGED FEE (ANNUALIZED)
----------------------------------------
<S> <C>
First $200 million 0.300%
Next $300 million 0.200
Next $500 million 0.150
Assets over $1 billion 0.125
----------------------------------------
</TABLE>

Equinox is paid a quarterly advisory fee based on the average month-end
assets of its portion of Windsor II:

<TABLE>
<CAPTION>
----------------------------------------
AVERAGE ASSETS MANAGED FEE (ANNUALIZED)
----------------------------------------
<S> <C>
First $400 million 0.200%
Next $600 million 0.150
Next $1 billion 0.125
Assets over $2 billion 0.100
----------------------------------------
</TABLE>

Founded in 1980, Tukman Capital Management, Inc., 60 East Sir Francis Drake
Boulevard, Larkspur, CA 94939, is an investment advisory firm that currently
manages $3.8 billion in assets.

Tukman is paid a quarterly advisory fee based on the average month-end assets
of its portion of Windsor II:

<TABLE>
<CAPTION>
----------------------------------------
Average Assets Managed Fee (Annualized)
----------------------------------------
<S> <C>
First $25 million 0.40%
Next $125 million 0.35
Next $350 million 0.25
Next $500 million 0.20
Assets over $1 billion 0.15
----------------------------------------
</TABLE>

<PAGE> 84
Vanguard Core Management Group, P.O. Box 2600, Valley Forge, PA 19482,
provides investment advisory services to several Vanguard funds, managing more
than $59 billion in total assets at the end of 1996. Vanguard Core Management
Group provides advisory services to the Fund on an at-cost basis.

The current fee agreements with the advisers authorize them to choose brokers
or dealers to handle the purchase and sale of the Fund's securities, and directs
the advisers to get the best available price and most favorable execution from
these brokers with respect to all transactions. At times, the advisers may
choose brokers who charge higher commissions in the interests of obtaining
better execution of a transaction. If more than one broker can obtain the best
available price and favorable execution of a transaction, then the advisers are
authorized to choose a broker who, in addition to executing the transaction,
will provide research services to the advisers or the Fund. However, the
advisers will not pay higher commissions specifically for the purpose of
obtaining research services. The Fund may direct the advisers to use a
particular broker for certain transactions in exchange for commission rebates or
research services provided to the Fund.

GENERAL INFORMATION

12
<PAGE> 85
INVESTING WITH VANGUARD

FOR PLAN PARTICIPANTS

Vanguard/Windsor II is an investment option in your retirement or savings plan.
Your plan administrator or your employee benefits office can provide you with
detailed information on how to participate in your plan and how to elect the
Fund as an investment option.

- - If you have any questions about the Fund or Vanguard, including the Fund's
investment objectives, strategies, or risks, contact Vanguard's Participant
Services Department, toll-free, at 1-800-523-1188.

- - If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.

INVESTMENT OPTIONS AND ALLOCATIONS

TRANSACTIONS

EXCHANGES

Before making an exchange, you should consider the following:

- - Before you exchange to another Vanguard Fund available in your plan, you
should read that Fund's prospectus. Contact Participant Services, toll-free,
at 1-800-523-1188 for a copy.

- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.

FOR OTHER INSTITUTIONAL INVESTORS

If you have questions about Vanguard/Windsor II, including how to establish an
account, call Vanguard, toll-free, at 1-800-523-1036.

If you have questions about an existing account, contact your Vanguard
account administrator.

TRANSACTIONS

Purchases, exchanges, or redemptions of the Fund's shares are processed as soon
as they have been received by Vanguard in good order. Good order means that your
request includes complete information on your purchase, exchange, or redemption,
and that Vanguard has received the appropriate assets. The price of shares
bought, exchanged, or

13
<PAGE> 86
Investing with Vanguard (continued)

sold will be the Fund's next-determined net asset value after Vanguard has
processed your request, provided your request has been received before 4 p.m.
Eastern time.

Vanguard must consider the interests of all Fund shareholders and so reserves
the right to . . .

- - Delay or reject any purchase or exchange request that may disrupt the Fund's
operation or performance.

- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at any time, without notice.

- - Take up to seven days to deliver your redemption proceeds.

- - Pay redemption proceeds -- in whole or in part -- through a distribution in
kind of readily marketable securities.

Accessing Fund Information by Computer

VANGUARD ONLINE(sm)
KEYWORD: Vanguard

Use your personal computer to learn more about Vanguard Funds and services; map
out a long-term investment strategy; and ask questions, make suggestions, and
send messages to Vanguard. Vanguard Online is offered through America Online(R)
(AOL). To establish an AOL account, call 1-800-238-6336.

VANGUARD ON THE
WORLD WIDE WEB
http://www.vanguard.com

Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard Funds and services; an
on-line "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.

14
<PAGE> 87
PROSPECTUS POSTSCRIPT

This prospectus is designed to provide you with pertinent information about
Vanguard/Windsor II, including its investment objectives, risks, strategies, and
expenses, as well as services available to you as a shareholder.

IN READING THE PROSPECTUS, DID YOU LEARN . . .

/ / The Fund's objectives? (page 4)

/ / The Fund's investment strategies? (page 5)

/ / Who should invest in the Fund? (page 4)

/ / The risks associated with the Fund? (pages 4 - 8)

/ / Whether the Fund is federally insured?
(inside front cover)

/ / The Fund's expenses? (page 2)

/ / The background of the Fund's investment managers?
(page 10)

PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS

Reading this prospectus will help you to decide whether Vanguard/Windsor II is
suitable for your investment goals. If you decide to invest, don't throw the
prospectus out; you will no doubt need it for future reference.

15
<PAGE> 88
ABOUT THE QUIZ

HOW TO SCORE THE QUIZ

Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (NOTE: if you chose answer #1
or #2 to Question C, subtract five points from your total score.)

- - If you scored between 0 and 25 points, you are considered a CONSERVATIVE
INVESTOR.

- - If you scored between 26 and 32 points, you are considered a MODERATE
INVESTOR.

- - If you scored between 33 and 35 points, you are considered an AGGRESSIVE
INVESTOR.

A SIMPLE RISK QUIZ

A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL
STOCKS OR BONDS) FOR . . .

1. Less than a year
2. 1 - 2 years
3. 3 - 4 years
4. 5 - 9 years
5. 10 years or more

B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M . . .

1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor

C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.

1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree

D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.

1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree

E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE-HOME PAY.

1. Zero
2. One
3. Two
4. Three
5. Four or more

F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.

1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree

G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.

1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree

16
<PAGE> 89
GLOSSARY OF INVESTMENT TERMS

CAPITAL GAINS DISTRIBUTION

Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.

CASH RESERVES

Cash deposits as well as short-term bank deposits, money market instruments,
bank CDs, repurchase agreements, and U.S. Treasury bills.

COMMON STOCK

A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.

DIVIDEND INCOME

Payment to shareholders of income from interest or dividends generated by a
fund's investments.

EXPENSE RATIO

The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.

FIXED-INCOME SECURITIES

Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.

GROWTH AND INCOME STOCK FUND

A mutual fund that seeks moderate capital appreciation and some dividend income
by investing primarily in stocks.

GROWTH STOCK FUND

A mutual fund that emphasizes stocks of companies whose strong earnings and
revenue potential indicate above-average prospects for capital growth, with less
emphasis on dividend income.

INVESTMENT ADVISER

An organization that makes the day-to-day decisions regarding a portfolio's
investments.

MUTUAL FUND

An investment company that pools the money of many people and invests it in a
variety of securities in an attempt to achieve a specific objective over time.

NET ASSET VALUE (NAV)

The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.

PORTFOLIO DIVERSIFICATION

Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.

PRICE/EARNINGS (P/E) RATIO

The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.

PRINCIPAL

The amount of your own money you put into an investment.

SECURITIES

Stocks, bonds, and other investment vehicles.

TOTAL RETURN

VALUE STOCK FUND

A mutual fund that focuses on stocks of companies that, considering their
earnings and dividends, are attractively priced; these companies often pay
regular dividend income to shareholders.

VOLATILITY

The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low share
prices.

YIELD

Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 90
[THE VANGUARD GROUP LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482

<TABLE>
<S> <C> <C>
FOR PARTICIPANTS IN FOR OTHER INSTITUTIONAL ELECTRONIC ACCESS TO THE
EMPLOYER-SPONSORED PLANS INVESTORS VANGUARD MUTUAL FUND
1-800-523-1036 EDUCATION AND INFORMATION
PARTICIPANT SERVICES For information on Vanguard CENTER
DEPARTMENT Funds and services
1-800-523-1188 On America Online(R)
TEXT TELEPHONE: Keyword: Vanguard
1-800-523-8004
For information on the On the World Wide Web
Vanguard Funds in your plan, http://www.vanguard.com
Monday through Friday
8:30 a.m. to 7:00 p.m., To send e-mail to Vanguard
Eastern time [email protected]
</TABLE>

I073N

<PAGE> 91

PART B

VANGUARD/WINDSOR FUNDS, INC.
(FORMERLY THE WINDSOR FUNDS, INC.)

STATEMENT OF ADDITIONAL INFORMATION

FEBRUARY 28, 1997

This Statement is not a prospectus, but should be read in conjunction with:
(1) the current Prospectus (dated February 28, 1997) relating to the Windsor
Fund series or the Windsor II series, as appropriate. To obtain either
Prospectus please call the Investor Information Department:

1-800-662-7447

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
The Company............................................................................. B-1
Investment Objectives and Policies...................................................... B-1
Purchase of Shares...................................................................... B-6
Redemption of Shares.................................................................... B-6
Yield and Total Return.................................................................. B-7
Investment Limitations.................................................................. B-7
Management of the Company............................................................... B-9
Investment Advisory Services............................................................ B-12
Portfolio Transactions.................................................................. B-19
Performance Measures.................................................................... B-20
Description of Shares and Voting Rights................................................. B-21
Financial Statements.................................................................... B-22
</TABLE>

THE COMPANY

Vanguard/Windsor Funds, Inc. (the "Company") is an open-end, diversified,
management investment company whose shares are currently offered in two separate
series -- the Vanguard/Windsor Fund series and the Vanguard/Windsor II series.
Each series in effect represents a separate mutual fund. Vanguard/Windsor Fund
series has been offered under the name "Windsor Fund" since 1958. Shares of
Vanguard/Windsor II were initially offered on June 24, 1985. Wellington
Management Company, LLP has served as investment adviser to the Vanguard/Windsor
Fund series since its inception. Barrow, Hanley, Mewhinney & Strauss, Inc.
("BHM&S"), Equinox Capital Management, Inc. ("Equinox") and Tukman Capital
Management, Inc. ("Tukman"), three separate and distinct investment counseling
firms that have no affiliation with Wellington Management Company, nor with each
other, serve as investment advisers to the Vanguard/Windsor II series.
Additionally, The Vanguard Group, Inc., ("Vanguard") provides investment
advisory services on an at-cost basis with respect to a portion of
Vanguard/Windsor II's assets.

INVESTMENT OBJECTIVES AND POLICIES

The following policies supplement the investment objectives and policies
set forth in each of the Company's Prospectuses.

PORTFOLIO TURNOVER. While the rate of portfolio turnover is not a limiting
factor when the investment adviser deems changes appropriate, it is anticipated
that the annual portfolio turnover rate for each series will not normally exceed
100%. A rate of turnover of 100% could occur, for example, if all of the
securities in a series' portfolio are replaced within a period of one year. The
portfolio turnover rates for the Vanguard/ Windsor Fund series and the
Vanguard/Windsor II series are set forth under "Financial Highlights," in
Vanguard/Windsor Fund's and Vanguard/Windsor II's Prospectuses, respectively.

B-1
<PAGE> 92

REPURCHASE AGREEMENTS. Each series may invest in repurchase agreements
with domestic banks, brokers or dealers, either for temporary defensive purposes
due to market conditions, or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the series acquires a money
market instrument (generally a security issued by the U.S. Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
domestic bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally the next business day). A repurchase agreement may
be considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by the
series and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the series (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by the Company's custodian bank until
repurchased. In addition, the Board of Directors will monitor the repurchase
agreement transactions for each series generally and will establish guidelines
and standards for review by the investment adviser of the creditworthiness of
any bank, broker or dealer party to a repurchase agreement with the Company. No
more than an aggregate of 15% of a series assets, at the time of investment,
will be invested in repurchase agreements having maturities longer than seven
days and in securities subject to legal or contractual restrictions on resale
for which there are no readily available market quotations. See "Illiquid
Securities" on page B-3.

The use of repurchase agreements involves certain risks. For example, if
the seller of the securities under an agreement defaults on its obligation to
repurchase the underlying securities at a time when the value of these
securities has declined, the series may incur a loss upon disposition of them.
If the seller becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a bankruptcy court may determine that the
underlying securities are collateral for a loan by the series not within the
control of the series and therefore subject to sale by the trustee in
bankruptcy. Finally, it is possible that the series may not be able to
substantiate its interest in the underlying securities. While the Company's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.

LENDING OF SECURITIES. Each series may lend its portfolio securities to
qualified institutional investors who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
portfolio securities, each series attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the series. Each series may lend its portfolio securities to
qualified brokers, dealers, domestic banks or other domestic financial
institutions, so long as the terms, and the structure of such loans are not
inconsistent with the Investment Company Act of 1940, or the Rules and
Regulations or interpretations of the Securities and Exchange Commission (the
"Commission") thereunder, which currently require that (a) the borrower pledge
and maintain with the series collateral consisting of cash, an irrevocable
letter of credit or securities issued or guaranteed by a domestic bank or the
United States Government having a value at all times not less than 100% of the
value of the securities loaned, (b) the borrower add to such collateral whenever
the price of the securities loaned rises (i.e., the borrower "marks to the
market" on a daily basis), (c) the loan be made subject to termination by the
series at any time and (d) the series receive reasonable interest on the loan
(which may include the series investing any cash collateral in interest bearing
short-term investments), any distributions on the loaned securities and any
increase in their market value. A series will not lend portfolio securities if,
as a result, the aggregate of such loans exceeds 33 1/3% of the value of the
series' net assets. Loan arrangements made will comply with all other applicable
regulatory requirements, including the rules of the New York Stock Exchange,
which rules require the borrower, after notice, to redeliver the securities
within the normal settlement time of three business days. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Board of Directors.

At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Directors (Trustees). In addition, voting
rights pass with

B-2
<PAGE> 93

the loaned securities, but if a material event occurs affecting an investment on
loan, the loan must be called and the securities voted.

FOREIGN INVESTMENTS. As indicated in the Prospectus, Vanguard/Windsor Fund
may include foreign securities to a certain extent. Investors should recognize
that investing in foreign companies involves certain special considerations
which are not typically associated with investing in U.S. companies.

Country Risk As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in companies in those countries.

Although Vanguard/Windsor Fund will endeavor to achieve most favorable
execution costs in its portfolio transactions in foreign securities, fixed
commissions on many foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. In addition, it is expected that the expenses for
custodial arrangements of the Portfolios foreign securities will be somewhat
greater than the expenses for the custodial arrangement for handling U.S.
securities of equal value.

Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income Vanguard/Windsor Fund receives from its foreign investments.

Currency Risk Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since Vanguard/Windsor Fund may
temporarily hold uninvested reserves in bank deposits in foreign currencies, the
Fund will be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations, and may incur costs in connection with
conversions between various currencies. The investment policies of
Vanguard/Windsor Fund permit it to enter into forward foreign currency exchange
contracts in order to hedge holdings and commitments against changes in the
level of future currency rates. Such contracts involve an obligation to purchase
or sell a specific currency at a future date at a price set at the time of the
contract.

ILLIQUID SECURITIES. Illiquid securities are securities that may not be
sold or disposed of in the ordinary course of business within seven business
days at approximately the value at which they are being carried on a Fund's
books. An illiquid security includes repurchase agreements which have a maturity
of longer than seven days, securities which are illiquid by virtue of the
absence of a readily available market, and demand instruments with a demand
notice exceeding seven days. Illiquid securities may include securities that are
not registered under the Securities Act of 1933 (the "1933 Act"); however,
unregistered securities that can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act will not be considered illiquid so
long as it is determined by the Fund's advisor that an adequate trading market
exists for the security.

FUTURES CONTRACTS. Each series may enter into stock futures contracts,
options, and options on futures contracts only for the purpose of remaining
fully invested and reducing transactions costs. Futures contracts provide for
the future sale by one party and purchase by another party of a specified amount
of a specific security at a specified future time and at a specified price.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"), a U.S. Government agency. Assets committed
to Futures contracts will be segregated at the Fund's custodian bank to the
extent required by law.

Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract

B-3
<PAGE> 94

which has previously been "sold," "selling" a contract previously purchased) in
an identical contract to terminate the position. Brokerage commissions are
incurred when a futures contract is bought or sold.

Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less than 5% of the value of the contract being traded.

After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. Each series
expects to earn interest income on its margin deposits.

Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
interest rates. Each series intends to use futures contracts only for bona fide
hedging purposes.

Regulations of the CFTC applicable to the Company require that all of its
futures transactions constitute bona fide hedging transactions. Each series will
only sell futures contracts to protect securities it owns against price declines
or purchase contracts to protect against an increase in the price of securities
it intends to purchase. As evidence of this hedging interest, each series
expects that approximately 75% of its futures contract purchases will be
"completed;" that is, equivalent amounts of related securities will have been
purchased or are being purchased by the series upon sale of open futures
contracts.

Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of the series' income to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While each series will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of portfolio securities.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. A series will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the series' total assets. In addition, a series will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the series' total assets.
Assets committed to futures contracts or options will be held in a segregated
account at the Fund's custodian bank.

RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may
be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a series would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a series has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a series may be
required to make delivery of the instruments underlying interest rate futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge its portfolio.
A series will minimize the risk that it will be unable to close out a futures
contract by only entering into futures contracts which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.

B-4
<PAGE> 95

The risk of loss in trading futures contracts in some strategies can be
substantial, due to the extremely high degree of leverage involved in futures
pricing. As a result, a relatively small price movement in a futures contract
may result in immediate and substantial loss (as well as gain) to the investor.
For example, if at the time of purchase, 10% of the value of the futures
contract is deposited as margin, a subsequent 10% decrease in the value of the
futures contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit if
the contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the contract. However,
because the futures strategies of the series are engaged in only for hedging
purposes, the advisers do not believe that the series are subject to the risks
of loss frequently associated with futures transactions. The series would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying security and sold it after the decline.

There is the risk of loss by a series of margin deposits in the event of
bankruptcy of a broker with whom the series has an open position in a futures
contract or related option. Additionally, investments in futures and options
involve the risk that the investment adviser will incorrectly predict stock
market and interest rate trends.

Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.

FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Each series is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts as of the end of the year as
well as those actually realized during the year. In most cases, any gain or loss
recognized with respect to a futures contract is considered to be 60% long-term
capital gain or loss and 40% short-term capital gain or loss, without regard to
the holding period of the contract. Furthermore, sales of futures contracts
which are intended to hedge against a change in the value of securities held by
a series may affect the holding period of such securities and, consequently, the
nature of the gain or loss on such securities upon disposition. The series may
be required to defer the recognition of losses on futures contracts to the
extent of any unrecognized gains on related positions held by the series.

In order for a series to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income derived from the fund's
business of investing in securities or currencies. In addition, gains realized
on the sale or other disposition of securities held for less than three months
must be limited to less than 30% of the series' annual gross income. It is
anticipated that any net gain realized from the closing of futures contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In order to avoid realizing
excessive gains on securities held less than three months, the series may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on futures contracts, which have been open for less than three months as
of the end of the series' fiscal year and which are recognized for tax purposes,
will not be considered gains on securities held less than three months for the
purpose of the 30% test.

Each series will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes, including unrealized
gains at the end of the series' fiscal year on futures

B-5
<PAGE> 96

transactions. Such distributions will be combined with distributions of capital
gains realized on the series' other investments and shareholders will be advised
on the nature of the payments.

PURCHASE OF SHARES

The purchase price of shares of each series of the Company is the net asset
value next determined after the order is received in Good Order, as defined in
the Prospectus. The net asset value is calculated as of the close of the New
York Stock Exchange on each day the Exchange is open for business. An order
received prior to the close of the Exchange will be executed at the price
computed on the date of receipt; and an order received after the close of the
Exchange will be executed at the price computed on the next day the Exchange is
open.

Each series reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the series, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of the series' shares. Vanguard/Windsor Fund is currently closed to new
investors. Existing shareholders may purchase additional shares, but may not
invest more than $25,000 each year.

REDEMPTION OF SHARES

Each series may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"); (ii) during any period when an emergency
exists, as defined by the rules of the Commission, as a result of which it is
not reasonably practicable for the series to dispose of securities owned by it,
or to determine fairly the value of its assets; and (iii) for such other periods
as the Commission may permit.

The Company has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of a series at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in readily marketable investment securities or in
cash, as the Directors may deem advisable; however, payment will be made wholly
in cash unless the Directors believe that economic or market conditions exist
which would make such a practice detrimental to the best interests of the
Company. If redemptions are paid in investment securities, such securities will
be valued as set forth in the Prospectus for the appropriate series, and a
redeeming shareholder would normally incur brokerage expenses if he converted
these securities to cash.

No charge is made by the Company for redemptions. Any redemption may be
more or less than the shareholder's cost, depending on the market value of the
series' portfolio securities.

SIGNATURE GUARANTEES. To protect your account, the Company and Vanguard
from fraud, signature guarantees are required for certain redemptions. A
signature guarantee verifies the authenticity of your signature. Examples of
situations in which signature guarantees are required are: (1) ALL REDEMPTIONS,
REGARDLESS OF THE AMOUNT INVOLVED, WHEN THE PROCEEDS ARE TO BE PAID TO SOMEONE
OTHER THAN THE REGISTERED ACCOUNT OWNER(S) AND/OR TO AN ADDRESS OTHER THAN THE
ADDRESS OF RECORD; AND (2) SHARE TRANSFER REQUESTS. These requirements are not
applicable to redemptions in Vanguard's prototype retirement plans, except in
connection with: (1) distributions made when the proceeds are to be paid to
someone other than the plan participant; (2) certain authorizations to effect
exchanges by telephone; and (3) when proceeds are to be wired. These
requirements may be waived by the Company in certain instances.

Signature guarantees can be obtained from a bank, broker or any other
guarantor that Vanguard deems acceptable. NOTARIES PUBLIC ARE NOT ACCEPTABLE
GUARANTORS.

B-6
<PAGE> 97

YIELD AND TOTAL RETURN

The yield of Vanguard/Windsor Fund for the thirty-day period ended October
31, 1996 was +2.41%, and the yield for Vanguard/Windsor II for the same period
was +2.78%.

The average annual total returns for Vanguard/Windsor Fund for the one-,
five- and ten-year periods ending October 31, 1996 were +23.16%, +16.69% and
+13.38%, respectively. The average annual total returns for the one-, five- and
ten-year periods for Vanguard/Windsor II were +27.17%, +16.56% and +13.91%,
respectively. Total return is computed by determining the average compounded
rates of return over the one-, five- and ten-year periods set forth above that
would equate an initial amount invested at the beginning of the periods to the
ending redeemable value of the investment.

INVESTMENT LIMITATIONS

Each series of the Company is subject to the following restrictions which
may not be changed without the approval of at least a majority of the
outstanding voting securities of that series. A series will not:

1) with respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the series would
hold more than 10% of the outstanding voting securities of the issuer,
or more than 5% of the value of the total assets of the series would be
invested in the securities of such issuer;

2) invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
approved by the shareholders of the series or otherwise to the extent
permitted by Section 12 of the Investment Company Act of 1940. A series
will invest only in investment companies which have investment
objectives and investment policies consistent with those of that series;

3) borrow money, except that a series may borrow from banks (or through
reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests which
might otherwise require the untimely disposition of securities, in an
amount not exceeding 10% of the value of the net assets of the series
(including the amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the net assets of the series, the
series will not make any additional investments;

4) purchase securities on margin, or sell securities short except that each
series may invest in stock futures contracts, stock options and options
on stock futures contracts to the extent that not more than 5% of a
series' assets are required as deposit on a futures contract and not
more than 20% of a series' assets are invested in futures contracts and
options transactions at any time;

5) purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including any investment in The Vanguard Group, Inc.);

6) invest for the purpose of exercising control over management of any
company;

7) purchase or retain securities of any company in which those Officers and
Directors of the Company and/or its investment advisers owning more than
1/2 of 1% of such securities, own in the aggregate more than 5% of such
securities;

8) make loans, except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements) which are either publicly
distributed or customarily purchased by institutional investors, and
(ii) as provided under "Lending of Securities" (See page B-2);

9) purchase assessable securities;

10) engage in the business of underwriting securities issued by other
persons, except to the extent that the series may technically be deemed
to be an underwriter under the Securities Act of 1933, as amended, in
disposing of investment securities;

B-7
<PAGE> 98

11) purchase real estate, commodities or commodity contracts except as
described above in "(4)"; or

12) invest more than 25% of the value of its total assets in any one
industry.

Notwithstanding these limitations, each series of the Company may own all
or any portion of the securities of, or make loans to, or contribute to the
costs or other financial requirements of any company which will be wholly owned
by the Company and one or more other investment companies and is primarily
engaged in the business of providing, at-cost, management, administrative or
related services to the Company and other investment companies. See "Management
of the Company".

These investment limitations are considered at the time investment
securities are purchased.

B-8
<PAGE> 99

MANAGEMENT OF THE COMPANY

OFFICERS AND DIRECTORS

The Officers of the Funds manage their day-to-day operations and are
responsible to the Funds' Boards of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is a list of the Directors
and Officers of the Funds and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Funds is Post Office Box 876, Valley Forge, PA
19482.

<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman and Director* JOHN C. SAWHILL, Director
Chairman and Director of The Vanguard President and Chief Executive Officer, The
Group, Inc., and each of the investment Nature Conservancy; formerly, Director
companies in The Vanguard Group; and Senior Partner, McKinsey & Co. and
Director of The Mead Corporation, President, New York University; Director
General Accident Insurance and of Pacific Gas and Electric Company,
Chris-Craft Industries, Inc. Proctor & Gamble Company and NACCO
JOHN J. BRENNAN, President, Chief Executive Industries.
Officer & Director* JAMES O. WELCH, JR., Director
President, Chief Executive Officer and Retired Chairman of Nabisco Brands, Inc. and
Director of The Vanguard Group, Inc. and retired Vice Chairman and Director of
each of the investment companies in The RJR Nabisco; Director of TECO Energy,
Vanguard Group. Inc. and Kmart Corporation.
BARBARA BARNES HAUPTFUHRER, Director J. LAWRENCE WILSON, Director
Director of The Great Atlantic and Chairman and Chief Executive Officer, Rohm &
Pacific Tea Company, Raytheon Company, Haas Company; Director of Cummins Engine
Knight-Ridder, Inc., Massachusetts Company; and Trustee of Vanderbilt
Mutual Life Insurance Co., and ALCO University.
Standard, Corp.; Trustee Emerita of
Wellesley College. RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The
ROBERT E. CAWTHORN, Director Vanguard Group, Inc.; Secretary of each
Chairman Emeritus and Director of Rhone- of the investment companies in The
Poulenc Rorer, Inc., Sun Company, Inc. Vanguard Group.
and Westinghouse Electric Corporation. RICHARD F. HYLAND, Treasurer*
BRUCE K. MACLAURY, Director Treasurer of The Vanguard Group, Inc. and of
President Emeritus of The Brookings each of the investment companies in The
Institution; Director of American Vanguard Group.
Express Bank, Ltd., The St. Paul
Companies, Inc. and National Steel KAREN E. WEST, Controller*
Corporation. Principal of The Vanguard Group, Inc.;
Controller of each of the investment
BURTON G. MALKIEL, Director companies in The Vanguard Group.
Chemical Bank Chairman's Professor of ---------------------------------------------
Economics, Princeton University;
Director of Prudential Insurance Co. of *Officers of the Funds are "interested
America, Amdahl Corporation, Baker persons" as defined in the Investment Company
Fentress & Co., The Jeffrey Co., and Act of 1940.
Southern New England Communications
Company.
ALFRED M. RANKIN, JR., Director
Chairman, President and Chief Executive
Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company, and
The Standard Products Company.
</TABLE>

B-9
<PAGE> 100

THE VANGUARD GROUP

The Company is a member of The Vanguard Group of Investment Companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Company and the other Funds in the Group obtain at cost virtually all of
their corporate management, administrative and distribution services. Vanguard
also provides investment advisory services on an at-cost basis to certain of the
Vanguard Funds.

Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's total expenses which are allocated among the
Funds under methods approved by the Board of Directors (Trustees) of each Fund.
In addition, each Fund bears its own direct expenses, such as legal, auditing
and custodian fees.

The Funds' Officers are also Officers and employees of Vanguard. No Officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.

The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17 j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.

The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds has invested in Vanguard are adjusted from time
to time in order to maintain the proportionate relationship between each Fund's
relative net assets and its contribution to Vanguard's capital. At October 31,
1996, Vanguard/Windsor Fund had contributed capital of $1,450,000 to Vanguard,
representing 7.2% of Vanguard's capitalization and, at that time,
Vanguard/Windsor II had contributed capital of $1,344,000 to Vanguard,
representing 6.7% of Vanguard's capitalization. The Funds' Service Agreement
provides for the following arrangement: (a) each Vanguard Fund may invest up to
0.40% of its current net assets in Vanguard and (b) there is no other limitation
on the amount that each Vanguard Fund may contribute to Vanguard's
capitalization.

MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended October 31, 1996, Vanguard/Windsor Fund's share of Vanguard's
actual net costs of operation relating to management and administrative services
(including transfer agency) totaled approximately $26,107,000 and Vanguard/
Windsor II's share of such costs of operation totaled approximately $27,243,000.

DISTRIBUTION. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for shares of the
Funds in connection with any sales made directly to investors in the states of
Florida, Missouri, New York, Ohio, Texas and such other states as may be
required.

The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.

One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remaining
one half of these expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of

B-10
<PAGE> 101

a marketing and promotional nature shall exceed 125% of the average distribution
expense rate for the Group, and no Fund shall incur annual distribution expenses
in excess of .02 of 1% of its average month-end net assets. During the fiscal
year ended October 31, 1996, Vanguard/Windsor Fund paid approximately $2,505,000
of the Group's distribution and marketing expenses, which represented an
effective annual rate of .02 of 1% of Vanguard/Windsor Fund's average net assets
and Vanguard/Windsor II paid approximately $2,254,000 of such expenses which
represented an effective annual rate of .02 of 1% of Vanguard/Windsor II's net
assets.

INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to Vanguard Windsor II, Vanguard Money Market Reserves, Vanguard
Municipal Bond Fund, several Portfolios of Vanguard Fixed Income Securities
Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard California Tax-Free Fund,
Vanguard New York Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund,
Vanguard Ohio Tax-Free Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard
Index Trust, Vanguard Bond Index Fund, Vanguard International Equity Index Fund,
Vanguard Balanced Index Fund, Vanguard Admiral Funds, the Total International
Portfolio of Vanguard STAR Fund, Vanguard Tax-Managed Fund, Aggressive Growth
Portfolio of Vanguard Horizon Fund, Vanguard Institutional Index Fund, several
Portfolios of Vanguard Variable Insurance Fund, a portion of Vanguard/Morgan
Growth Fund as well as several indexed separate accounts. These services are
provided on an at-cost basis by an investment management staff employed directly
by Vanguard. The compensation and other expenses of this staff are paid by the
Funds utilizing these services.

REMUNERATION OF DIRECTORS AND OFFICERS

The Company pays each Director who is not also an Officer an annual fee
plus travel and other expenses incurred in attending Board meetings. The
Company's Officers and employees are paid by Vanguard which, in turn, is
reimbursed by the Company, and each other Fund in the Group, for its
proportionate share of Officers' and employees' salaries and retirement
benefits. For the fiscal year ended October 31, 1996, the Fund's proportionate
share of remuneration for all Officers as a group was approximately -- and its
proportionate share of the amounts contributed to the retirement plans of all
Officers as a group was approximately --.

Under its Retirement Plan, Vanguard contributes annually an amount equal to
10% of each Officer's annual compensation plus 5.7% of that part of the
Officer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under the Thrift Plan, all Officers are
permitted to make pre-tax basic contributions in a maximum amount equal to 4% of
total compensation. Vanguard matches the basic contributions on a 100% basis.
Upon retirement, Directors who are not Officers are paid an annual fee based on
the number of years of service on the Board, up to fifteen years of service. The
fee is equal to $1,000 for each year of service and each investment company
member of The Vanguard Group contributes a proportionate amount of this fee
based on its relative net assets. This fee is paid, subsequent to a Director's
retirement, for a period of ten years or until the death of a retired Director.

B-11
<PAGE> 102

The following table provides detailed information with respect to the
amounts paid or accrued for the Directors and the Officers of the Company for
whom the Company's proportionate share of remuneration exceeded $60,000, for the
fiscal year ended October 31, 1996 and for all Directors and Officers as a
group:

VANGUARD/WINDSOR FUNDS
COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR RETIREMENT
AGGREGATE BENEFITS ACCRUED ESTIMATED TOTAL COMPENSATION
COMPENSATION AS PART OF ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM THE COMPANY COMPANY EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
- --------------------------- ---------------- --------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) $ -- $ -- -- --
John J. Brennan(1) $ -- $ -- -- --
Barbara Barnes Hauptfuhrer $ 9,030 $ 1,402 $ 15,000 $65,000
Robert E. Cawthorn $ 9,030 $ 1,168 $ 13,000 $65,000
Bruce K. MacClaury $ 9,785 $ 1,372 $ 12,000 $60,000
Burton G. Malkiel $ 9,030 $ 935 $ 15,000 $65,000
Alfred M. Rankin, Jr. $ 9,030 $ 738 $ 15,000 $65,000
John C. Sawhill $ 9,030 $ 876 $ 15,000 $65,000
James O. Welch, Jr $ 9,030 $ 1,078 $ 15,000 $65,000
J. Lawrence Wilson $ 9,030 $ 779 $ 15,000 $65,000
</TABLE>

<TABLE>
<CAPTION>
NAMES OF OTHER OFFICERS
- ---------------------------
<S> <C> <C> <C> <C>
Raymond J. Klapinsky,
Secretary $ -- $ -- -- --
</TABLE>

(1) As "Interested Directors", Messrs. Bogle and Brennan receive no compensation
for their service as Directors.

(2) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 34 Vanguard funds
(33 in the case of Mr. Malkiel; 27 in the case of Mr. MacLaury).

INVESTMENT ADVISORY SERVICES

VANGUARD/WINDSOR FUND

The Company employs Wellington Management Company, LLP ("WMC") under an
investment advisory agreement dated August 1, 1996 to manage the investment and
reinvestment of the assets of Vanguard/Windsor Fund and to continuously review,
supervise and administer Vanguard/Windsor Fund's investment program. WMC
discharges its responsibilities subject to the control of the Officers and
Directors of the Company. WMC is a Massachusetts limited liability partnership
controlled by the following general partners: Robert W. Doran, Duncan M.
McFarland and John R. Ryan. WMC and its predecessor organizations have provided
investment advisory services to investment companies since 1933 and to
investment counseling clients since 1960. Charles T. Freeman, Senior Vice
President of WMC, has served as portfolio manager of the Fund since January,
1996.

Vanguard/Windsor Fund pays WMC a basic fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to Vanguard/Windsor Fund's average month-end net assets for
the quarter.

<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------------------------------------------------- -----------
<S> <C>
First $17.5 billion................................. .125%
Assets in excess of $17.5 billion................... .100%
</TABLE>

The basic fee paid to WMC may be increased or decreased by applying an
adjustment formula based on Vanguard/Windsor Fund's investment performance. Such
formula provides for an increase or decrease in the basic fee paid to WMC each
quarter, depending upon Vanguard/Windsor Fund's investment performance for the
thirty-six months preceding the end of the quarter relative to the investment
record of the Standard and Poor's 500 Composite Stock Price Index (the "Index")
for the same period. The schedule of incentive/penalty adjustments is set forth
in the Vanguard/Windsor Fund Prospectus.

B-12
<PAGE> 103

The Basic Fee, as provided above, shall be increased or decreased by
applying an incentive/penalty fee adjustment based on the investment performance
of Vanguard/Windsor Fund relative to the investment performance of the Index.

The following table sets forth the adjustment factors to the base advisory
fee payable by the Company to WMC under this investment advisory agreement:

For the first $17.5 billion of assets;

<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT*
------------------------------------------------- ------------------
<S> <C>
Less than -12%................................... -0.67 X Basic Fee
Between -12% and -6%............................. -0.33 X Basic Fee
Between -6% and 6%............................... 0.00 X Basic Fee
Between 6% and 12%............................... +0.33 X Basic Fee
More than 12%.................................... +0.67 X Basic Fee
</TABLE>

For assets over $17.5 billion;

<TABLE>
<S> <C>
Less than -12%................................... -0.90 X Basic Fee
Between -12% and -6%............................. -0.45 X Basic Fee
Between -6% and 6%............................... 0.00 X Basic Fee
Between 6% and 12%............................... +0.45 X Basic Fee
More than 12%.................................... +0.90 X Basic Fee
</TABLE>

- ---------------

*For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.

The new incentive/penalty fee will not be fully operable until the quarter
ending July 31, 1999. Until that date, a "blended" fee rate consisting of
varying percentages of (i) the performance adjustment based on the schedule set
forth above (the "new rate"), and (ii) the performance adjustment based on the
schedule set forth in Vanguard/Windsor Fund's previous investment advisory
agreement with WMC(1) (the "previous rate") shall be used as follows:

1) QUARTER ENDING JANUARY 31, 1997. The incentive/penalty fee was
calculated as the sum of 16.7% of the fee payable under the new rate
plus 83.3% of the fee payable under the previous rate.

2) QUARTER ENDING APRIL 30, 1997. The incentive/penalty fee shall be
calculated as the sum of 25% of the fee payable under the new rate plus
75% of the fee payable under the previous rate.

3) QUARTER ENDING JULY 31, 1997. The incentive/penalty fee shall be
calculated as the sum of 33% of the fee payable under the new rate plus
67% of the fee payable under the previous rate.

4) QUARTER ENDING OCTOBER 31, 1997. The incentive/penalty fee shall be
calculated as the sum of 41.6% of the fee payable under the new rate
plus 58.4% of the fee payable under the previous rate.

5) QUARTER ENDING JANUARY 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 50% of the fee payable under the new rate plus
50% of the fee payable under the previous rate.

6) QUARTER ENDING APRIL 30, 1998. The incentive/penalty fee shall be
calculated as the sum of 58.4% of the fee payable under the new rate
plus 41.6% of the fee payable under the previous rate.

7) QUARTER ENDING JULY 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 67% of the fee payable under the new rate plus
33% of the fee payable under the previous rate.

- ---------------

(1)The previous incentive/penalty fee structure provided that the Basic Fee be
increased or decreased by an amount equal to .05% per annum (.0125 per
quarter) of the average month-end assets if the Fund's investment performance
for the 36 months preceding the end of the quarter was between 6 and 12
percentage points above or below, respectively, the investment record of the
Standard & Poor's 500 Composite Stock Index (the "Index") and .10% per annum
(.025 per quarter) of the average month-end assets of the Fund if the Fund's
investment performance for the 36 months preceding the end of the quarter was
twelve percentage points or more above or below, respectively, the investment
record of the Index.

B-13
<PAGE> 104

8) QUARTER ENDING OCTOBER 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 75% of the fee payable under the new rate and
25% of the fee payable under the previous rate.

9) QUARTER ENDING JANUARY 31, 1999. The incentive/penalty fee shall be
calculated as the sum of 83.3% of the fee payable under the new rate
plus 16.7% of the fee payable under the previous rate.

10) QUARTER ENDING APRIL 30, 1999. The incentive/penalty fee shall be
calculated as the sum of 91.7% of the fee payable under the new rate
plus 8.3% of the fee payable under the previous rate.

11) QUARTER ENDING JULY 31, 1999. New rate fully operable.

For purposes of incentive/penalty adjustments, the investment performance
of Vanguard/Windsor Fund for any period is expressed as a percentage of
Vanguard/Windsor Fund's net asset value per share at the beginning of the
period. This percentage is equal to the sum of: (i) the change in
Vanguard/Windsor Fund's net asset value per share during the period; (ii) the
value of Vanguard/Windsor Fund's cash distributions per share having an
ex-dividend date occurring within the period; and (iii) the per share amount of
capital gains taxes paid or accrued during the period by Vanguard/Windsor Fund
for undistributed realized long-term capital gains. The investment record of the
S&P Index for any period is expressed as a percentage of the S&P Index level at
the beginning of the period. This percentage is equal to the sum of (i) the
change in the level of the S&P Index, during the period and (ii) the value,
computed consistently with the S&P Index, of cash distributions having an
ex-dividend date occurring within the period made by companies whose securities
comprise the S&P Index.

During the fiscal years ended October 31, 1994, 1995 and 1996
Vanguard/Windsor Fund paid the following advisory fees:

<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Basic Fee......................................... $17,236,000 $19,022,000 $18,816,000
Increase or Decrease for Performance
Adjustment...................................... 9,213,000 7,752,000 (4,417,000)
----------- ----------- -----------
Total........................................ $26,449,000 $26,774,000 $14,399,000
=========== =========== ===========
</TABLE>

These fees were paid under a previous fee schedule that provides for a
higher rate of fees.

VANGUARD/WINDSOR II

Vanguard/Windsor II employs a "multi-manager" approach utilizing four
investment advisors.

BARROW, HANLEY, MEWHINNEY & STRAUSS

Vanguard/Windsor II has entered into an investment advisory agreement dated
May 1, 1993 with Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S") to manage a
portion of the equity allocation of Vanguard/Windsor II (currently approximately
72%). Under this agreement, BHM&S manages the investment and reinvestment of the
designated assets and continuously reviews, supervises and administers the
investment program of Vanguard/Windsor II with respect to those assets. BHM&S
discharges its responsibilities subject to the control of the Officers and
Directors of the Company.

BHM&S is a Texas corporation controlled by the following officers of BHM&S:
James Purdy Barrow, Principal; Bryant Miller Hanley, Jr., President, Secretary
and Treasurer; Michael Christopher Mewhinney, Principal; and John Luke Strauss,
Principal.

B-14
<PAGE> 105

Vanguard/Windsor II pays BHM&S a basic fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets of Vanguard/Windsor II
managed by BHM&S for the quarter:

<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------------------------------------------------- -----------
<S> <C>
First $200 million.................................. 0.300%
Next $300 million................................... 0.200%
Next $500 million................................... 0.150%
Over $1 billion..................................... 0.125%
</TABLE>

The basic fee paid to BHM&S will be increased or decreased by applying an
adjustment formula based on the investment performance of the assets of
Vanguard/Windsor II managed by BHM&S (the "BHM&S Portfolio"). Such formula
provides for an increase or decrease in the basic fee paid to BHM&S each
quarter, depending upon the BHM&S Portfolio's investment performance for the
thirty-six months preceding the end of the quarter relative to the investment
record of the Standard & Poor's/BARRA Value Index (the "BARRA Value Index"). The
schedule of incentive/penalty adjustments is set forth in the Vanguard/Windsor
II Prospectus.

The BARRA Value Index includes stocks in the Standard and Poor's 500
Composite Stock Price Index with lower than average ratios of market price to
book value. These types of stocks are often referred to as "value" stocks.

The investment performance of the BHM&S Portfolio for any period is
expressed as a percentage of the "BHM&S Portfolio Unit Value" at the beginning
of such period. This percentage is equal to the sum of: (i) the change in the
BHM&S Portfolio Unit Value during such period; (ii) the unit value of the Fund's
cash distributions from the BHM&S Portfolio's net investment income and realized
net capital gains (whether long-term or short-term) having an ex-dividend date
occurring within such period; and (iii) the unit value of capital gains taxes
paid or accrued during such period by Vanguard/Windsor II for undistributed
realized long-term capital gains realized from the BHM&S Portfolio.

The "BHM&S Portfolio Unit Value" will be determined by dividing the total
net assets of the BHM&S Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the BHM&S Portfolio was equal to
the total shares outstanding of Vanguard/Windsor II. After such initial date, as
assets are added to or withdrawn from the BHM&S Portfolio, the number of units
of the BHM&S Portfolio will be adjusted based on the unit value of the BHM&S
Portfolio on the day such changes are executed.

The investment record of the BARRA Value Index is calculated quarterly by
(i) multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the BARRA Value Index by its weighting in
the BARRA Value Index at the beginning of the quarter, and (ii) adding the
values discussed in (i). For any period, therefore, the investment record of the
BARRA Value Index will be the compounded quarterly returns of the BARRA Value
Index.

During the fiscal years ended October 31, 1994, 1995 and 1996,
Vanguard/Windsor II paid advisory fees to BHM&S of approximately $7,518,000,
$8,514,842, and 11,475,528, respectively.

OTHER ADVISERS

On November 1, 1991, Vanguard/Windsor II added Equinox Capital Management
("Equinox") and Tukman Capital Management ("Tukman") to manage the investment
and reinvestment of a portion of its equity allocation (approximately 10% each).
Additionally, Vanguard's Core Management Group was added to manage approximately
8% of the Vanguard/Windsor II's equity allocation. Equinox, Tukman and
Vanguard's Core Management Group discharge their respective responsibilities
subject to the control of the Directors and Officers of the Fund.

EQUINOX

Equinox is a Delaware corporation controlled by the following officers of
Equinox: Ronald J. Ulrich, President and Director; Wendy D. Lee, Managing
Director; David E. Walker, Principal; Laura Starr, Vice

B-15
<PAGE> 106

President; Jacqueline A. Williams, Vice President; Mark W. Watson, Vice
President; and Kenneth J. Doerr, Vice President.

Under the terms of an investment advisory agreement dated August 1, 1996,
Vanguard/Windsor II pays Equinox a basic fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the portion of Vanguard/Windsor II's average month-end net
assets managed by Equinox for the quarter.

<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------------------------------------------------- -----------
<S> <C>
First $400 million.................................. .200%
Next $600 million................................... .150%
Next $1 billion..................................... .125%
Assets in excess of $2 billion...................... .100%
</TABLE>

The basic fee paid to Equinox may be increased or decreased by applying an
adjustment formula based on the investment performance of the portion of
Vanguard/Windsor II's assets managed by Equinox (the "Equinox Portfolio")
relative to the investment of the Russell 1000 Value Index. Such formula
provides for an increase or decrease in the basic fee paid to Equinox each
quarter, depending upon the Equinox Portfolio's investment performance for the
thirty-six months preceding the end of the quarter.

The following table sets forth the adjustment factors to the base advisory
fee payable by the Equinox Portfolio to Equinox under this investment advisory
agreement:

<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
VERSUS THE INDEX ADJUSTMENT*
------------------------------------------------- ------------------
<S> <C>
Less than -9%.................................... -0.50 X Basic Fee
Between -9% and -4.5%............................ -0.25 X Basic Fee
Between -4.5% and 4.5%........................... 0 X Basic Fee
Between 4.5% and 9%.............................. +0.25 X Basic Fee
More than 9%..................................... +0.50 X Basic Fee
</TABLE>

- ---------------
* For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.

The investment performance of the Equinox Portfolio for any period is
expressed as a percentage of the "Equinox Portfolio Unit Value" at the beginning
of such period. This percentage is equal to the sum of: (i) the change in the
Equinox Portfolio Unit Value during such period; (ii) the unit value of
Vanguard/Windsor II's cash distributions from the Equinox Portfolio net
investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and (iii)
the unit value of capital gains taxes paid or accrued during such period by
Vanguard/Windsor II for undistributed realized long-term capital gains realized
from the Equinox Portfolio.

The "Equinox Portfolio Unit Value" will be determined by dividing the total
net assets of the Equinox Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Equinox Portfolio was equal to
the total shares outstanding of Vanguard/Windsor II. After such initial date, as
assets are added to or withdrawn from the Equinox Portfolio, the number of units
of the Equinox Portfolio will be adjusted based on the unit value of the Equinox
Portfolio on the day such changes are executed.

The investment record of the Russell 1000 Value Index will be calculated
quarterly by (i) multiplying the total return for the quarter (change in the
market price plus dividends) of each stock included in the Russell 1000 Value
Index by its weighting in the Russell 1000 Value Index at the beginning of the
quarter, and (ii) adding the values discussed in (i). For any period, therefore,
the investment record of the Russell 1000 Value Index will be the compounded
quarterly returns of the Russell 1000 Value Index.

B-16
<PAGE> 107

During the fiscal years ended October 31, 1994, 1995 and 1996,
Vanguard/Windsor II paid advisory fees to Equinox of approximately $1,424,000,
$1,681,435, and 1,980,458 before a performance adjustment of $4,747,
respectively. These fees were paid under a previous fee schedule that provided
for a higher rate of fees.

TUKMAN

Tukman is a Delaware corporation controlled by the following officers of
Tukman: Melvin T. Tukman, President and Director, and Daniel L. Grossman, Vice
President.

Under the terms of an investment advisory agreement dated November 1, 1991,
the Fund pays Tukman a basic fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates, to
the average month-end assets of the portion of Vanguard/Windsor II's assets
managed by Tukman:

<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------------------------------------------------- -----------
<S> <C>
First $25 million................................... 0.400%
Next $125 million................................... 0.350%
Next $350 million................................... 0.250%
Next $500 million................................... 0.200%
Over $1 billion..................................... 0.150%
</TABLE>

The basic fee paid to Tukman may be increased or decreased by applying an
adjustment formula based on the investment performance of the portion of
Vanguard/Windsor II's assets managed by Tukman (the "Tukman Portfolio") relative
to the investment record of the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"). Such formula provides for an increase or decrease in the
basic fee paid to Tukman each quarter, depending upon the Tukman Portfolio's
investment performance for the thirty-six months preceding the end of the
quarter. The schedule of incentive/penalty fee adjustments is set forth in the
Vanguard/ Windsor II Prospectus.

The investment performance of the Tukman Portfolio for any period is
expressed as a percentage of the "Tukman Portfolio Unit Value" at the beginning
of such period. The percentage is equal to the sum of: (i) the change in the
Tukman Portfolio Unit Value during such period; (ii) the unit value of
Vanguard/Windsor II's cash distributions from the Tukman Portfolio net
investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and (iii)
the unit value of capital gains taxes paid or accrued during such period by
Vanguard/Windsor II for undistributed realized long-term capital gains realized
from the Tukman Portfolio.

The "Tukman Portfolio Unit Value" will be determined by dividing the total
net assets of the Tukman Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Tukman Portfolio was equal to
the total shares outstanding of Vanguard/Windsor II. After such initial date, as
assets are added to or withdrawn from the Tukman Portfolio, the number of units
of the Tukman Portfolio will be adjusted based on the unit value of the Tukman
Portfolio on the day such changes are executed.

The investment record of the S&P 500 will be calculated quarterly by (i)
multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the S&P 500 by its weighting in the S&P 500
at the beginning of the quarter, and (ii) adding the values discussed in (i).
For any period, therefore, the investment record of the S&P 500 will be the
compounded quarterly returns of the S&P 500.

During the fiscal years ended October 31, 1994, 1995 and 1996,
Vanguard/Windsor II paid advisory fees to Tukman of approximately $1,825,000,
$2,184,838, and 2,699,458 before a performance adjustment of $930,724,
respectively.

VANGUARD'S CORE MANAGEMENT GROUP

Since November 1, 1991, Vanguard's Core Management Group has provided
investment advisory services on an at-cost basis with respect to a portion of
Vanguard/Windsor II's equity allocation (currently approximately 7%). The Core
Management Group also provides investment advisory services to several Vanguard

B-17
<PAGE> 108

Funds, including Vanguard Index Trust, Vanguard Balanced Index Fund, Vanguard
Horizon Fund, Vanguard International Equity Index Fund, Vanguard REIT Index
Portfolio, Vanguard Institutional Index Fund, Total International Portfolio of
Vanguard STAR Fund, several indexed separate accounts as well as a portion of
Vanguard/Morgan Growth Fund's assets. The quantitative approach used by
Vanguard's Core Management Department is designed to generate highly predictable
results relative to a benchmark of large and medium capitalization "value"
stocks. A portfolio is constructed from attractively priced "value" stocks using
an optimizer to assure that the characteristics of the portfolio are similar to
that of the benchmark. The Core Management Group is supervised by the Officers
of the Fund.

DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS

Vanguard/Windsor Fund's present agreement with WMC continues in effect
until July 31, 1998. Vanguard/ Windsor II's present agreements with BHM&S,
Equinox and Tukman continue in effect until April 30, 1997, July 31, 1998 and
October 31, 1997, respectively. Each agreement is renewable for successive
one-year periods if specifically approved by a vote of the Company's Board of
Directors at a meeting called for the purpose of considering such approval. The
Board's approval must include the affirmative votes of a majority of the
Directors who are neither parties to the contract or "interested persons" of
such parties (as defined in the Investment Company Act of 1940). In addition,
the question of continuing an investment advisory agreement may be presented to
shareholders. In such an event, the agreement would be continued only if
approved by the affirmative vote of a majority of the outstanding shares of the
Fund to which the agreement related.

Each investment advisory agreement is automatically terminated if assigned,
and may be terminated without penalty at any time (1) by majority vote of either
the Board of Directors or the Fund's outstanding shares upon 60 days' written
notice to the adviser, or (2) by the adviser upon 90 days' written notice to the
Fund.

The Company's Board of Directors may, without the approval of shareholders,
provide for:

(A) The employment of a new investment adviser pursuant to the terms of a
new advisory agreement, either as a replacement for an existing adviser
or as an additional adviser;

(B) A change in the terms of an advisory agreement; or

(C) The continued employment of an existing adviser, on the same advisory
contract terms, where a contract has been assigned because of a change
in control of the adviser.

Any such change will be made upon not less than 30 days' prior written
notice to shareholders, which shall include the information concerning the
adviser that would have normally been included in a proxy statement.

MORE INFORMATION ON ADVISERS' INCENTIVE/PENALTY FEES

In April 1972, the Securities and Exchange Commission ("SEC") issued
Release No. 7113 under the Investment Company Act of 1940 to call the attention
of directors and investment advisers to certain factors which must be considered
in connection with investment company incentive fee arrangements. One of these
factors is to "avoid basing significant fee adjustments upon random or
insignificant differences" between the investment performance of a fund and that
of the particular index with which it is being compared. The Release provides
that "preliminary studies (of the SEC staff) indicate that as a 'rule of thumb'
the performance difference should be at least +/-10 percentage points" annually
before the maximum performance adjustment may be made. However, the Release also
states that "because of the preliminary nature of these studies, the Commission
is not recommending, at this time, that any particular performance difference
exist before the maximum fee adjustment may be made." The Release concludes that
the directors of a fund "should satisfy themselves that the maximum performance
adjustment will be made only for performance differences that can reasonably be
considered significant." The Board of Directors has fully considered the SEC
Release and believes that the performance adjustments as included in the
agreements with WMC, BHM&S, Equinox and Tukman are entirely appropriate although
not within the +/-10 percentage points per year range suggested in the Release.
Under the Funds' investment advisory agreements, the maximum performance

B-18
<PAGE> 109

adjustments are made at a difference of +/-12 and +/-9 percentage points from
the performance of the respective index over a thirty-six month period, which
would effectively be the equivalent of approximately +/-4 and +/-3 percentage
points difference per year.

PORTFOLIO TRANSACTIONS

WMC, BHM&S, Equinox, Tukman and Vanguard are authorized to (with the
approval of the Board of Directors) select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the respective
series of the Company. The investment advisory agreements direct the advisers to
use their best efforts to obtain the best available price and most favorable
execution as to all transactions. Each investment adviser has undertaken to
execute each investment transaction at a price and commission which provides the
most favorable total cost or proceeds reasonably obtainable under the
circumstances.

In placing portfolio transactions, each investment adviser will use its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain best available price and most favorable execution.
The full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical
information and provide other services in addition to execution services to the
series and/or the investment adviser. Each investment adviser considers such
information useful in the performance of its obligations under the agreement,
but is unable to determine the amount by which such services may reduce its
expenses.

The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Board of Directors, each investment adviser may cause the series
to pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the adviser to the Company and the other Funds in the Group.

Currently, it is the Company's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions that
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the series.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to an investment adviser and/or the Company.
However, the investment advisers have informed the Company that they will not
pay higher commission rates specifically for the purpose of obtaining research
services.

Since the Company does not market its shares through intermediary brokers
or dealers, it is not the Company's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be through such firms.
However, the Company may place portfolio orders with qualified broker-dealers
who recommend shares of the Company to other clients, or who act as agent in the
purchase of the Company's shares for their clients, and may, when a number of
brokers and dealers can provide comparable best price and execution on a
particular transaction, consider the sale of the Company's shares by a broker or
dealer in selecting among qualified broker-dealers.

During the fiscal years ended October 31, 1994, 1995 and 1996 the Company
paid $14,906,748, $17,775,409 and 25,321,530 in brokerage commissions,
respectively.

Some securities considered for investment by a series of the Company may
also be appropriate for the other series and for other Funds and/or clients
served by the investment adviser. If purchase or sale of securities consistent
with the investment policies of the series and one or more of these other Funds
or clients served by the investment adviser are considered at or about the same
time, transactions in such securities will be allocated among the several Funds
and clients in a manner deemed equitable by the investment adviser.

B-19
<PAGE> 110

PERFORMANCE MEASURES

Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.

Each of the investment company members of the Vanguard Group, including
Vanguard/Windsor Fund and Vanguard/Windsor II, may from time to time use one or
more of the following unmanaged indices for comparative performance purposes.

STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.

STANDARD AND POOR'S/BARRA VALUE INDEX -- consists of the stocks in the Standard
and Poor's 500 Composite Stock Price Index ("S&P 500") with the lowest
price-to-book ratios, comprising 50% of the market capitalization of the S&P
500.

RUSSELL 1000 VALUE INDEX -- consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.

WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.

WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.

MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australasia and the Far East.

GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.

SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.

SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.

LEHMAN LONG-TERM TREASURY BOND INDEX -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.

MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX -- consists of over 4,500 U.S.
Treasury Agency and investment grade corporate bonds.

LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.

LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.

BOND BUYER MUNICIPAL BOND INDEX -- is a yield index on current coupon high-grade
general obligation municipal bonds.

STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, noncallable preferred stock issues.

NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.

B-20
<PAGE> 111

COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.

COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.

COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 25% Standard & Poor's Utilities Index).

LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.

LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.

LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB or better with maturities between
1 and 5 years. The index has a market value of over $1.3 trillion.

LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.

LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.

LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.

LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.

LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.

LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.

LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.

DESCRIPTION OF SHARES AND VOTING RIGHTS

The Company was originally organized as a corporation in 1959. On January
2, 1985, the Company was reorganized into a Pennsylvania business trust which
was created solely for that purpose. The Company was reorganized as a Maryland
corporation on December 30, 1985. The Amended and Restated Articles of
Incorporation permit the Directors to issue 2,200,000,000 shares of common
stock, with one cent par value. The Board of Directors has the power to
designate one or more classes ("series") of shares of common stock and to
classify or reclassify any unissued shares with respect to such series.
Currently the Company is offering shares of two series.

The shares of each series are fully paid and non-assessable, and have no
preference as to conversion, exchange, dividends, retirement or other features.
The shares of each series have no pre-emptive rights. Such shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. A shareholder is entitled to one vote for each full
share held (and a fractional vote for each fractional share held), then

B-21
<PAGE> 112

standing in his name on the books of the Company. On any matter submitted to a
vote of shareholders, all shares of the Company then issued and outstanding and
entitled to vote, irrespective of the series, shall be voted in the aggregate
and not by series except (i) when required by the Investment Company Act of
1940, shares shall be voted by individual series; and (ii) when the matter does
not affect any interest of a particular series, then only shareholders of the
affected series shall be entitled to vote thereon.

FINANCIAL STATEMENTS

The Funds' Financial Statements for the year ended October 31, 1996,
including the financial highlights for each of the five fiscal years in the
period ended October 31, 1996, appearing in the Vanguard/Windsor Fund and
Vanguard/Windsor II 1996 Annual Reports to Shareholders, and the reports thereon
of Price Waterhouse LLP, independent accountants, also appearing therein, are
incorporated by reference in this Statement of Additional Information. The
Funds' 1996 Annual Reports to Shareholders are enclosed with this Statement of
Additional Information. For a more complete discussion of a Fund's performance,
please see the Fund's 1996 Annual Report to Shareholders, which may be obtained
without charge.

B-22
<PAGE> 113

PART C

VANGUARD/WINDSOR FUNDS, INC.
(FORMERLY THE WINDSOR FUNDS, INC.)

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS

The Registrant's audited financial statements for the year ended October
31, 1996, including Price Waterhouse LLP's reports thereon, are incorporated by
reference, in the Statement of Additional Information, from the Registrant's
1996 Annual Reports which have been filed with the Commission as Exhibits to
this Registration Statement. The financial statements included in each of the
Annual Reports are:

1. Statement of Net Assets as of October 31, 1996.

2. Statement of Operations for the year ended October 31, 1996.

3. Statement of Changes in Net Assets for the years ended October 31, 1995
and October 31, 1996.

4. Financial Highlights for each of the five years in the period ended
October 31, 1996.

5. Notes to Financial Statements.
6. Report of Independent Accountants.

(b) EXHIBITS

1. Articles of Incorporation
2. By-Laws of Registrant
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Not Applicable
7. Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information
8. Form of Custody Agreement
9. Form of Vanguard Service Agreement
10. Opinion of Counsel
11. Consent of Independent Accountants*
12. Financial Statements -- reference is made to (a) above
13. Not Applicable
14. Not Applicable
15. Not Applicable
16. Schedule for Computation of Performance Quotations*
27. Financial Data Schedule*
- ---------------
* Filed herewith

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

Registrant is not controlled by or under common control with any person.
The officers of the Registrant and the other investment companies in The
Vanguard Group of Investment Companies are identical. In addition, the officers
of the Registrant are also officers of The Vanguard Group, Inc. Reference is
made to the caption "Management of the Fund" in the Prospectus constituting Part
A and "Management of the Fund" in the Statement of Additional Information
constituting Part B of this Registration Statement.

C-1
<PAGE> 114

ITEM 26. NUMBER OF HOLDERS OF SECURITIES

As of October 31, 1996 the number of shareholders of each Series of Common
Stock ($.01 par value) was as follows:

<TABLE>
<S> <C>
Vanguard/Windsor Fund Series........................................................... 433,443
Vanguard/Windsor II Series............................................................. 549,374
</TABLE>

ITEM 27. INDEMNIFICATION

Reference is made to Article XI of Registrant's Articles of Incorporation.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Wellington Management Company, LLP ("Wellington Management") is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"). The list required by this Item 28 of officers and
partners of Wellington Management, together with any information as to any
business profession, vocation or employment of a substantial nature engaged in
by such officers and partners during the past two years, is incorporated herein
by reference to Schedules A and D of Form ADV filed by Wellington Management
pursuant to the Advisers Act (SEC File No. 801-159089).

Listed below are the names of, and office held by, each director and
principal officer of Barrow, Hanley, Mewhinney & Strauss, Inc., investment
adviser to the Vanguard/Windsor II Series. The business address of each such
director and officer is 3232 McKinney Avenue, 15th Floor, Dallas, TX 75204. No
officer or director of Barrow, Hanley, Mewhinney & Strauss, Inc. has any other
affiliation with the Registrant.

<TABLE>
<CAPTION>
NAME POSITION
----- -------
<S> <C>
James Purdy Barrow Principal
Bryant Miller Hanley, Jr. President, Secretary and Treasurer
Michael Christopher Mewhinney Principal
John Luke Strauss Principal
John Stevens Williams Principal
</TABLE>

Listed below are the names and offices held by each principal officer of
Equinox Capital Management, Inc., 590 Madison Avenue, 41st Floor, New York, NY
10022.

<TABLE>
<CAPTION>
NAME POSITION
----- -------
<S> <C>
Ronald J. Ulrich President & Director
Wendy D. Lee Managing Director
David E. Walker Principal
Laura Starr Vice President
Jacqueline A. Williams Vice President
Mark W. Watson Vice President
Kenneth J. Doerr Vice President
</TABLE>

Listed below are the names and offices held by each principal officer of
Tukman Capital Management, Inc., 60 East Sir Francis Drake Boulevard, Larkspur,
California 94939:

<TABLE>
<CAPTION>
NAME POSITION
----- -------
<S> <C>
Melvin T. Tukman President & Director
Daniel L. Grossman Vice President
</TABLE>

ITEM 29. PRINCIPAL UNDERWRITERS

(a) None

(b) Not Applicable

C-2
<PAGE> 115

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

The books, accounts and other document required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and Registrant's Custodian, State Street Bank & Trust
Company, Boston, Mass.

ITEM 31. MANAGEMENT SERVICES

Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and described in
Part B hereof under "Management of the Company," the Registrant is not a party
to any management-related service contract.

ITEM 32. UNDERTAKINGS

Registrant hereby undertakes to comply with the provisions of Section 16(c)
of the Investment Company Act of 1940 in regard to shareholders' rights to call
a meeting of shareholders for the purpose of voting on the removal of directors
and to assist in shareholder communications in such matters, to the extent
required by law.

Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.

C-3
<PAGE> 116

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Valley
Forge and the Commonwealth of Pennsylvania, on the 21st day of February, 1997.

VANGUARD/WINDSOR FUNDS, INC.

BY: RAYMOND J. KLAPINSKY
-------------------------------------
(Raymond J. Klapinsky)
John J. Brennan*,
President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- ------------------------- -----------------
<C> <S> <C>
BY: RAYMOND J. KLAPINSKY Chairman of the Board and February 21, 1997
- --------------------------------------------- Director
(Raymond J. Klapinsky)
John C. Bogle*

BY: RAYMOND J. KLAPINSKY President, Chief February 21, 1997
- ---------------------------------------------- Executive Officer and
(Raymond J. Klapinsky) Director
John J. Brennan*

BY: RAYMOND J. KLAPINSKY Director February 21, 1997
- ----------------------------------------------
(Raymond J. Klapinsky)
Robert E. Cawthorn*

BY: RAYMOND J. KLAPINSKY Director February 21, 1997
- ----------------------------------------------
(Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*

BY: RAYMOND J. KLAPINSKY Director February 21, 1997
- ----------------------------------------------
(Raymond J. Klapinsky)
Burton G. Malkiel*

BY: RAYMOND J. KLAPINSKY Director February 21, 1997
- ----------------------------------------------
(Raymond J. Klapinsky)
Alfred M. Rankin, Jr.*

BY: RAYMOND J. KLAPINSKY Director February 21, 1997
- ----------------------------------------------
(Raymond J. Klapinsky)
John C. Sawhill*

BY: RAYMOND J. KLAPINSKY Director February 21, 1997
- ----------------------------------------------
(Raymond J. Klapinsky)
Bruce K. MacLaury*

BY: RAYMOND J. KLAPINSKY Director February 21, 1997
- ----------------------------------------------
(Raymond J. Klapinsky)
James O. Welch, Jr.*

BY: RAYMOND J. KLAPINSKY Director February 21, 1997
- ----------------------------------------------
(Raymond J. Klapinsky)
J. Lawrence Wilson*

BY: RAYMOND J. KLAPINSKY Treasurer and Principal February 21, 1997
- ---------------------------------------------- Financial Officer and
(Raymond J. Klapinsky) Accounting Officer
Richard F. Hyland*
</TABLE>

* By Power of Attorney. See 1933 Act File No. 2-14336, January 23, 1990.
Incorporated by Reference.
<PAGE> 117

INDEX TO EXHIBITS

<TABLE>
<S> <C>
Consent of Independent Accountants................................................... EX-99-B11
Schedule for Computation of Performance Quotations................................... EX-99-B16
Financial Data Schedule.............................................................. EX-27
</TABLE>

<PAGE> 1

EX-99-B11

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 88 to the Registration Statement on Form N-1A (the "Registration
Statement") of our reports dated December 2, 1996, relating to the financial
statements and financial highlights appearing in the October 31, 1996 Annual
Reports to Shareholders of Vanguard/Windsor Fund and Vanguard/Windsor II, which
are also incorporated by reference into the Registration Statement. We also
consent to the references to us under the heading "Financial Highlights" in the
Prospectuses and under the heading "Financial Statements" in the Statement of
Additional Information.

PRICE WATERHOUSE LLP

Philadelphia, PA

February 20, 1997

<PAGE> 1

EX-99.B16

SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS*
VANGUARD/WINDSOR FUND
(FORMERLY WINDSOR FUND)

1. Average Annual Total Return

<TABLE>
<C> <S>
P (1 + T)to the nth power = ERV

Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = 23.16%
N = 1
ERV = $1,231.62
Five Year
P = $1,000
T = 16.69%
N = 5
ERV = $2,163.45
Ten Year
P = $1,000
T = 13.38%
N = 10
ERV = $3,509.13
</TABLE>

2. YIELD

<TABLE>
<C> <S> <C>
a - b
Yield = 2[( ----- +1)to the 6th power -1]
c X d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period

Example a = $35,228,037.00
b = $3,681,288.00
c = 933,324,135.8922
d = $16.90
Yield = 2.41%
</TABLE>

*Figures presented are as of the year ended October 31, 1996.

<PAGE> 2

EX-99.B16

SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS*
VANGUARD/WINDSOR II
(FORMERLY WINDSOR II)

1. Average Annual Total Return

<TABLE>
<C> <S>
P (1 + T)to the nth power = ERV

Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = 27.17%
N = 1
ERV = $1,271.72
Five Year
P = $1,000
T = 16.56%
N = 5
ERV = $2,151.21
Ten Year
P = $1,000
T = 13.91%
N = 10
ERV = $3,677.47
</TABLE>

2. YIELD

<TABLE>
<C> <S> <C>
a - b
Yield = 2[( ----- +1)to the 6th power - 1]
c X d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period

Example a = $38,280,448.00
b = $4,686,182.00
c = 609,596,508.056
d = $23.95
Yield = 2.78%
</TABLE>

*Figures presented are as of the year ended October 31, 1996.

<ARTICLE> 6
<CIK> 0000107606
<NAME> VANGUARD/WINDSOR FUNDS, INC.
<SERIES>
<NUMBER> 01
<NAME> VANGUARD/WINDSOR FUND
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 13066602
<INVESTMENTS-AT-VALUE> 15848895
<RECEIVABLES> 574990
<ASSETS-OTHER> 7102
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16430987
<PAYABLE-FOR-SECURITIES> 107422
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 482515
<TOTAL-LIABILITIES> 589937
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11707454
<SHARES-COMMON-STOCK> 932474
<SHARES-COMMON-PRIOR> 836253
<ACCUMULATED-NII-CURRENT> 114649
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1236654
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2782293
<NET-ASSETS> 15841050
<DIVIDEND-INCOME> 319222
<INTEREST-INCOME> 118745
<OTHER-INCOME> 0
<EXPENSES-NET> 41891
<NET-INVESTMENT-INCOME> 396076
<REALIZED-GAINS-CURRENT> 1243836
<APPREC-INCREASE-CURRENT> 1366247
<NET-CHANGE-FROM-OPS> 3006159
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 406918
<DISTRIBUTIONS-OF-GAINS> 1165890
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 121079
<NUMBER-OF-SHARES-REDEEMED> 127266
<SHARES-REINVESTED> 102408
<NET-CHANGE-IN-ASSETS> 2833285
<ACCUMULATED-NII-PRIOR> 125491
<ACCUMULATED-GAINS-PRIOR> 1159252
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 14399
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 44607
<AVERAGE-NET-ASSETS> 14423726
<PER-SHARE-NAV-BEGIN> 15.55
<PER-SHARE-NII> 0.43
<PER-SHARE-GAIN-APPREC> 2.85
<PER-SHARE-DIVIDEND> 0.46
<PER-SHARE-DISTRIBUTIONS> 1.38
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.99
<EXPENSE-RATIO> 0.31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000107606
<NAME> VANGUARD/WINDSOR FUNDS, INC.
<SERIES>
<NUMBER> 02
<NAME> VANGUARD/WINDSOR II
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 10795160
<INVESTMENTS-AT-VALUE> 14704883
<RECEIVABLES> 165732
<ASSETS-OTHER> 7341
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14877956
<PAYABLE-FOR-SECURITIES> 59767
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 60303
<TOTAL-LIABILITIES> 120070
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9941349
<SHARES-COMMON-STOCK> 613765
<SHARES-COMMON-PRIOR> 511974
<ACCUMULATED-NII-CURRENT> 192348
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 714076
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3910113
<NET-ASSETS> 14757886
<DIVIDEND-INCOME> 360574
<INTEREST-INCOME> 49056
<OTHER-INCOME> 0
<EXPENSES-NET> 46762
<NET-INVESTMENT-INCOME> 362868
<REALIZED-GAINS-CURRENT> 714637
<APPREC-INCREASE-CURRENT> 1828051
<NET-CHANGE-FROM-OPS> 2905556
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 309925
<DISTRIBUTIONS-OF-GAINS> 352517
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 166158
<NUMBER-OF-SHARES-REDEEMED> 90590
<SHARES-REINVESTED> 26223
<NET-CHANGE-IN-ASSETS> 4485721
<ACCUMULATED-NII-PRIOR> 139405
<ACCUMULATED-GAINS-PRIOR> 351956
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 17167
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 48152
<AVERAGE-NET-ASSETS> 12412486
<PER-SHARE-NAV-BEGIN> 20.06
<PER-SHARE-NII> 0.62
<PER-SHARE-GAIN-APPREC> 4.63
<PER-SHARE-DIVIDEND> 0.58
<PER-SHARE-DISTRIBUTIONS> 0.69
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 24.04
<EXPENSE-RATIO> 0.39
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>