February 1, 2003 Dear Shareholder: The Zweig Fund's net asset value increased 4.3% during the three months ended December 31, 2002, including the $0.144 distribution paid on October 28, 2002. During the same period, the Standard & Poor's 500 Index gained 8.4%, including dividends. For the year ended December 31, 2002, the Fund's net asset value declined 22.82%, including $0.698 in distributions and the effect of the rights offering. During this span, the Standard & Poor's 500 Index fell 22.10%, including dividends. DISTRIBUTION DECLARED On January 2, 2003, the Fund announced a distribution of $0.137 payable on January 10, 2003 to shareholders of record on December 31, 2002. Including this distribution, our total payout since the Fund's inception is now $17.565. Of the $0.64 considered to be distributed in 2002 for tax purposes, $0.008954 is ordinary income and $0.631046 is return of capital. (The return of capital distribution is a tax-free return of capital and therefore should not be reported as income.) Sincerely, /s/ Philip R. McLoughlin Philip R. McLoughlin Chairman MARKET OUTLOOK While the overall market averages showed improvement in the final quarter, the performance for the year was dismal. For the quarter the Dow was up 10.59%, the S&P 500 Index, 8.44%, and the Nasdaq Composite Index, 14.07%. However, for the full year, the Dow was down 15.01%, the S&P Index, 22.10%, and the Nasdaq, a whopping 31.26%. This is the first time since 1939-41 that the Dow and S&P fell for three consecutive years, while the Nasdaq, which was introduced in 1971, was down three years in a row for the first time. Because I do not believe we have seen the bottom, I reduced our exposure during what I considered a rally phase in the bear market. Although the market weakness has had a long run, I don't think there is any limit on how many consecutive years the market can go up or down. From 1995 to 1999 we came off a string when the S&P 500 rose for five years in a row. We were in a bubble, and the market went to ridiculous valuations. We have been paying the piper ever since. In an attempt to provide a boost for the economy and the stock market, the Administration, which now controls both houses of Congress, has proposed an extensive stimulus package that includes a proposal to eliminate the taxation of dividends. Such action might provide some relief. The problem is that the market is a discounting mechanism, and this package has been talked about for some time. However, I believe that this expectation helped contribute to the recent market strength. As far as dividends are concerned, they might have difficulty eliminating all of the double taxation because it would cost the Treasury too much revenue. They might have to settle to cut the tax in half to roughly 20%, the same as the capital gains tax. Even then, they will have a problem because some people will perceive it as a tax break for the rich. However, I do believe they should end the double taxation of dividends. Anything that eases the tax burden on dividends would help the stock market. It would give the market some kind of cushion. At least the market would not go down as far as I think it could. It would also encourage companies to pay more dividends. That would be good news because I think many companies have not been judicious in handling their retained earnings. Too many companies bought in their own stock rather than issue dividends and paid outrageous prices. I think that was an atrocious misallocation of capital. If a company doesn't need retained earnings for its business, it should pay out the dividends rather than purchase its own stock. If an investor can get these dividends, especially without paying an extra tax, he could invest it where he sees fit and help support the market. Incidentally, I have no problem with companies buying back their own stock if prices are low enough. I do have a problem with a recent comment by Fed chairman Alan Greenspan that deflation is more of a threat to economic growth than inflation. As I see it, neither inflation nor deflation is a problem. The problem is what causes inflation or deflation. It's like saying that when the temperature outside reads zero, the thermometer is at fault because it is registering cold, meaning deflation. The thermometer is not the problem--it's the weather pattern. Something in the atmosphere is causing it. If excess capacity and excess debt are causing deflation, that is the problem. Obviously, the solution is to get rid of the excesses. It's not easy to do, and it takes a long time. It has been suggested that the Fed could fight deflation by printing money and flooding the system with reserves. That would be horrible. If you doubled the money supply, you would roughly double the price level. It would be easier for companies to pay off debt. The flip side is that those who were owed money would suffer. The economy would not benefit. As far as the economy is concerned, corporate leaders are more skeptical than the Fed. That's because the Fed has an ax to grind. They don't want to say everything is terrible or everything is great. They are always playing the game, and then there is Greenspan speak. Half the time you're not supposed to know what he is really saying. The people running the corporations have their own ax to grind. If they are telling you prospects are great, they're usually trying to pump up their stock. If they say business is lousy, they're probably telling you the truth. At least that's the way I see it. Regardless of either perspective, we have gone through the worst Christmas season in 30 years. However, the economy is not a disaster right now. It's just kind of limp. While it is on the plus side, it is not growing very rapidly. The state of the economy is reflected in the fact that for the first time since 1988 net outflows from stock mutual funds topped inflows in 2002. When the public sells mutual funds en masse for a long time, as it did in much of 1973 and 1974, the market tends to underperform. That's a problem now because the market was boosted through the 1990s mainly by money pouring into mutual funds. To some extent, it was a great con game. I'm not saying that the mutual funds were creating a game--it was the whole bubble business. People were buying technology stocks at any price and putting their IRAs, Keoghs, and 401(k)s in the market because the market always does well in the long run. However, the long run may be 20 or 30 years down the road. If things get too exuberant in the short run, you have a problem. The inflow was overdone and helped propel the market higher. Now I think people are scared. They look at their portfolios, which are down a third or a half 2 or something like that. Sick of losing money, they're buying fewer mutual funds and even withdrawing money. This may continue for a long time because the inflows poured in for years and years. After the 1987 crash, we had outflows for most of 1988 and part of 1989. After that, except for an occasional month, we had inflows for 10 or 11 years, and it was overdone. Now we have had outflows for a year or so. However, the outflows, relative to assets, are very small. If it does go on, it will not help the markets. Meanwhile, the flow of European funds into the U.S. is at a pace to reach the lowest level since 1988, the last time Europe was a net seller of stock. In September, the last month for which we have figures, the 12 euro countries were net sellers of $2.8 billion of U.S. equities. In the long run, and I have the data back to 1940, it is usually not good for the market when foreigners are heavy buyers, and it's good when they are heavy sellers. At the last 14 major market bottoms, foreigners were sellers at 11 of them. On a quarterly basis, all foreigners, including Europeans, haven't turned to the sell side. The one-month result is encouraging, but I don't think we have seen enough of it. Some analysts see a potential bright side for the markets in the so-called cash on the sidelines. About $6.6 trillion is now in low return vehicles like savings accounts and money market funds. With interest rates so low, they say, where else can people put their money? Well, I think the public's holding of cash is too low relative to people's own debt and needs. I don't know if much of the cash is destined to go into the market. I just don't think there is so much idle cash available for investment. The total value of U.S. mergers and acquisitions fell 41% to $447.8 billion in 2002, the lowest level since 1994. From the peak in 2000, the value of deals has dropped 74%. I think it is encouraging that mergers have slowed down. During the bubble years, we had a feeding frenzy and corporations felt they had to join the feast. Now we are in the cooling off period. These cycles have been seen many times. I don't know when we will reach the bottom. It was almost like death in 1974. There were very few mergers. I guess corporations have to go through the hangover period. We are also in the hangover mode as far as initial public offerings are concerned. There were just 83 IPO deals in 2002, raising just $22.2 billion, the lowest figure since the early 1990s. In the past too much money was raised by too many low quality companies. The good news is that the better quality companies have come into the market. That's because the weaker companies are having a very hard time getting financing. Again, going back to 1975, there were very few IPOs after the two-year bear market. We may have to go to much lower levels before the current cycle is over. I would like to see it go a lot lower relative to market capitalization. We are nowhere near as low as this activity has gone in previous major bear markets. Similarly, the sentiment of investment advisors has not gotten to levels generally seen at market bottoms. About half of all investment advisors recently were bullish, more than twice the number at the October bottom. Historically, going back 40 years, we have had about two bears for every bull at market bottoms. Recently we have had perhaps three weeks when there were slightly more bears than bulls. We just haven't seen the kind of pessimism we had in 1970, 1974, and 1982. It hasn't happened. Given that we had the biggest bubble of all time, I don't think that's a good sign. On the positive side, the Fed has recently cut interest rates for the twelfth time and that may be helpful. The money supply is growing and that's okay. Also, the recession of 2001 is over; last quarter saw the fifth consecutive gain in gross domestic product. However, the recovery has been anemic and there is a chance we will see a double-dip recession. 3 We should have had a much better stock market recovery than we've seen, and my sentiment indicators are just not very good. Although they were pretty decent, they didn't get to bear-killing levels in September and October and have deteriorated since. I considered valuations too high the whole time, and the recent rally only made them worse. Although the rally may carry further in the short run, I am not convinced there are enough positives to overcome the negatives in the long run. Right now I am cautious. We are at about 64% invested, which is lower than our norm. I probably would go down lower if it weren't the beginning of the year, which is a seasonally strong period. PORTFOLIO COMPOSITION Except for small changes in percentages held, our leading industry groups at year-end were basically unchanged from the close of the third quarter. They included financial services, health care, technology, consumer products and services, energy, and media. Our largest individual holdings include Microsoft, Pfizer, IBM, Bank of America, General Electric, Wells Fargo, Johnson & Johnson, Citigroup, American International Group, and Dell. New to this grouping are IBM, Dell, and AIG, where we added to our positions, and Citigroup. No longer in this listing are Tenet Healthcare, which we sold out completely, and Procter & Gamble, United Healthcare, and Wal-Mart, where we trimmed our holdings. Sincerely, /s/ Martin E. Zweig, Ph.D. Chairman Martin E. Zweig, Ph.D. President Zweig Consulting LLC 4 THE ZWEIG FUND, INC. STATEMENT OF INVESTMENTS December 31, 2002 Number of Shares Value --------- ------------ COMMON STOCKS 61.64% AEROSPACE & AIR TRANSPORT 2.77% Boeing Co..................................... 69,400 $ 2,289,506 L-3 Communications Holdings, Inc.............. 42,000 (a) 1,886,220 Northrop Grumman Corp......................... 21,000 2,037,000 Raytheon Co................................... 68,500 2,106,375 United Technologies Corp...................... 44,400 2,750,136 ------------ 11,069,237 ------------ BUILDING & FOREST PRODUCTS 1.33% International Paper Co........................ 54,700 1,912,859 Smurfit-Stone Container Corp.................. 120,400 (a) 1,853,077 Temple-Inland Inc............................. 35,000 1,568,350 ------------ 5,334,286 ------------ CHEMICALS 0.67% E.I. du Pont de Nemours & Co.................. 62,900 2,666,960 ------------ COMMERCIAL SERVICES 0.61% First Data Corp............................... 69,300 2,453,913 ------------ CONSUMER PRODUCTS & SERVICES 5.58% Anheuser-Busch Cos., Inc...................... 69,400 3,358,960 Avon Products, Inc............................ 84,500 4,552,015 Black & Decker Corp........................... 52,800 2,264,592 Kimberly-Clark Corp........................... 52,500 2,492,175 PepsiCo, Inc.................................. 41,400 1,747,908 Procter & Gamble Co........................... 56,600 4,864,204 Unilever NV, ADR.............................. 49,000 3,023,790 ------------ 22,303,644 ------------ EXCHANGE TRADED FUNDS 1.94% iShares Dow Jones U.S. Consumer Non-Cyclical Sector Index Fund........................... 70,000 2,845,500 Pharmaceutical HOLDRs Trust................... 66,500 4,933,635 ------------ 7,779,135 ------------ FINANCE -- FINANCIAL SERVICES 11.72% Allstate Corp................................. 86,800 3,210,732 American International Group, Inc............. 103,100 5,964,335 Bank of America Corp.......................... 103,800 7,221,366 Citigroup, Inc................................ 172,300 6,063,237 Fannie Mae.................................... 52,300 3,364,459 See notes to financial statements 5 Number of Shares Value --------- ----------- FINANCE -- FINANCIAL SERVICES (CONTINUED) Freddie Mac.................................. 52,400 $ 3,094,220 Lehman Brothers Holdings, Inc................ 59,100 3,149,439 Merrill Lynch & Co., Inc..................... 56,000 2,125,200 Morgan Stanley............................... 62,500 2,495,000 Washington Mutual, Inc....................... 105,000 3,625,650 Wells Fargo & Co............................. 140,200 6,571,174 ----------- 46,884,812 ----------- FOOD, BEVERAGES, TOBACCO 0.67% Kraft Foods, Inc., Class A................... 68,500 2,666,705 ----------- HEALTH CARE 9.53% AmerisourceBergen Corp....................... 35,400 1,922,574 Amgen, Inc................................... 68,500 (a) 3,311,290 Barr Laboratories, Inc....................... 28,000 (a) 1,822,520 Baxter International, Inc.................... 91,000 2,548,000 Johnson & Johnson............................ 116,300 6,246,473 MedImmune, Inc............................... 51,100 (a) 1,388,387 Medtronic, Inc............................... 52,500 2,394,000 Pfizer, Inc.................................. 291,100 8,898,927 St. Jude Medical, Inc........................ 70,000(a) 2,780,400 UnitedHealth Group, Inc...................... 34,800 2,905,800 Wyeth........................................ 105,000 3,927,000 ----------- 38,145,371 ----------- MANUFACTURING 2.37% General Electric Co.......................... 275,800 6,715,730 Pitney Bowes, Inc............................ 84,800 2,769,568 ----------- 9,485,298 ----------- MEDIA 3.73% Clear Channel Communications, Inc............ 85,700(a) 3,195,753 Gannett Co., Inc............................. 35,000 2,513,000 Tribune Company.............................. 80,500 3,659,530 Viacom, Inc., Class B........................ 87,500(a) 3,566,500 Walt Disney Co............................... 122,900 2,004,499 ----------- 14,939,282 ----------- METALS 0.30% Inco Ltd..................................... 56,000(a) 1,188,320 ----------- OIL & OIL-GAS DRILLING 3.82% Anadarko Petroleum Corp...................... 34,000 1,628,600 ConocoPhillips............................... 34,000 1,645,260 Exxon Mobil Corp............................. 103,300 3,609,302 Occidental Petroleum Corp.................... 118,000 3,357,100 See notes to financial statements 6 Number of Shares Value --------- ------------ OIL & OIL-GAS DRILLING (CONTINUED) Talisman Energy, Inc......................... 68,200 $ 2,466,794 Valero Energy Corp........................... 70,000 2,585,800 ------------ 15,292,856 ------------ RAILROADS 0.52% Union Pacific Corp........................... 35,000 2,095,450 ------------ RESTAURANTS 0.47% Wendy's International, Inc................... 70,000 1,894,900 ------------ RETAILING 3.25% Best Buy Co., Inc............................ 70,000(a) 1,690,500 Kroger Co.................................... 105,000(a) 1,622,250 Lowe's Cos., Inc............................. 70,500 2,643,750 Reebok International Ltd..................... 52,000(a) 1,528,800 Wal-Mart Stores, Inc......................... 108,900 5,500,539 ------------ 12,985,839 ------------ TECHNOLOGY 9.03% Applied Materials, Inc....................... 70,700(a) 921,221 Cisco Systems, Inc........................... 207,300(a) 2,715,630 Dell Computer Corp........................... 222,100(a) 5,938,954 Intel Corp................................... 294,400 4,583,808 International Business Machines Corp......... 108,500 8,408,750 Microsoft Corp............................... 196,200(a) 10,143,540 Nokia Corp., ADR............................. 104,700 1,622,850 Texas Instruments, Inc....................... 120,500 1,808,705 ------------ 36,143,458 ------------ TELECOMMUNICATIONS 1.70% AT&T Corp.................................... 54,820 1,431,350 CenturyTel, Inc.............................. 87,500 2,570,750 SBC Communications, Inc...................... 103,400 2,803,174 ------------ 6,805,274 ------------ UTILITIES -- ELECTRIC & GAS 1.63% DTE Energy Co................................ 49,000 2,273,600 Entergy Corp................................. 52,900 2,411,711 Exelon Corp.................................. 35,000 1,846,950 ------------ 6,532,261 ------------ Total Common Stocks (Cost $288,997,746).......... 246,667,001 ------------ See notes to financial statements 7 Principal Amount Value ----------- ------------ SHORT-TERM INVESTMENTS 38.41% 7-Eleven Inc., 1.32%, 1/10/03................. $ 7,000,000 $ 6,997,690 BP America Inc., 1.20%, 1/02/03............... 20,000,000 19,999,333 Diageo Capital PLC, 1.31%, 1/03/03............ 20,000,000 19,998,545 General RE Financial Products Corp., 1.28%, 1/07/03..................................... 20,000,000 19,995,733 Knight-Ridder Inc., 1.20%, 1/09/03............ 8,700,000 8,699,710 New York Life Cap. Corp., 1.34%, 1/06/03...... 20,000,000 19,996,278 Philip Morris Co. Inc., 1.32%, 1/13/03........ 18,000,000 17,992,080 SLM Corp., 1.22%, 1/02/03..................... 20,000,000 19,999,322 UBS Financial Corp., 1.20%, 1/02/03........... 20,000,000 19,999,333 ------------ Total Short-Term Investments (Cost $153,678,024).. 153,678,024 ------------ Total Investments (Cost $442,675,770) -- 100.05%.. 400,345,025 Other assets less liabilities -- 0.05%............ (182,246) ------------ Net Assets -- 100%................................ $400,162,779 ============ -------- (a) Non-income producing security For Federal income tax purposes, the tax basis of investments owned at December 31, 2002 was $444,927,473 and net unrealized depreciation of investments consisted of: Gross unrealized appreciation................................. $ 7,144,733 Gross unrealized depreciation................................. (51,727,181) ------------ Net unrealized depreciation................................... $(44,582,448) ============ See notes to financial statements 8 THE ZWEIG FUND, INC. STATEMENT OF ASSETS AND LIABILITIES December 31, 2002 ASSETS Investments, at value (identified cost $442,675,770)..... $ 400,345,025 Cash..................................................... 99,992 Dividends receivable..................................... 225,317 Prepaid expenses......................................... 25,693 ------------- Total Assets......................................... 400,696,027 ------------- LIABILITIES Accrued advisory fees (Note 4)........................... 292,029 Accrued administration fees (Note 4)..................... 44,663 Other accrued expenses................................... 196,556 ------------- Total Liabilities.................................... 533,248 ------------- NET ASSETS $ 400,162,779 ============= NET ASSET VALUE, PER SHARE ($400,162,779 / 73,233,013 shares outstanding -- Note 5). $ 5.46 ============= Net Assets consist of Capital paid-in.......................................... $ 620,097,204 Accumulated net realized loss on investments............. (177,603,680) Net unrealized depreciation on investments............... (42,330,745) ------------- $ 400,162,779 ============= See notes to financial statements 9 THE ZWEIG FUND, INC. STATEMENT OF OPERATIONS For the Year Ended December 31, 2002 INVESTMENT INCOME Income.......................................................... Interest.................................................... $ 1,408,293 Dividends (net of foreign withholding taxes of $13,064)..... 4,448,141 ------------- Total Income............................................. 5,856,434 ------------- Expenses........................................................ Investment advisory fees (Note 4)........................... 3,693,363 Administrative fees (Note 4)................................ 564,867 Transfer agent fees......................................... 344,465 Printing and postage expenses............................... 167,095 Professional fees (Note 4).................................. 102,638 Directors' fees and expenses (Note 4)....................... 92,111 Custodian fees.............................................. 71,234 Miscellaneous............................................... 195,868 ------------- Total Expenses........................................... 5,231,641 ------------- Net Investment Income................................ 624,793 ------------- NET REALIZED AND UNREALIZED LOSSES Net realized loss on investments................................ (137,974,324) Decrease in unrealized depreciation on investments.............. 21,342,523 ------------- Net realized and unrealized loss on investments............. (116,631,801) ------------- Net decrease in net assets resulting from operations........ $(116,007,008) ============= See notes to financial statements 10 THE ZWEIG FUND, INC. STATEMENT OF CHANGES IN NET ASSETS For the Year Ended December 31 ---------------------------- 2002 2001 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS Operations Net investment income (loss)..................................... $ 624,793 $ (174,304) Net realized loss on investments................................. (137,974,324) (38,614,009) Decrease (increase) in unrealized depreciation of investments.................................................... 21,342,523 (50,005,448) ------------- ------------- Net decrease in net assets resulting from operations.......... (116,007,008) (88,793,761) ------------- ------------- Dividends and distributions to shareholders from Net investment income............................................ (624,793) (477,795) Net realized short-term gains on investments..................... -- (4,254,673) Tax return of capital............................................ (45,982,141) (49,117,006) ------------- ------------- Total dividends and distributions to shareholders............. (46,606,934) (53,849,474) ------------- ------------- Capital share transactions Net asset value of shares issued to shareholders in reinvestment of distributions resulting in the issuance of common stock................................................... 6,178,332 11,550,317 Net proceeds from the sales of shares during rights offering..... 67,337,079 -- ------------- ------------- Net increase in net assets derived from capital share transactions................................................... 73,515,411 11,550,317 ------------- ------------- Net decrease in net assets....................................... (89,098,531) (131,092,918) NET ASSETS Beginning of year.................................................... 489,261,310 620,354,228 ------------- ------------- End of year.......................................................... $ 400,162,779 $ 489,261,310 ============= ============= See notes to financial statements 11 THE ZWEIG FUND, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2002 NOTE 1 -- Organization The Zweig Fund, Inc. (the "Fund") is a closed-end, diversified management investment company registered under the Investment Company Act of 1940 (the "Act"). The Fund was incorporated under the laws of the State of Maryland on June 18, 1986. NOTE 2 -- Significant Accounting Policies The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Portfolio Valuation Portfolio securities that are traded only on stock exchanges are valued at the last sale price. Secu- rities traded in the over-the-counter market which are National Market System securities are valued at the last sale price. Other over-the-counter securities are valued at the most recently quoted bid price provided by the principal market makers. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market, as determined by the Adviser. Debt securities may be valued on the basis of prices provided by an independent pricing service, when such prices are believed by the Adviser to reflect the fair market value of such securities. Short-term investments having a remaining maturity of 60 days or less when purchased are valued at amortized cost (which approximates market value). Futures contracts traded on commodities exchanges are valued at their closing settlement price on such exchange. Securities for which market quotations are not readily available (of which there were none at December 31, 2002) and other assets, if any, are valued at fair value as determined under procedures approved by the Board of Directors of the Fund. B. Security Transactions and Investment Income Security transactions are recorded on trade date. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Discount and premium on securities purchased other than short-term securities are accreted on the constant yield method over the life of the respective securities. Realized gains and losses on sales of investments are determined on the identified cost basis for financial reporting and tax purposes. 12 C. Federal Income Tax Information It is the policy of the Fund to comply with the requirements of the Internal Revenue Code ("the Code"), applicable to regulated investment companies, and to distribute all of its taxable income to its shareholders. In addition, the Fund intends to distribute an amount sufficient to avoid the imposition of any excise tax under Section 4982 of the Code. Therefore, no provision for federal income taxes or excise taxes has been made. D. Dividends and Distributions to Shareholders Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include the treatment of net operating losses, losses deferred due to wash sales and the timing of distributions. For financial reporting purposes, book basis capital accounts are adjusted to reflect the tax character of permanent book/tax differences. The reclassifications have no impact on the net assets or net asset value of the Fund. As of December 31, 2002, the Fund increased the accumulated net realized loss on investments by $11,981,945 and increased capital paid-in by $11,981,945. As of December 31, 2002, the components of distributable earnings on a tax basis (excluding unrealized appreciation/(depreciation) which is disclosed in the schedule of investments) were as follows: Undistributed Ordinary Income........ $0 Undistributed Long-term Capital Gains $0 Capital Loss Carryovers.............. $38,468,937 expiring 2009 $136,883,040 expiring 2010 Capital loss carryovers may be used to offset future capital gains. The differences between the book basis and tax basis components of distributable earnings relate principally to the timing of recognition of income and gains and distributions for federal income tax purposes. Short term gain distributions reported in the statement of changes in net assets are reported as ordinary income for federal tax purposes. NOTE 3 -- Portfolio Transactions During the year ended December 31, 2002, purchases and sales of investments, excluding short-term investments were: Common Stocks ------------ Purchases.................................... $371,382,124 ============ Sales........................................ $463,611,797 ============ 13 NOTE 4 -- Investment Advisory Fees and Other Transactions with Affiliates a) Investment Advisory Fee: The Investment Advisory Agreement (the "Agreement") between Phoenix/Zweig Advisers LLC (the "Adviser"), the Fund's investment adviser, and the Fund provides that, subject to the direction of the Board of Directors of the Fund and the applicable provisions of the Act, the Adviser is responsible for the actual management of the Fund's portfolio. Phoenix/Zweig Advisers LLC is a wholly-owned subsidiary of Phoenix Investment Partners, Ltd. ("PXP"). PXP is an indirect, wholly-owned subsidiary of The Phoenix Companies, Inc. ("PNX"). The responsibility for making decisions to buy, sell or hold a particular investment rests with the Adviser, subject to review by the Board of Directors and the applicable provisions of the Act. For the services provided by the Adviser under the Agreement, the Fund pays the Adviser a monthly fee equal, on an annual basis, to 0.85% of the Fund's average daily net assets. During the year ended December 31, 2002, the Fund accrued advisory fees of $3,693,363. b) Administration Fee: Phoenix Equity Planning Corporation ("PEPCO"), an indirect wholly-owned subsidiary of PNX, serves as the Fund's Administrator (the "Administrator") pursuant to an Administration Agreement with the Fund. The Administrator generally assists in all aspects of the Fund's operations, other than providing investment advice, subject to the overall authority of the Fund's Board of Directors. The Administrator determines the Fund's net asset value daily, prepares such figures for publication on a weekly basis, maintains certain of the Fund's books and records that are not maintained by the Adviser, custodian or transfer agent, assists in the preparation of financial information for the Fund's income tax returns, proxy statements, quarterly and annual shareholder reports, and responds to shareholder inquiries. Under the terms of the Agreement, the Fund pays the Administrator a monthly fee equal, on an annual basis, to 0.13% of the Fund's average daily net assets. During the year ended December 31, 2002, the Fund accrued administration fees of $564,867. c) Directors' Fee: The Fund pays each Director who is not an interested person of the Fund or the Adviser a fee of $10,000 per year plus $1,500 per Directors' or committee meeting attended, together with the out-of-pocket costs relating to attendance at such meetings. Any Director of the Fund who is an interested person of the Fund or the Adviser receives no remuneration from the Fund. d) Brokerage Commission: During the year ended December 31, 2002, the Fund paid PXP Securities Corp., a wholly-owned subsidiary of PXP, brokerage commissions of $33,396 in connection with portfolio transactions effected through them. In addition, PXP Securities Corp. charged $70,352 in commissions for transactions effected on behalf of the participants in the Fund's Automatic Reinvestment and Cash Purchase Plan. NOTE 5 -- Capital Stock and Reinvestment Plan At December 31, 2002, the Fund had one class of common stock, par value $.10 per share, of which 100,000,000 shares are authorized and 73,233,013 shares are outstanding. Registered shareholders may elect to receive all distributions in cash paid by check mailed directly to the shareholder by EquiServe as dividend paying agent. Pursuant to the Automatic Reinvestment and Cash Purchase Plan (the "Plan") shareholders not making such election will have all such amounts automatically reinvested by EquiServe, as the Plan agent, in whole or fractional shares of the Fund, as the case may be. During the years ended December 31, 2002 and 2001, 787,167 and 1,310,223 shares, respectively, were issued pursuant to the Plan. 14 In a non transferable rights offering ended June 17, 2002, shareholders exercised rights to purchase 11,000,000 shares of common stock at an offering price of $6.17 per share for proceeds, net of expenses, of $67,337,079. On December 16, 2002, the Board of Directors declared a distribution of the greater of 2.5% of its net value on December 13, 2002 or all available net investment income plus net short and long term gains. On January 2, 2003, the Fund announced a distribution of $0.137 per share to shareholders of record on December 31, 2002. This distribution had an ex-dividend date of January 3, 2003 and was payable on January 10, 2003. NOTE 6 -- Financial Highlights Selected data for a share outstanding throughout each year: Year Ended December 31 -------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Per Share Data Net asset value, beginning of year. $ 7.96 $ 10.32 $ 12.20 $ 12.03 $ 12.63 -------- -------- -------- -------- -------- Income From Investment Operations Net investment income.............. 0.01 -- 0.20 0.20 0.23 Net realized and unrealized gains (losses).......................... (1.76) (1.47) (0.90) 1.16 0.55 -------- -------- -------- -------- -------- Total from investment operations... (1.75) (1.47) (0.70) 1.36 0.78 -------- -------- -------- -------- -------- Dividends and Distributions Dividends from net investment income............................ (0.01) (0.01) (0.21) (0.19) (0.35) Distributions from net realized gains............................. -- (0.07) (0.97) (1.00) (0.87) Tax return of capital.............. (0.68) (0.81) -- -- -- -------- -------- -------- -------- -------- Total dividends and distributions.. (0.69) (0.89) (1.18) (1.19) (1.22) -------- -------- -------- -------- -------- Effect on net asset value as a result of rights offering*........ (0.06) -- -- -- (0.16) -------- -------- -------- -------- -------- Net asset value, end of year.... $ 5.46 $ 7.96 $ 10.32 $ 12.20 $ 12.03 ======== ======== ======== ======== ======== Market value, end of year**..... $ 4.93 $ 7.90 $ 9.81 $ 10.06 $ 10.81 ======== ======== ======== ======== ======== Total investment return***......... (29.78)% (11.27)% 9.45% 3.61% (8.68)% ======== ======== ======== ======== ======== Ratios/Supplemental Data Net assets, end of period (in thousands)........................ $400,163 $489,261 $620,354 $733,523 $723,521 Ratio of expenses to average net assets............................ 1.20% 1.19% 1.12% 1.12% 1.12% Ratio of net investment income (loss) to average net assets...... 0.14% (0.03)% 1.74% 1.68% 1.90% Portfolio turnover rate............ 104.8% 80.3% 114.8% 114.9% 68.7% -------- * Shares were sold at a 5% discount from the average market price. ** Closing Price -- New York Stock Exchange. *** Total investment return is calculated assuming a purchase of common stock on the opening of the first business day and a sale on the closing of the last business day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation, to be reinvested at prices obtained under the Fund's Automatic Reinvestment and Cash Purchase Plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or a decrease in the premium of the market value to the net assets from the beginning to the end of such years. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to end of such periods. 15 Report of Independent Accountants To the Board of Directors and Shareholders of The Zweig Fund, Inc.: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The Zweig Fund, Inc. (the "Fund") at December 31, 2002, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP New York, New York February 13, 2003 16 FUND MANAGEMENT Information pertaining to the Directors and officers of the Fund is set forth below. The address of each individual, unless otherwise noted, is c/o Phoenix/Zweig Advisers LLC, 900 Third Avenue, New York, NY 10022. Number of Portfolios in Fund Term of Office Complex Name, (Age), Address and Length of Overseen Principal Occupation(s) and Position(s) with Fund Time Served by Director During Past 5 Years and Other Directorships Held ------------------------- ----------------- ----------- ------------------------------------------------------- INDEPENDENT DIRECTORS Charles H. Brunie (72)........ Term: Until 2003. 2 Chairman, Brunie Associates (investments) since April Brunie Associates Served since: 2001; Chairman, Oppenheimer Capital (1969-2000); 600 Third Avenue, 1988. Chairman Emeritus, Board of Trustees, Manhattan 17th Floor Institute (since 1990); Trustee, Milton and Rose D. New York, NY 10016 Friedman Foundation for Vouchers (since 1999). Trustee, Hudson Institute (since 2002). Trustee, Director American Spectator (since 2002). Elliot S. Jaffe (76).......... Term: Until 2005. 2 Chairman of The Dress Barn, Inc. (since 1963). 30 Dunnigan Drive Served since: Director, National Retail Federation (since 1994); Suffern, NY 10901 1988. Stamford Hospital Foundation (since 1997). Member, Board of Overseers of The School of Arts and Sciences, Director University of Pennsylvania (since 1998); Trustee, Teachers College, Columbia University (since 1996). Director of Citigroup Funds (since 1990). Wendy Luscombe (51)........... Term: Until 2005. 2 Principal, WKL Associates, Inc. (investment c/o Phoenix/Zweig Advisers LLC Served since: management) (since 1994). Fellow, Royal Institution of 900 Third Avenue 2001. Chartered Surveyors. Member, Chartered Institute of New York, NY 10022 Arbitrators. Director, Amadeus Vision Capital, plc (since 1999). Director, Endeavour Real Estate Director Securities, Ltd. (since 2000). Director, PXRE Corp. (reinsurance) (since 1994). Alden C. Olson, Ph.D. (74).... Term: Until 2004. 2 Currently retired. Chartered Financial Analyst (since 2711 Ramparte Path Served since: 1964). Professor of Financial Management, Investments Holt, MI 48842 1996. at Michigan State University (1959 to 1990). Director James B. Rogers, Jr. (60)..... Term: Until 2003. 2 Private investor (since 1980). Chairman, Beeland 352 Riverside Drive Served since: Interests (Media and Investments) (since 1980). Regular New York, NY 10025 1986. Commentator on CNBC (1998). Author of "Investment Biker: On the Road with Jim Rogers" (1994). Visiting Director Professor, Columbia University (1998). Columnist, WORTH Magazine (since 1995). Director, Emerging Markets Brewery Fund (1993-2002). Director, Levco Series Trust 2 portfolios (since 1996). 17 Number of Portfolios in Fund Term of Office Complex Name, (Age), Address and Length of Overseen Principal Occupation(s) and Position(s) with Fund Time Served by Director During Past 5 Years and Other Directorships Held ------------------------- ----------------- ----------- ------------------------------------------------------- INTERESTED DIRECTOR Philip R. McLoughlin (56)... Term: Until 2003. 49 Director, PXRE Corporation (Delaware) (1985-present), 56 Prospect Street Served since: World Trust Fund (1991-present). Chairman (1997- Hartford, CT 06115-0480 2002. 2002), Director (1995-2002), Vice Chairman (1995-1997) Chairman and President and Chief Executive Officer (1995-2002), Phoenix Investment Partners, Ltd. Director, Executive Vice President and Chief Investment Officer, The Phoenix Companies, Inc. (2001-2002). Director (1994-2002) and Executive Vice President, Investments (1988-2002), Phoenix Life Insurance Company. Director (1983-2002) and Chairman (1995-2002), Phoenix Investment Counsel, Inc. Director (1984-2002) and President (1990- 2000), Phoenix Equity Planning Corporation. Chairman and Chief Executive Officer, Phoenix/Zweig Advisers LLC (1999-2002). Director and President, Phoenix Investment Management Company (2001-2002). Director and Executive Vice President, Phoenix Life and Annuity Company (1996-2002). Director and Executive Vice President, PHL Variable Insurance Company (1995-2002). Director, Phoenix National Trust Company (1996-2002). Director and Vice President, PM Holdings, Inc. (1985-2002). Director, PHL Associates, Inc. (1995-2002). Director (1992-2002) and President (1992-1994), WS Griffith Securities, Inc. OFFICERS WHO ARE NOT DIRECTORS Jeffrey Lazar (43).......... Served since Vice President, Phoenix/Zweig Advisers LLC (since Executive Vice President and 1988. 1999). Director and Vice President, The Zweig Fund, Treasurer Inc. (until 1999); Vice President and Treasurer, The Zweig Advisors, Inc. (until 1999). Christopher M. Capano (35).. Served since: Investment Professional, Phoenix/Zweig Advisers LLC Vice President 1996. (since 1994). Nancy J. Engberg (46)....... Served since: Vice President and Counsel, Phoenix Investment 56 Prospect Street 1999. Partners, Ltd. since 1999. Counsel, Phoenix Home Life Hartford, CT 06115 Mutual Insurance Company (1994 to 1999). Secretary 18 THE ZWEIG FUND, INC. YEAR END RESULTS Total Return on Net Asset Net Asset NYSE Premium Value Value Share Price (Discount) ------------ --------- ----------- ---------- Year ended 12/31/2002..... (22.8%) $ 5.46 $ 4.9300 (9.7%) Year ended 12/31/2001..... (15.0%) 7.96 7.9000 (0.8%) Year ended 12/31/2000..... (5.1%) 10.32 9.8125 (4.9%) Year ended 12/31/1999..... 12.9% 12.20 10.0625 (17.5%) Year ended 12/31/1998..... 6.6% 12.03 10.8125 (10.1%) Year ended 12/31/1997..... 22.0% 12.63 13.2500 4.9% Year ended 12/31/1996..... 14.5% 11.45 10.8750 (5.0%) Year ended 12/31/1995..... 18.3% 11.06 11.2500 1.7% Year ended 12/31/1994..... (2.7%) 10.33 10.3750 0.4% Year ended 12/31/1993..... 13.3% 11.68 13.7500 17.7% Year ended 12/31/1992..... 0.4% 11.36 13.0000 14.4% Year ended 12/31/1991..... 30.1% 12.40 13.7500 10.9% Year ended 12/31/1990..... 1.9% 10.48 11.0000 5.0% Year ended 12/31/1989..... 22.3% 11.43 12.3750 8.3% Year ended 12/31/1988..... 17.9% 10.35 10.3750 0.2% Year ended 12/31/1987..... 14.7% 9.73 9.0000 (7.5%) Inception 10/2/86-12/31/86 (0.4%) 9.31 9.1250 (2.0%) -------------------------------------------------------------------------------- KEY INFORMATION 1-800-272-2700 Zweig Shareholder Relations: For general information and literature 1-800-272-2700 The Zweig Fund Hot Line: For updates on net asset value, share price, major industry groups and other key information REINVESTMENT PLAN Many of you have questions about our reinvestment plan. We urge shareholders who want to take advantage of this plan and whose shares are held in "Street Name," to consult your broker as soon as possible to determine if you must change registration into your own name to participate. ----------------- Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940 that the Fund may from time to time purchase its shares of common stock in the open market when Fund shares are trading at a discount from their net asset value. 19 OFFICERS AND DIRECTORS Philip R. McLoughlin Chairman of the Board and President Jeffrey Lazar Executive Vice President and Treasurer Nancy J. Engberg Secretary Christopher M. Capano Vice President Charles H. Brunie Director Elliot S. Jaffe Director Wendy Luscombe Director Alden C. Olson, Ph.D. Director James B. Rogers, Jr. Director Investment Adviser Phoenix/Zweig Advisers LLC 900 Third Avenue New York, NY 10022 Fund Administrator Phoenix Equity Planning Corporation 56 Prospect St. PO Box 150480 Hartford, CT 06115-0480 Custodian The Bank of New York One Wall Street New York, NY 10286 Transfer Agent EquiServe Trust Co., N.A. P.O. Box 43010 Providence, RI 02940-3010 Legal Counsel Katten Muchin Zavis Rosenman 575 Madison Avenue New York, NY 10022 Independent Accountants PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 -------------------------------------------------------------------------------- This report is transmitted to the shareholders of The Zweig Fund, Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report. PXP 1337 4902-ANN 12/02 Annual Report Zweig The Zweig Fund, Inc. December 31, 2002 [GRAPHIC]