VANGUARD WHITEHALL FUNDS INC, 497, 1997-03-03

VANGUARD WHITEHALL FUNDS INC
497, 1997-03-03

Previous: GROUP LONG DISTANCE INC, SB-2/A, 1997-03-03

Next: DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS, N-30D, 1997-03-03

<PAGE> 1

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A
REGISTRATION STATEMENT (NO. 33-64845) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [X]
POST-EFFECTIVE AMENDMENT NO. 2
AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 5
VANGUARD WHITEHALL 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

IT IS REQUESTED THAT THIS FILING BECOME EFFECTIVE:
on February 28, 1997 pursuant to paragraph (b) of Rule 485.

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.

The registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 of the Investment Company Act of
1940. Registrant filed its Rule 24f-2 for the year ended October 31, 1996, on
December 30, 1996.

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

VANGUARD WHITEHALL FUNDS, INC.

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....................................... Highlights
Item 3. Condensed Financial Information................ N/A
Item 4. General Description of Registrant.............. Investment Strategies; Investment
Limitations; Investment Policies; General
Information
Item 5. Management of the Fund......................... Management of the Fund; The Portfolio and
Vanguard
Item 6. Capital Stock and Other Securities............. Investing with Vanguard; Buying Shares;
Redeeming Shares; Share Price; Dividends,
Capital Gains, and Taxes; General
Information
Item 7. Purchase of Securities Being Offered........... Cover Page; Investing in Vanguard; Buying
Shares
Item 8. Redemption or Repurchase....................... Redeeming Shares
Item 9. Pending 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 Fund
Item 16. Investment Advisory and Other Services......... Management of the Fund
Item 17. Brokerage Allocation........................... Not Applicable
Item 18. Capital Stock and Other Securities............. Financial Statement
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered.................................. Purchase of Shares; Redemption of Shares
Item 20. Tax Status..................................... Not Applicable
Item 21. Underwriters................................... Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund.................................... Not Applicable
Item 23. Financial Statements........................... Financial Statement
</TABLE>
<PAGE> 3
VANGUARD
SELECTED VALUE
PORTFOLIO

Prospectus
February 28, 1997

A Portfolio of Vanguard
Whitehall Funds

This prospectus
contains data for the
Portfolio through the
fiscal period ended
October 31, 1996.

[SHIP GRAPHIC]

[VANGUARD LOGO]
<PAGE> 4
VANGUARD SELECTED VALUE PORTFOLIO A Value Stock Mutual Fund

CONTENTS

Portfolio Expenses 2

Financial Highlights 3

A Word About Risk 4

The Portfolio's Objective 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 Portfolio and Vanguard 10

Investment Adviser 10

General Information 11

Investing with Vanguard 12

Services and Account Features 12

Types of Accounts 13

Distribution Options 14

Buying Shares 14

Redeeming Shares 16

Fund and Account Updates 18

Prospectus Postscript 20

Glossary Inside Back Cover

INVESTMENT OBJECTIVE AND POLICIES
Vanguard Selected Value Portfolio (the "Portfolio") is a diversified mutual
fund, a part of Vanguard Whitehall Funds, Inc. (the "Fund"), an open-end
investment company.

The Portfolio seeks to provide long-term growth of capital and income
by investing mainly in equity securities of medium-size U.S. companies. The
Portfolio uses a "value" investment approach, emphasizing companies with
relatively low price/earnings ratios, reasonable financial strength, and strong
cash flows. These companies tend to be out of favor with investors.

IT IS IMPORTANT TO NOTE THAT THE PORTFOLIO'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 PORTFOLIO.

FEES AND EXPENSES
The Portfolio 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 PORTFOLIO
A Statement of Additional Information (dated February 28, 1997) containing more
information about the Portfolio 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 objective, risks, and strategies of the Selected
Value Portfolio. 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 Portfolio 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> 5
PORTFOLIO PROFILE Vanguard Selected Value Portfolio

WHO SHOULD INVEST (page 4)
- - Investors seeking a stock mutual fund that emphasizes undervalued,
medium-size companies as part of a balanced and diversified investment
program.
- - Investors seeking growth of their capital and income over the long term--at
least five years.

WHO SHOULD NOT INVEST
- - Investors seeking a significant amount of current dividend income.
- - Investors unwilling to accept significant fluctuations in share price.

RISKS OF THE PORTFOLIO (pages 4-8)
This Portfolio's total return will fluctuate within a wide range, so an investor
could lose money over short or even extended periods. The Portfolio is also
subject to manager risk (the chance that poor security selection will cause it
to lag the stock market as a whole) and, as a mid-cap value stock fund, to
objective risk (the chance that returns from value stocks or stocks of
medium-size companies will trail returns from the overall stock market).

DIVIDENDS AND CAPITAL GAINS (page 9)
Paid annually in December.

INVESTMENT ADVISER (page 10)
Barrow, Hanley, Mewhinney & Strauss, Inc., Dallas, TX.

INCEPTION DATE: February 15, 1996

NET ASSETS AS OF 10/31/96: $93 million

PORTFOLIO'S ANNUALIZED EXPENSE RATIO*
FOR THE PERIOD ENDED 10/31/96: 0.75%

LOADS, 12b-1 MARKETING FEES: None

SUITABLE FOR IRAS: Yes

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

NEWSPAPER ABBREVIATION: SelValu

VANGUARD FUND NUMBER: 934

ACCOUNT FEATURES (page 12)
- - Telephone Redemption
- - Vanguard Direct Deposit Service(sm)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)

TOTAL RETURNS*--
PERIOD ENDED OCTOBER 31, 1996
Selected Value Portfolio 0.7%
Russell Midcap Stock Index 8.3

*Since inception (2/15/96).

In evaluating past performance, remember that it is not indicative of future
performance. Performance figures include the reinvestment of any dividends and
capital gains distributions. The returns shown are net of expenses, but they do
not reflect income taxes an investor would have incurred. Note, too, that both
the return and principal value of an investment will fluctuate so that
investor's 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 Selected Value Portfolio's expense ratio for the period ended
October 31, 1996, was 0.75%, or $7.50 per $1,000 of average net assets. The
average mid-cap equity mutual fund had expenses in 1996 of 1.50%, or $15.00 per
$1,000 of average net assets, according to Lipper Analytical Services, Inc.,
which reports on the mutual fund industry.

PORTFOLIO EXPENSES

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

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

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 Portfolio. These expenses are deducted from the
Portfolio's income before it is paid to you. Expenses include investment
advisory fees as well as the costs of maintaining accounts, administering the
Portfolio, providing shareholder services, and other activities. The expenses
shown in the table are annualized for the Portfolio's first full year since the
Portfolio was not in operation until February 15, 1996.

ESTIMATED ANNUAL PORTFOLIO OPERATING EXPENSES
<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.28%
Investment Advisory Expenses: 0.40%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.01%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.06%
----
Total Other Expenses: 0.07%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.75%
====
</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 Portfolio 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>
$8 $24 $42 $93
----------------------------------------
</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> 7
FINANCIAL HIGHLIGHTS

The following financial highlights table shows the results for a share
outstanding for the period February 15, 1996 (commencement of operation) through
October 31, 1996. The financial highlights were audited by Price Waterhouse llp,
independent accountants. You should read this information in conjunction with
the Portfolio's financial statements and accompanying notes, which appear in the
Portfolio's most recent Annual Report (along with the audit report from Price
Waterhouse) to shareholders. The Report is incorporated by reference in the
Statement of Additional Information and in this prospectus, and contains a more
complete discussion of the Portfolio's performance. You may have the report sent
to you without charge by writing to Vanguard or by calling our Investor
Information Department.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD FEBRUARY 15*-OCTOBER 31, 1996
- -------------------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $ 10.00
-------
INVESTMENT OPERATIONS
Net Investment Income .04
Net Realized and Unrealized Gain (Loss) on Investments .03
-------
TOTAL FROM INVESTMENT OPERATIONS .07
- -------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income --
Distributions from Realized Capital Gains --
-------
TOTAL DISTRIBUTIONS --
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.07
===========================================================================================
TOTAL RETURN 0.70%
- -------------------------------------------------------------------------------------------

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 93
Ratio of Expenses to Average Net Assets 0.75%**
Ratio of Net Investment Income to Average Net Assets 0.75%**
Portfolio Turnover Rate 25%
Average Commission Rate Paid $0.0537
- -------------------------------------------------------------------------------------------
*Commencement of operations.
**Annualized.
- -------------------------------------------------------------------------------------------
</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

Vanguard Selected Value Port-folio began operations on February 15, 1996, with a
net asset value (price) of $10.00 per share. As of October 31, 1996, the
Portfolio earned $0.04 per share from investment income (interest and dividends)
and $0.03 per share from investments that had appreciated in value or that were
sold for higher prices than the Portfolio paid for them. This resulted in total
earnings of $0.07 per share, none of which was returned to shareholders in the
form of distributions. The earnings ($0.07 per share) resulted in a share price
of $10.07 on October 31, 1996, an increase of $0.07 per share (from $10.00 at
the beginning of the period to $10.07 at the end of the period). Total return
from the Selected Value Portfolio was 0.70% for the period.

As of October 31, 1996, the Portfolio had $93 million in net assets.
For the period then ended, the Portfolio had an annualized expense ratio of
0.75% ($7.50 per $1,000 of net assets); and annualized net investment income
amounting to 0.75% of its average net assets.

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. Growth funds generally
focus on companies that, due to their strong earnings and revenue potential,
offer above-average prospects for capital growth. Value and growth stocks have,
in the past, produced similar long-term returns, though each has had periods
when it outperformed the other. In general, value funds are appropriate for
investors who want 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 Selected Value Portfolio 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
Selected Value Portfolio. 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 the Selected Value
Portfolio, you should also take into account your personal 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 Portfolio, will confront.

THE PORTFOLIO'S OBJECTIVE

The Portfolio seeks to provide long-term growth in capital and income. This
objective is fundamental, which means that it cannot be changed unless a
majority of shareholders vote to do so. Dividend income is not a main objective.

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

WHO SHOULD INVEST

The Portfolio may be a suitable investment for you if:

- - You wish to add a stock fund that emphasizes undervalued, medium-size
companies to your existing holdings, which could include other stock--as
well as bond, money market, and tax-exempt--investments.
- - You are seeking growth of capital over the long term--at least five years.
- - You are not looking for significant levels of current income from dividends
or interest.
- - You characterize your investment temperament as "moderately aggressive."

This Portfolio 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 Portfolio's shareholders.
To minimize such costs, which reduce the ultimate returns achieved by you and
other shareholders, the Portfolio has adopted the following policies:

- - The Portfolio reserves the right to reject any purchase request--including
exchanges from other Vanguard Funds--that it

4
<PAGE> 9
regards as disruptive to the efficient management of the Portfolio. 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
Portfolio (see "Redeeming Shares" in the Investing with Vanguard section).

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

INVESTMENT STRATEGIES

This section explains how the Portfolio's investment adviser pursues the
objective of long-term growth in capital. It also explains three important
risks--market risk, objective risk, and manager risk--faced by investors in the
Portfolio. Unlike the Portfolio's investment objective, the adviser's investment
strategies are not fundamental and can be changed by the Portfolio's Board of
Directors without shareholder approval. However, before making any important
change in its strategies, the Portfolio will give shareholders 30-days notice,
in writing.

MARKET EXPOSURE

The Portfolio invests chiefly in mid-cap common stocks with low prices in
relation to corporate earnings and book value.

[FLAG] THE PORTFOLIO 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 best and worst 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

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 do not generate the costs.
Therefore, the Portfolio 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 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 less than $1 billion. Historically, large-cap funds have
exhibited lower volatility than mid-cap and small-cap funds.

5
<PAGE> 10
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 more than 40% 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 five-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 Portfolio in particular.

Finally, the Selected Value Portfolio emphasizes stocks of medium-size
companies, but will also include stocks of small as well as large companies. At
all times, however, the majority of the Portfolio's assets will be invested in
medium-size companies. Mid- and small-cap stocks have historically been more
volatile than--and at times have performed quite differently from--the large-cap
stocks found in the S&P 500 Index. This is due to several factors, including
less-certain growth and dividend prospects for smaller companies. For these
reasons and because the Selected Value Portfolio does not hold the same
securities held in the S&P 500 Index or any other market index, the performance
of the Portfolio will not mirror the returns of any particular index.

[FLAG] THE PORTFOLIO IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY
THAT RETURNS FROM MID-CAP STOCKS OR VALUE STOCKS WILL TRAIL RETURNS FROM
THE OVERALL STOCK MARKET. AS A GROUP, VALUE STOCKS TEND TO GO THROUGH
CYCLES OF RELATIVE UNDERPERFORMANCE AND OUTPERFORMANCE IN COMPARISON TO
COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS
LONG AS SEVERAL YEARS.

SECURITY SELECTION AND PORTFOLIO DIVERSIFICATION
Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S), adviser to the Portfolio,
seeks out what it considers to be undervalued medium-size companies through
extensive research and meetings with company management. According to BHM&S, a
company is considered undervalued if its earnings potential is not reflected in
its stock's share price. These stocks generally have low price/earnings ratios.
BHM&S holds an undervalued stock until its share price reflects the company's
underlying value.

The top ten holdings (which amounted to 44% of the Portfolio's
net assets) as of October 31, 1996, follow.

1. Quanex Corp.
2. Harnischfeger Industries Inc.
3. Kirby Corp.
4. H.B. Fuller Co.
5. Valassis Communication
6. First Federal Financial Corp.
7. Canandaigua Wine Co., Inc. Class A
8. International Specialty Products, Inc.
9. Lear Corp.
10. Heilig-Meyers Co.

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

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

[FLAG] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT
BHM&S MAY DO A POOR JOB OF SELECTING STOCKS.

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

INVESTMENT POLICIES

Besides investing in common stocks of medium-size companies, the Portfolio may
follow a number of investment policies to achieve its objective.

[FLAG] THE PORTFOLIO RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN
STOCK FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES OF
DERIVATIVES. HOWEVER, USING DERIVATIVES IS NOT A STANDARD PART OF THE
ADVISER'S APPROACH TO INVESTING.

Futures and options contracts are the only derivatives, if any, that the
Portfolio will use. 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. This Portfolio will not use futures and options for speculative
purposes or as leveraged investments that magnify the gains or losses of an
investment. Rather, the Portfolio 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 Portfolio's
assets--up to 5% if required for deposit and no more than 20% of total
assets--may be committed to such contracts.

The reasons for which the Portfolio may use 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.

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 75%.

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.

7
<PAGE> 12
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.

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

The Portfolio 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 Portfolio may hold cash
reserves without limit.

INVESTMENT LIMITATIONS

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

- - Invest more than 5% of its assets in the securities of companies that have
been in business for less than three years.
- - 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, this Portfolio will not:

- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting securities 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 Portfolio's shareholders.

INVESTMENT PERFORMANCE

Vanguard Selected Value Portfolio invests primarily in common stocks, so its
performance is somewhat 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.

<TABLE>
<CAPTION>
------------------------------------------------
TOTAL RETURNS* FOR PERIOD ENDED OCTOBER 31, 1996
------------------------------------------------
<S> <C>
Selected Value Portfolio 0.7%
Russell Midcap Stock Index 8.3%
------------------------------------------------
</TABLE>
*Since inception (2/15/96).

<PAGE> 13
SHARE PRICE

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

Total Assets - Liabilities
Net Asset Value = -----------------------------------
Number of Shares Outstanding

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

The Portfolio'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 Portfolio's name, but the most
common is SELVALU.

DIVIDENDS, CAPITAL GAINS, AND TAXES

Each December, the Portfolio distributes to shareholders virtually all of its
income from interest and dividends, as well as any capital gains realized from
the sale of securities. 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 Portfolio are taxable to you as long-term capital
gains, no matter how long you've owned shares in the Portfolio. Both
dividends and capital gains distributions are taxable to you whether
received in cash or reinvested in additional shares. Although the
Portfolio 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 Portfolio.
Consequently, distributions may vary considerably from year to year.

- - If you sell or exchange 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.

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 the 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.

9
<PAGE> 14

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.

[FLAG] Distributions of dividends or capital gains, and capital gains or
losses from your sale or exchange of Portfolio 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
account such as an IRA. You should consult your own tax adviser about the tax
consequences of an investment in the Portfolio.

THE PORTFOLIO AND VANGUARD

The 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 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 Adviser

The Portfolio employs Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S), 3232
McKinney Avenue, Dallas, TX 75204, as its investment adviser. BHM&S manages the
Portfolio subject to the control of the officers and directors of the Fund.

Each quarter, BHM&S is paid an advisory fee based on average month-end
net assets of the Portfolio and a sliding percentage scale:

<TABLE>
<CAPTION>
--------------------------------------------
ASSETS MANAGED ANNUALIZED FEE
--------------------------------------------
<S> <C>
First $100 million 0.40%
Next $200 million 0.35
Next $300 million 0.25
Next $400 million 0.20
Assets over $1 billion 0.15
</TABLE>

Beginning with the quarter ending April 30, 1997, the base fee may be
increased or decreased, depending on the Portfolio's 36-month cumulative total
return performance compared to that of the Russell Midcap Index, a market
benchmark that covers the smallest 800 of the 1,000 largest companies in the
United States. Under the fee schedule, BHM&S's fee may be increased or decreased
by as much as 50%.

10
<PAGE> 15

The incentive/penalty fee structure will not be in full operation until
the quarter ending April 30, 1999. Until then, the incentive/ penalty fee will
be calculated using certain transition rules. The incentive/penalty fee schedule
and calculation process for the Portfolio's first three years are described in
the Portfolio's Statement of Additional Information, which can be obtained by
writing to or calling Vanguard.

The agreement authorizes BHM&S to choose brokers or dealers to handle
the purchase and sale of the Portfolio's securities, and directs BHM&S to get
the best available price and most favorable execution from these brokers with
respect to all transactions. At times, BHM&S 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 BHM&S is authorized to choose a
broker who, in addition to executing the transaction, will provide research
services to BHM&S or the Fund. However, BHM&S will not pay higher commissions
specifically for the purpose of obtaining research services. The Fund may
direct BHM&S 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,
either as a replacement for BHM&S or as an additional adviser. However, no such
change would be made before giving shareholders 30-days notice, in writing.

GENERAL INFORMATION

The Selected Value Portfolio is a Portfolio of Vanguard Whitehall Funds, Inc.,
which is a corporation organized under the laws of the state of Maryland.

Shareholders of the Selected Value Portfolio 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 Portfolio 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 Portfolio's shares request a
meeting in writing.

PLAIN TALK ABOUT

THE PORTFOLIO'S ADVISER

Barrow, Hanley, Mewhinney & Strauss, Inc., an investment advisory firm founded
in 1979, manages more than $20.5 billion in stock and bond portfolios for a
limited number of institutional clients. BHM&S has managed the majority of the
assets for Vanguard/Windsor II since 1985. The managers responsible for
overseeing the implementation of BHM&S's strategy for Vanguard Selected Value
Portfolio are:

JAMES S. MCCLURE, Principal at BHM&S; 23 years investment experience;
B.A. and M.B.A. from the University of Texas. From 1989 through July 1995, he
was senior portfolio manager of the Goldman Sachs Capital Growth Fund.

JOHN P. HARLOE, Principal at BHM&S; 19 years investment experience;
B.A. and M.B.A. from the University of South Carolina. From 1986 through July
1995, he was equity portfolio manager at Sterling Capital Management.

Both spent about ten years together at American National
Insurance Company, American Capital Management & Research, and Oppenheimer &
Co., Inc.

<PAGE> 16

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 Selected Value Portfolio shareholder.
Booklets providing detailed information are available on the services marked
with a ** . 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 Portfolio unless you notify us otherwise.

VANGUARD DIRECT DEPOSIT
SERVICE
**

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
**

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

VANGUARD FUND EXPRESS
**

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
**

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)
**

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" ** 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

12
<PAGE> 17

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 name of one
(individual) or more (joint tenants) people.
$3,000 minimum initial investment.

FOR A MINOR CHILD 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 To invest assets held in an existing trust.
** $3,000 minimum initial investment.

FOR THIRD-PARTY TRUSTEE To open an account as a retirement trust or plan
RETIREMENT INVESTMENTS based on an existing corporate or institutional
(Vanguard is not the plan. These accounts are established by the
custodian or trustee.) 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. You may also need to provide additional
documentation. To request the appropriate adoption agreement and forms, or to
ask questions about investing for retirement, call Investor Information.

FOR AN INDIVIDUAL RETIREMENT To open a retirement account in the name of an
ACCOUNT (IRA) individual. IRAs can be established with a
(Vanguard Fiduciary Trust contribution, a direct rollover from an employer's
Company is the custodian.) 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 name of an
PENSION PLAN ACCOUNT employee. SEPs allow employers to make deductible
(SEP-IRA) contributions directly to IRAs established by
(Vanguard Fiduciary Trust their employees. A SEP can be established by
Company is the custodian.) people who are self-employed, small-business
owners, partnerships, or corporations.

FOR A QUALIFIED RETIREMENT To open a retirement account that allows
PROGRAM ACCOUNT small-business owners or people who are
(Vanguard Fiduciary Trust self-employed to make tax-deductible retirement
Company can be the trustee.) 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

13
<PAGE> 18

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
is the custodian.) (for example, schools or hospitals) to
make Company 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 reinvested
in additional shares of the Portfolio 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 Portfolio.

DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains are paid by
IN CASH 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 Portfolio'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
Portfolio 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 Mail your check with an Invest-
[ENVELOPE ICON] application 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-934 The Vanguard Group-934

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.

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

14
<PAGE> 19

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
[TELEPHONE ICON] hours a day--or Client Services hours a day--or Client Services
1-800-662-6273 during business hours--to exchange during business hours--to exchange
Vanguard Tele-Account(R) from another Vanguard from another Vanguard
1-800-662-2739 fund account with the same fund account with the same
Client Services registration (name, address, registration (name, address,
taxpayer I.D., and account type). taxpayer I.D., and account type).

Use Vanguard Fund Express (see
"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 Call Client Services to arrange
[WIRE ICON] your wire transaction. your wire transaction.

Wire to: Wire transactions are not Wire transactions are not
CoreStates Bank, N.A. available for retirement accounts. available for retirement accounts.
ABA 031000011
CoreStates No 01019897
[Temporary Account Number]
Vanguard Selected Value Portfolio
[Account Registration]
Attention: Vanguard

AUTOMATICALLY -- Vanguard offers a variety of ways
[GRAPHIC OF ARROWS that you can add to your account
IN A CIRCLE] 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, while your redemption request will be
processed as soon as it is received, your redemption proceeds will not be
available until payment for your purchase is collected, which may take up to ten
days.

NOTE: If you buy Portfolio 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 Portfolio
shareholders and so reserve the right to delay or refuse any purchase that will
disrupt the Portfolio's operation or performance.

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

15
<PAGE> 20

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) Portfolio 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:

- Portfolio 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 Portfolio 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 Portfolio's
next-determined net asset value after Vanguard receives all required documents
in good order.

Good order means that the request includes:

- Portfolio 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 Portfolio reserves the right to close any non-retirement or
UGMA/UTMA account whose balance falls below the minimum initial investment. The
Portfolio 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

16
<PAGE> 21

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 Portfolio and increase transaction costs, Vanguard limits exchange activity
to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30 days apart) from the
Portfolio during any 12-month period. "Substantive" means either a dollar amount
large enough to have a negative impact on the Portfolio 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 ACCOUNT TYPE

BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[TELEPHONE ICON] Call Vanguard Tele-Account* 24 hours a
day--or Client Services during
1-800-662-6273 business hours--to sell or exchange
Vanguard Tele-Account shares. You can exchange shares from
1-800-662-2739 this Portfolio to open an account in
Client Services 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.

BY MAIL ALL TYPES EXCEPT RETIREMENT:
[ENVELOPE ICON] Send a letter of instruction signed by
all registered account holders. Include
First-class mail to: the portfolio name and account number
The Vanguard Group and (if you are selling) a dollar amount
Vanguard Selected Value Portfolio or number of shares OR (if you are
P.O. Box 1120 exchanging) the name of the fund you
Valley Forge, PA 19482 want to exchange into and a dollar
amount or number of shares.

EXPRESS or REGISTERED mail to: RETIREMENT:
The Vanguard Group For information on how to request
Vanguard Selected Value Portfolio distributions from . . .
455 Devon Park Drive - IRAs, call Client Services.
Wayne, PA 19087 - 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:
[ICON OF ARROWS
IN A CIRCLE] 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.

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

17
<PAGE> 22

REDEEMING SHARES (continued)

It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Portfolio shareholders and so
reserve the right to delay your redemption proceeds--up to seven days--if the
amount will disrupt the Portfolio'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 Selected Value Portfolio account throughout the year as
well as when you are preparing your income tax returns.

In addition, you will receive semi-annual fund reports about the
Portfolio. These comprehensive reports include an assessment of the Portfolio's
performance (and a comparison to its industry benchmark) as well as a listing of
its holdings.

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 Portfolio.

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 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

18
<PAGE> 23

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 week, transactions--through any TouchTone(TM)
from anywhere in the continental telephone. Tele-Account provides total
United States and Canada. 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) 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
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.

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

19
<PAGE> 24

PLAIN TALK ABOUT

KEEPING YOUR PROSPECTUS

Reading this prospectus will help you to decide whether Vanguard Selected Value
Portfolio 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.

PROSPECTUS POSTSCRIPT

This prospectus is designed to provide you with pertinent information about
Vanguard Selected Value Portfolio, 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 Portfolio 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 Portfolio's objective? (page 4)

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

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

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

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

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

/ / The background of the Portfolio's investment managers?
(page 11)

/ / How to open an account? (page 14)

/ / How to sell or exchange shares? (page 16)

/ / How often you'll receive statements and financial reports?
(page 18)

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,
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.

DOLLAR-COST AVERAGING
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.

EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes 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 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 effort 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
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 the stocks of companies that, considering their
earnings and dividends, are attractively priced.

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 prices.

YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 26
[VANGUARD LOGO]
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]

P934N
<PAGE> 27
VANGUARD
SELECTED VALUE
PORTFOLIO

Institutional Prospectus
February 28, 1997

A Portfolio of Vanguard Whitehall Funds

This prospectus contains data for the Portfolio through the fiscal period ended
October 31, 1996.

[SHIP GRAPHIC]

A MEMBER OF THE VANGUARD GROUP
<PAGE> 28
VANGUARD SELECTED VALUE PORTFOLIO A VALUE STOCK MUTUAL FUND

CONTENTS
<TABLE>
<S> <C>
Portfolio Expenses 2

Financial Highlights 3

A Word About Risk 4

The Portfolio's
Objective 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 Portfolio and
Vanguard 10

Investment Adviser 10

General Information 11

Investing
with Vanguard

- - For Plan Participants 12

- - For Other
Institutional Investors 12

Accessing Fund
Information
By Computer 13

Prospectus Postscript 14

Risk Quiz 15

An Investment Primer 16

Glossary Inside Back Cover
</TABLE>

INVESTMENT OBJECTIVE AND POLICIES

Vanguard Selected Value Portfolio (the "Portfolio") is a diversified mutual
fund, a part of Vanguard Whitehall Funds, Inc. (the "Fund"), an open-end
investment company.

FEES AND EXPENSES

The Portfolio 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.

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 PORTFOLIO

A Statement of Additional Information (dated February 28, 1997) containing more
information about the Portfolio is, by reference, part of this prospectus and
may be obtained without charge by contacting Vanguard (see back cover).

WHY READING THIS PROSPECTUS IS IMPORTANT

This prospectus explains the objective, risks, and strategies of the Selected
Value Portfolio. 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 Portfolio is the right investment
for your needs. 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> 29
PORTFOLIO PROFILE VANGUARD SELECTED VALUE PORTFOLIO

WHO SHOULD INVEST (page 4)

- - Investors seeking a stock mutual fund that emphasizes undervalued,
medium-size companies as part of a balanced and diversified investment
program.

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

WHO SHOULD NOT INVEST

- - Investors seeking a significant amount of current dividend income.

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

RISKS OF THE PORTFOLIO (pages 4 - 8)

This Portfolio's total return will fluctuate within a wide range, so an investor
could lose money over short or even extended periods. The Portfolio is also
subject to manager risk (the chance that poor security selection will cause it
to lag the stock market as a whole) and, as a mid-cap value stock fund, to
objective risk (the chance that returns from value stocks or stocks of
medium-size companies will trail returns from the overall stock market).

DIVIDENDS AND CAPITAL GAINS (page 9)

Paid annually in December. In participant accounts, all distributions are
automatically reinvested.

INVESTMENT ADVISER (page 10)

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

INCEPTION DATE: February 15, 1996

NET ASSETS AS OF 10/31/96: $93 million

PORTFOLIO'S ANNUALIZED EXPENSE RATIO* FOR THE PERIOD ENDED 10/31/96: 0.75%

NEWSPAPER ABBREVIATION: SelValu

VANGUARD FUND NUMBER: 934

TOTAL RETURNS* --
PERIOD ENDED OCTOBER 31, 1996
<TABLE>
<S> <C>
Selected Value Portfolio 0.7%
Russell Midcap Stock Index 8.3
</TABLE>

*Since inception (2/15/96).

<PAGE> 30
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

PORTFOLIO EXPENSES

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

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

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

</TABLE>

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
$8 $24 $42 $93
</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 the period February 15, 1996 (commencement of operation) through
October 31, 1996. The financial highlights were audited by Price Waterhouse LLP,
independent accountants. You should read this information in conjunction with
the Portfolio's financial statements and accompanying notes, which appear in the
Portfolio's most recent Annual Report (along with the audit report from Price
Waterhouse) to shareholders. The Report is incorporated by reference in the
Statement of Additional Information and in this prospectus, and contains a more
complete discussion of the Portfolio's performance. You may have the report sent
to you without charge by writing to Vanguard or by calling our Investor
Information Department.

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD FEBRUARY 15* - OCTOBER 31, 1996
- ---------------------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $ 10.00
---------
Investment Operations
Net Investment Income .04
Net Realized and Unrealized Gain (Loss) on Investments .03
---------
Total from Investment Operations .07
- ---------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income --
Distributions from Realized Capital Gains --
---------
Total Distributions --
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.07
=============================================================================================
Total Return 0.70%
=============================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $ 93
Ratio of Expenses to Average Net Assets 0.75%**
Ratio of Net Investment Income to Average Net Assets 0.75%**
Portfolio Turnover Rate 25%
Average Commission Rate Paid $ 0.0537
- --------------------------------------------------------------------------------
*Commencement of operations.
**Annualized.
- --------------------------------------------------------------------------------
</TABLE>

PLAIN TALK ABOUT

HOW TO READ THE FINANCIAL
HIGHLIGHTS TABLE

Vanguard Selected Value Portfolio began operations on February 15, 1996, with a
net asset value (price) of $10.00 per share. As of October 31, 1996, the
Portfolio earned $0.04 per share from investment income (interest and dividends)
and $0.03 per share from investments that had appreciated in value or that were
sold for higher prices than the Portfolio paid for them. This resulted in total
earnings of $0.07 per share, none of which was returned to shareholders in the
form of distributions. The earnings ($0.07 per share) resulted in a share price
of $10.07 on October 31, 1996, an increase of $0.07 per share (from $10.00 at
the beginning of the period to $10.07 at the end of the period). Total return
from the Selected Value Portfolio was 0.70% for the period.

As of October 31, 1996, the Portfolio had $93 million in net assets. For
the period then ended, the Portfolio had an annualized expense ratio of 0.75%
($7.50 per $1,000 of net assets); and annualized net investment income amounting
to 0.75% of its average net assets.

3
<PAGE> 32
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. Growth funds generally
focus on companies that, due to their strong earnings and revenue potential,
offer above-average prospects for capital growth. Value and growth stocks have,
in the past, produced similar long-term returns, though each has had periods
when it out-performed the other. In general, value funds are appropriate for
investors who want 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 Selected Value Portfolio 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 [flag logo] throughout the
prospectus. It is used to mark detailed information about each type of risk
that you, as a shareholder of the Portfolio, will confront.

THE PORTFOLIO'S OBJECTIVE

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

WHO SHOULD INVEST

The Portfolio may be a suitable investment for you if:

- - You wish to add a stock fund that emphasizes undervalued, medium-size
companies to your existing holdings, which could include other stock -- as
well as bond and money market -- investments.

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

- - You characterize your investment temperament as "moderately aggressive."

This Portfolio 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 Portfolio's shareholders. To
minimize such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Portfolio has adopted the following policies:

- - The Portfolio 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 Portfolio. This could be
because of the timing of the investment or because of a history of
excessive trading by the investor.

4
<PAGE> 33
- - There is a limit on the number of times you can exchange into or out of the
Portfolio. If you own shares of the Portfolio as an investment option in
an employer-sponsored retirement or savings plan, your plan dictates the
rules governing exchanges. Contact your plan administrator for details.

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

INVESTMENT STRATEGIES

This section explains how the Portfolio's investment adviser pursues the
objective of long-term growth in capital. It also explains three important risks
- -- market risk, objective risk, and manager risk -- faced by investors in the
Portfolio. Unlike the Portfolio's investment objective, the adviser's investment
strategies are not fundamental and can be changed by the Portfolio's Board of
Directors without shareholder approval. However, before making any important
change in its strategies, the Portfolio will give shareholders 30-days notice,
in writing.

MARKET EXPOSURE

The Portfolio invests chiefly in mid-cap common stocks with low prices in
relation to corporate earnings and book value.

[flag logo] THE PORTFOLIO 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 do not generate the costs.
Therefore, the Portfolio discourages short-term trading by 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
less than $1 billion. Historically, large-cap funds have exhibited lower
volatility than mid-cap and small-cap funds.

5
<PAGE> 34
PLAIN TALK ABOUT

PORTFOLIO DIVERSIFICATION

Finally, the Selected Value Portfolio emphasizes stocks of medium-size
companies, but will also include stocks of small as well as large companies. At
all times, however, the majority of the Portfolio's assets will be invested in
medium-size companies. Mid- and small-cap stocks have historically been more
volatile than -- and at times have performed quite differently from -- the
large-cap stocks found in the S&P 500 Index. This is due to several factors,
including less-certain growth and dividend prospects for smaller companies. For
these reasons and because the Selected Value Portfolio does not hold the same
securities held in the S&P 500 Index or any other market index, the performance
of the Portfolio will not mirror the returns of any particular index.

[flag logo] THE PORTFOLIO IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE
POSSIBILITY THAT RETURNS FROM MID-CAP STOCKS OR VALUE STOCKS WILL
TRAIL RETURNS FROM THE OVERALL STOCK MARKET. AS A GROUP, VALUE
STOCKS TEND TO GO THROUGH CYCLES OF RELATIVE UNDERPERFORMANCE AND
OUTPERFORMANCE IN COMPARISON TO COMMON STOCKS IN GENERAL. THESE
PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.

SECURITY SELECTION AND PORTFOLIO DIVERSIFICATION

Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S), adviser to the Portfolio,
seeks out what it considers to be undervalued medium-size companies through
extensive research and meetings with company management. According to BHM&S, a
company is considered undervalued if its earnings potential is not reflected in
its stock's share price. These stocks generally have low price/earnings ratios.
BHM&S holds an undervalued stock until its share price reflects the company's
underlying value.

The top ten holdings (which amounted to 44% of the Portfolio's net assets) as
of October 31, 1996, follow.
<TABLE>
<S> <C>
1. Quanex Corp.
2. Harnischfeger Industries Inc.
3. Kirby Corp.
4. H.B. Fuller Co.
5. Valassis Communication
6. First Federal Financial Corp.
7. Canandaigua Wine Co., Inc. Class A
8. International Specialty Products, Inc.
9. Lear Corp.
10. Heilig-Meyers Co.
</TABLE>

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

[flag logo] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE
POSSIBILITY THAT BHM&S MAY DO A POOR JOB OF SELECTING STOCKS.

PORTFOLIO TURNOVER

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

INVESTMENT POLICIES

Besides investing in common stocks of medium-size companies, the Portfolio may
follow a number of investment policies to achieve its objective.

[flag logo] THE PORTFOLIO RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN
STOCK FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES OF
DERIVATIVES. HOWEVER, USING DERIVATIVES IS NOT A STANDARD PART OF
THE ADVISER'S APPROACH TO INVESTING.

Futures and options contracts are the only derivatives, if any, that
the Portfolio will use. 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. This Portfolio will not use futures and options for speculative
purposes or as leveraged investments that magnify the gains or losses of an
investment. Rather, the Portfolio 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 Portfolio's assets
- -- up to 5% if required for deposit and no more than 20% of total assets -- may
be committed to such contracts.

The reasons for which the Portfolio may use 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.

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. The average turnover rate for actively managed
funds investing in common stocks is 75%.

PLAIN TALK ABOUT

DERIVATIVES

7
<PAGE> 36

PLAIN TALK ABOUT

PAST PERFORMANCE

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

The Portfolio 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 Portfolio may hold cash
reserves without limit.

INVESTMENT LIMITATIONS

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

- - Invest more than 5% of its assets in the securities of companies that
have been in business for less than three years.

- - 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, this Portfolio will not:

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

- - Buy more than 10% of the outstanding voting securities 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 Portfolio's shareholders.

INVESTMENT PERFORMANCE

<TABLE>
<CAPTION>
------------------------------------------------
Total Returns* For Period Ended October 31, 1996
------------------------------------------------
<S> <C>
Selected Value Portfolio 0.7%
Russell Midcap Stock Index 8.3%
------------------------------------------------
*Since inception (2/15/96).
</TABLE>

8
<PAGE> 37

SHARE PRICE

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

DIVIDENDS, CAPITAL GAINS, AND TAXES

Each December, the Portfolio distributes to shareholders virtually all of its
income from interest and dividends, as well as any capital gains realized from
the sale of securities. 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 Selected Value Portfolio 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 mater 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.

PLAIN TALK ABOUT

DISTRIBUTIONS

9
<PAGE> 38

PLAIN TALK ABOUT

VANGUARD'S UNIQUE
CORPORATE STRUCTURE

PLAIN TALK ABOUT

THE PORTFOLIO'S ADVISER

Both spent about ten years together at American National Insurance
Company, American Capital Management & Research, and Oppenheimer & Co., Inc.

THE PORTFOLIO 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 ADVISER

Each quarter, BHM&S is paid an advisory fee based on average month-end
net assets of the Portfolio and a sliding percentage scale:

<TABLE>
<CAPTION>
-------------------------------------------------
Assets Managed Annualized Fee
-------------------------------------------------
<S> <C>
First $100 million 0.40%
Next $200 million 0.35
Next $300 million 0.25
Next $400 million 0.20
Assets over $1 billion 0.15
-------------------------------------------------
</TABLE>

The incentive/penalty fee structure will not be in full operation until
the quarter ending April 30, 1999. Until then, the incentive/penalty fee will
be calculated using certain transition rules. The incentive/penalty fee schedule
and calculation process for the Portfolio's first three years are described in
the Portfolio's Statement of Additional Information, which can be obtained by
writing to or calling Vanguard.

10
<PAGE> 39

GENERAL INFORMATION

The Selected Value Portfolio is a Portfolio of Vanguard Whitehall Funds, Inc.,
which is a corporation organized under the laws of the state of Maryland.

11
<PAGE> 40

INVESTING WITH VANGUARD

FOR PLAN PARTICIPANTS

Vanguard Selected Value Portfolio 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 Portfolio as an investment option.

- - If you have any questions about the Portfolio or Vanguard, including
the Portfolio'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 Portfolio'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
Portfolio 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

If you have questions about Vanguard Selected Value Portfolio, 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 Portfolio's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request

12
<PAGE> 41

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 Portfolio'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 Portfolio shareholders and
so reserves the right to . . .

- - Delay or reject any purchase or exchange request that may disrupt the
Portfolio'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.

13
<PAGE> 42

PLAIN TALK ABOUT

KEEPING YOUR PROSPECTUS

PROSPECTUS POSTSCRIPT

This prospectus is designed to provide you with pertinent information about
Vanguard Selected Value Portfolio, including its investment objective, risks,
strategies, and expenses.

IN READING THE PROSPECTUS, DID YOU LEARN . . .

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

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

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

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

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

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

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

14
<PAGE> 43

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

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.

15
<PAGE> 44

PLAIN TALK ABOUT

INFLATION AND YOUR
INVESTMENTS

No matter how you invest your money, inflation -- the rising cost of living --
is a constant threat to your investment returns. The chart below shows how
stocks, bonds, and cash reserves have fared against inflation over time.

INFLATION'S EFFECT ON
INVESTMENT RETURNS
(1926 - 1995)

Cash
Reserves Bonds Stocks
-------- ----- ------
<S> <C> <C> <C>
Real Return After Inflation 1.3% 2.5% 5.3%
Average Annual Rate of Inflation 5.4% 5.4% 5.4%
--- --- ----
Total Percentage 6.7% 7.9% 10.7%
</TABLE>

Source: (C) Stocks, Bonds, Bills, and Inflation 1996 Yearbook(TM), Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved.

AN INVESTMENT PRIMER

Whether you are investing for the short or long term, keep these three points in
mind:

1. INVEST IN ALL THREE OF THE MAJOR ASSET CLASSES.

Most people use a combination of . . .

- - Stocks, which are considered the "riskiest" of the three asset classes.
Day to day, or even year to year, stocks tend to have wide price
swings. Despite this potential for significant price fluctuation,
however, stocks have historically offered higher returns than the other
major asset classes over longer periods.

- - Bonds, which are chiefly influenced by changes in interest rates. When
interest rates climb, bond prices drop; when interest rates fall, bond
prices rise.

- - Cash reserves, which offer more share-price (or capital) stability than
stocks or bonds -- but also generate lower returns. Some examples are
Treasury bills and money market funds.

2. REMEMBER THAT SAFETY HAS A PRICE.

Many people want a "no-risk" investment. Remember, though, that the more safety
you seek, the less potential reward you can expect -- and the less you can
expect in returns after inflation. Inflation affects not only the price you pay
for goods and services; it also eats away at your investment returns over time.
What is left is known as your "real" return -- the actual return you receive
after you factor in inflation (see the chart at left).

3. CHANCES ARE GOOD THAT YOU CAN AFFORD TO TAKE MORE RISK.

As the chart shows, inflation cuts into the returns of all three asset classes.
However, stocks and bonds have had an easier time of outpacing inflation over
time -- which means that, to beat inflation, you may need to invest more
aggressively.

Don't be put off by potential downswings in the value of your
investment, especially if you are investing for long periods. Time acts as a
shock absorber, letting you ride out the short-term bumps that investments often
provide. The longer you hold an investment, the more likely it is that you will
earn a positive return.

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,
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.

DOLLAR-COST AVERAGING

Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.

EXPENSE RATIO

The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes 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 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 effort 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

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 the stocks of companies that, considering their
earnings and dividends, are attractively priced.

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 prices.

YIELD

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

THE VANGUARD GROUP
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]

1934N
<PAGE> 47

PART B

VANGUARD WHITEHALL FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION

FEBRUARY 28, 1997

This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated February 28, 1997). To obtain the
Prospectus please call the Investor Information Department:

1-800-662-7447

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies........................................................ 1
Investment Policies....................................................................... 1
Investment Limitations.................................................................... 5
Management of the Fund.................................................................... 6
Investment Advisory Services.............................................................. 9
Securities Transactions................................................................... 11
Purchase of Shares........................................................................ 12
Redemption of Shares...................................................................... 12
Comparative Indexes....................................................................... 13
</TABLE>

INVESTMENT OBJECTIVES AND POLICIES

The following policies supplement the Fund's Investment objectives and
policies set forth in the Prospectus.

PORTFOLIO TURNOVER While the rate of portfolio turnover is not a limiting
factor when management deems changes appropriate, it is anticipated that the
Selected Value Portfolio's annual portfolio turnover rate will not normally
exceed 30%. A portfolio turnover rate of 33% would occur if one-third of the
Portfolio's securities, exclusive of U.S. Government securities and other
securities whose maturities at the time of acquisition are one year or less, are
replaced in the period of one year. Turnover rates may vary greatly from year to
year as well as within a particular year and may also be affected by cash
requirements for redemptions of each Portfolio's shares and by requirements
which enable the Fund to receive certain favorable tax treatments. The portfolio
turnover rates will, of course, depend in large part on the level of purchases
and redemptions of shares of each Portfolio. Higher portfolio turnover can
result in corresponding increases in brokerage costs to the Portfolios of the
Fund and their shareholders.

INVESTMENT POLICIES

FUTURES CONTRACTS The Selected Value Portfolio may enter into futures
contracts, options, and options on futures contracts for several reasons: to
maintain cash reserves while remaining fully invested, to facilitate trading, to
reduce transaction costs, or to seek higher investment returns when a futures
contract is priced more attractively than the underlying equity security or
index. 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

1
<PAGE> 48

delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold," or "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. The Selected Value Portfolio's margin deposits
will be placed in a segregated account maintained by the Portfolio's custodian
bank. 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 which 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, 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. The Fund
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
the prices of underlying securities. The Selected Value Portfolio will not use
futures and options contracts for speculative purposes or as leveraged
investments that magnify the gains or losses of an investment.

Although techniques other than the sale and purchase of futures contracts
could be used to control the Selected Value Portfolio's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While the Portfolio 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 the underlying
securities.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS The Portfolio 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 its total assets. In addition, the Portfolio will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of its total assets.

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, the Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
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, the Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge.

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and 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.

2
<PAGE> 49

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 Fund are engaged in only for
hedging purposes, the Adviser does not believe that the Portfolio is subject to
the risks of loss frequently associated with futures transactions. A Portfolio
would presumably have sustained comparable losses if, instead of the futures
contract, it had invested in the underlying financial instrument and sold it
after the decline. Futures and options are derivative instruments, in that their
value is derived from the value of another security.

Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option. Additionally, investments in futures contracts and options
involve the risk that the investment advisers 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 Except for transactions the
Selected Value Portfolio has identified as hedging transactions, the Portfolio
is required for Federal income tax purposes to recognize as income for each
taxable year its net unrealized gains and losses on certain 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 the Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.

In order for the Portfolio 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, gains from the sale of
securities or foreign currencies or other income derived with respect to the
Fund's business of investing in securities. 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 Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out 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 Portfolio 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 Portfolio's fiscal year and which are recognized for tax
purposes, will not be considered gains on sales of securities held less than
three months for the purpose of the 30% test.

The Portfolio 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 Fund's fiscal year) on futures transactions.
Such distributions will be combined with distributions of capital gains realized
on the Portfolio's other investments and shareholders will be advised on the
nature of the transactions.

REPURCHASE AGREEMENTS The Selected Value Portfolio may invest in
repurchase agreements with commercial banks, brokers or dealers either for
defensive purposes due to market conditions or to generate income from its
excess cash balances. A repurchase agreement is an agreement under which the
Portfolio acquires a

3
<PAGE> 50

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
commercial 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 Portfolio and is unrelated to the interest rate on the underlying
instrument. In these transactions, the securities acquired by the Portfolio
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by a Custodian Bank until
repurchased. In addition, the Fund's Board of Directors will monitor the
Portfolio's repurchase agreement transactions 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 any Portfolio of the Fund. No more than an aggregate of 15% of the
Portfolio's assets, at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days or other illiquid
securities.

The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the realization by the Portfolio on such
collateral may be automatically stayed. Finally, it is possible that the
Portfolio may not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other party to the
agreement. While the Fund's management acknowledges these risks, it is expected
that they can be controlled through careful monitoring procedures.

LENDING OF SECURITIES The Selected Value Portfolio may lend its securities
on a short-term or long-term basis 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 securities, the Portfolio will be attempting to
increase its net investment 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 Portfolio. The
Portfolio may lend its portfolio securities to qualified brokers, dealers, banks
or other financial institutions, so long as the terms, the structure and the
aggregate amount 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 Fund collateral consisting of
cash, an irrevocable letter of credit or securities issued or guaranteed by 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
Portfolio at any time and (d) the Portfolio receives reasonable interest on the
loan which may include the Portfolio's investing any cash collateral in interest
bearing short-term investments, any distribution on the loaned securities and
any increase in their market value. The Portfolio will not lend its portfolio
securities, if as a result, the aggregate value of such loans exceeds 33 1/3% of
the value of the Portfolio's net assets. Loan arrangements made by the Portfolio
will comply with all other applicable regulatory requirements, including the
rules of the New York Stock Exchange, which rules presently 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
credit-worthiness 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.

INVESTMENT IN SHORT-TERM FIXED INCOME SECURITIES

Although it normally seeks to remain substantially invested in equity
securities, the Selected Value Portfolio may invest for temporary purposes in
certain short-term fixed income securities. Such securities may be used to
invest uncommitted cash balances, to maintain liquidity to meet shareholder
redemptions, or to take a temporary defensive position against potential stock
market declines. These securities include: obligations of the

4
<PAGE> 51

United States Government and its agencies or instrumentalities; commercial
paper, bank certificates of deposit, and bankers' acceptances; and repurchase
agreements collateralized by these securities.

INVESTMENT LIMITATIONS

The following policies supplement the Selected Value Portfolio's investment
limitations set forth in the Prospectus. It is a fundamental policy of the
Portfolio not to engage in any of the following activities or business
practices. These restrictions may not be changed without the approval of a
majority of the outstanding shares (as defined in the Investment Company Act of
1940) of the Portfolio. The Portfolio may not:

1) Issue senior securities;

2) Borrow money, except 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 in
excess of 15% of the value of the net assets of the Portfolio
(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 Portfolio,
the Portfolio will not make any additional investments;

3) 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 Portfolio
would hold more than 10% of the outstanding voting securities of the
issuer, or more than 5% of the value of the Portfolio's total assets
would be invested in the securities of such issuer;

4) Engage in the business of underwriting securities issued by others,
except to the extent that the Portfolio may technically be deemed to be
an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities;

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 the Fund's investment in The Vanguard Group, Inc., as
described on page 7);

6) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (5) above) which are either publicly distributed or
customarily purchased by institutional investors, and (ii) by lending
its securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the
Investment Company Act or the Rules and Regulations or interpretations
of the Commission thereunder and the aggregate value of all securities
loaned does not exceed 33 1/3% of the market value of the Portfolio's
net assets;

7) Pledge, mortgage, or hypothecate its assets, except to secure
borrowings permitted by limitation (2) above;

8) Buy any securities or other property on margin (except for such
short-term credits as are necessary for the clearance of transactions),
or, engage in short sales (unless by virtue of its ownership of other
securities it has a right to obtain at no added cost securities
equivalent in kind and amount to the securities sold) except as set
forth below in (12);

9) Purchase or sell puts or calls, or combinations thereof except as
provided for in the prospectus; provided however, that a Portfolio may
enter into futures contracts, options transactions or forward foreign
currency exchange transactions as set forth below in (12);

10) Purchase or sell real estate or real estate limited partnerships
(although it may purchase securities secured by real estate interests
or interests therein, or issued by companies or investment trusts which
invest in real estate or interests therein);

5
<PAGE> 52

11) The Fund will not 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 Fund's shareholders or otherwise
to the extent permitted by Section 12 of the Investment Company Act of
1940. The Fund will invest only in investment companies which have
investment objectives and investment policies consistent with those of
the Fund;

12) Purchase or sell commodities or commodity contracts; provided, however,
that a Portfolio may enter into forward foreign currency exchange
transactions and that each Portfolio may invest in futures contracts
and options to the extent that not more than 5% of the Portfolio's
assets are required as deposit to secure obligations under futures
contracts, within these limitations, each portfolio may purchase put
options as provided for in the prospectus. Additionally each Portfolio
will invest no more than 20% of its assets in swap agreements;

13) Invest in companies for the purpose of exercising control of
management; and

14) Invest more than 25% of its assets in any single industry.

Notwithstanding these limitations, the Portfolio may own all or any portion
of the securities of, make loans to, or contribute to the costs or other
financial requirements of, any company which will be wholly owned by the
Portfolio and one or more other investment companies and is primarily engaged in
the business of providing at cost services, such as management, administrative,
distribution or other related services to the Fund and other investment
companies. (See "Management of the Fund").

In order to permit the sale of shares of the Portfolio in certain states,
the Fund may make commitments more restrictive than the fundamental or
non-fundamental operating restrictions described above. Should the Fund
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders it will revoke the commitment by terminating sales of
its shares in the state(s) involved.

The above-mentioned investment limitations are considered at the time
investment securities are purchased.

MANAGEMENT OF THE FUND

THE VANGUARD GROUP The Fund is a member of The Vanguard Group of
Investment Companies which consists of more than 30 investment companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Vanguard Funds 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 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 net expenses which are allocated among the Funds under procedures
approved by the Directors (Trustees) of each Fund. In addition, each Fund bears
its own direct expenses such as legal, auditing and custodian fees.

The Officers of the Fund and the Vanguard Funds are also Officers and
employees of Vanguard. No Officer or employee is permitted to own any securities
of any external adviser for the Vanguard Funds.

The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-l 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, restrictions 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 have invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative

6
<PAGE> 53

net assets and its contribution to Vanguard's capital. The Fund's Service
Agreement provides as follows: (a) each Vanguard Fund may invest up to .40% of
its current assets in Vanguard, and (b) there is no other limitation on the
amount that each Vanguard Fund may contribute to Vanguard's capitalization. At
October 31, 1996, the Fund had contributed capital of $8,000 to Vanguard,
representing .04% of Vanguard's capitalization.

The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board 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 Fund is Post Office Box 876, Valley Forge, PA
19482.

JOHN C. BOGLE, Chairman and Director*
Chairman and Director of The Vanguard Group, Inc. and of each of the
investment companies in The Vanguard Group; Director of The Mead
Corporation, General Accident Insurance and Chris-Craft Industries, Inc.

JOHN J. BRENNAN, President, Chief Executive Officer and Director*
President, Chief Executive Officer and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.

ROBERT E. CAWTHORN, Director
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Director of
Sun Company, Inc.; Director of Westinghouse Electric Corporation.

BARBARA BARNES HAUPTFUHRER, Director
Director of The Great Atlantic and Pacific Tea Company, ALCO Standard
Corp., Raytheon Company, Knight-Ridder, Inc., Massachusetts Mutual Life
Insurance Co. and Trustee Emerita of Wellesley College.

BRUCE K. MACLAURY, Director
President Emeritus of The Brookings Institution; Director of American
Express Bank, Ltd., The St. Paul Companies, Inc. and National Steel
Corporation.

BURTON G. MALKIEL, Director
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co. and 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, The Standard Products Company and The
Reliance Electric Company.

JOHN C. SAWHILL, Director
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co., and President, New York
University; Director of Pacific Gas and Electric Company, Procter & Gamble
Company and NACCO Industries.

JAMES O. WELCH, JR., Director
Retired Chairman of Nabisco Brands, Inc., retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc.

J. LAWRENCE WILSON, Director
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Energy Company, and Trustee of Vanderbilt University and the Culver
Educational Foundation.

RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary
of each of the investment companies in The Vanguard Group.

RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.

KAREN E. WEST, Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- ---------------

*Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.

7
<PAGE> 54

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 Vanguard Funds by third parties.
During the period February 15, 1996 through October 31, 1996, the Fund's share
of Vanguard's actual net costs of operation relating to management and
administrative services (including transfer agency) totaled approximately
$115,000.

DISTRIBUTION Vanguard also provides all distribution and marketing
services for the Vanguard Funds. 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
are allocated among the Vanguard Funds based upon their relative net assets. The
remaining one half of these expenses is allocated among the Vanguard 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 a marketing and promotional
nature shall exceed 125% of the average distribution expense rate for the Group,
and that no Fund shall incur annual distribution expenses in excess of 20/100 of
1% of its average month-end net assets. During the period February 15, 1996
through October 31, 1996, the Fund paid approximately $4,000 of the Group's
distribution and marketing expenses, which represented an effective annual rate
of .01% of the Fund's average net assets.

INVESTMENT ADVISORY SERVICES An experienced investment management staff
employed directly by Vanguard also provides investment advisory services to
Vanguard Money Market Reserves, Vanguard Municipal Bond Fund, several Portfolios
of Vanguard Fixed Income Securities Fund, Vanguard California Tax-Free Fund,
Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund,
Vanguard New York Insured Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard
Pennsylvania Tax-Free Fund, Vanguard Admiral Funds, Vanguard Bond Index Fund,
Vanguard Balanced Index Fund, Vanguard Index Trust, Vanguard International
Equity Index Fund, REIT Index Portfolio of Vanguard Specialized Portfolios,
Total International Portfolio of Vanguard STAR Fund, Vanguard Tax-Managed Fund,
Vanguard Institutional Index Fund, Aggressive Growth Portfolio of Vanguard
Horizon Fund, several Portfolios of Vanguard Variable Insurance Fund, a portion
of Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund as well as
several indexed separate accounts. The compensation and other expenses of this
staff are paid by the Portfolios and Funds utilizing these services. During the
period February 15, 1996 through October 31, 1996, the fund paid approximately
$190,000 of Vanguard's investment advisory expenses.

REMUNERATION OF DIRECTORS AND OFFICERS The Fund will pay each Director who
is not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. Directors who are also Officers receive no
remuneration for their services as Directors. The Fund's Officers and employees
are paid by Vanguard which, in turn, is reimbursed by the Fund, and each other
Fund in the Group, for its proportionate share of Officers' and employees'
salaries and retirement benefits. During the period February 15, 1996 through
October 31, 1996, the Fund's proportionate share of remuneration paid to all
Officers of the Fund, as a group, was approximately $1,000.

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 an eligible
Officer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under its Thrift Plan, all employees of
Vanguard 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. The Fund's proportionate share of retirement contributions made by
Vanguard under its retirement and thrift plans on behalf of all Officers of the
Fund, as a group, during the period February 15, 1996 through October 31, 1996
was approximately $60.

DIRECTORS' RETIREMENT FEES A Retirement Plan for Directors has been
implemented to provide a fee to retired Directors equal to $1,000 per year of
service on the Board, up to 15 years of service. This fee will remain in place
subsequent to the Director's retirement for a period of 10 years or until a
retired Director's death.

8
<PAGE> 55

The following table provides detailed information with respect to the
amounts paid or accrued for the Directors of the Fund, for the fiscal year ended
October 31, 1996.

VANGUARD WHITEHALL FUNDS, INC.

DIRECTORS COMPENSATION TABLE

<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAME OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
- ----------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1)............. -- -- -- --
John J. Brennan(1)........... -- -- -- --
Barbara Barnes Hauptfuhrer... $ 14 $ 1 $15,000 $65,000
Robert E. Cawthorn........... $ 14 $ 1 $13,000 $65,000
Bruce K. MacLaury............ $ 15 $ 2 $12,000 $60,000
Burton G. Malkiel............ $ 14 $ 1 $15,000 $65,000
Alfred M. Rankin, Jr......... $ 14 $ 1 $15,000 $65,000
John C. Sawhill.............. $ 14 $ 1 $15,000 $65,000
James O. Welch, Jr........... $ 14 $ 1 $15,000 $65,000
J. Lawrence Wilson........... $ 14 $ 1 $15,000 $65,000
</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 his or her 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

INVESTMENT ADVISORY AGREEMENT WITH BARROW, HANLEY, MEWHINNEY &
STRAUSS. The Selected Value Portfolio is managed by Barrow, Hanley, Mewhinney &
Strauss ("BHM&S"), One McKinney Plaza, 3232 McKinney Avenue, Dallas, TX 75204
under the terms of an agreement dated January 31, 1996.

The investment philosophy of BHM&S is to use fundamental research to
identify undervalued stocks. Jim Clure and John Harloe have been designated as
portfolio managers for the assets of Vanguard Selected Value Portfolio. They
both have over 10 years experience.

For the services to be rendered by BHM&S, the Fund shall pay to BHM&S at
the end of each quarter a base advisory fee adjusted by an incentive/penalty
performance adjustment reflecting the investment performance of the Portfolio
relative to the return of the Russell Midcap Index. The Russell Midcap Index is
prepared by Frank Russell Company (which is unaffiliated with the Fund or any of
the Fund's affiliates) and is composed of the 800 smallest stocks (by market
capitalization) in the Russell 1000 Index. The fees shall be calculated
according to the following rules:

a) Total Quarterly Fee Payable. The total quarterly fee payable by
the Fund to BHM&S under this advisory agreement shall be the base
advisory fee for the quarter plus the performance adjustment
(which may be negative).

9
<PAGE> 56

b) Base Advisory Fee for the Quarter. The base advisory fee for the
quarter will be calculated by applying the following quarterly
percentage rates to the average of month-end assets of the
Portfolio for the quarter:

<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE QUARTERLY RATE
--------------------------- ------ --------------
<S> <C> <C>
First $100 million 0.40% 0.1000%
Next $200 million 0.35% 0.0875%
Next $300 million 0.25% 0.0625%
Next $400 million 0.20% 0.0500%
Over $1 billion 0.15% 0.0375%
</TABLE>

c) Performance Adjustment. The performance adjustment will be
calculated as follows:

i) prior to March 1, 1997, the performance adjustment will be $0.

ii) beginning with the quarter ending April 30, 1997 and thereafter,
the performance adjustment will be calculated for the relevant
performance period. The performance period will be the 36 months
preceding the quarter-end or the months that have elapsed between
March 1, 1996 and the end of the quarter for which the fee is being
computed, whichever is shorter. A base fee for the performance
period will be calculated based on the average of month end assets
during the performance period multiplied by the quarterly rates used
in calculating the base advisory fee for the quarter. An
incentive/penalty adjustment reflecting the investment performance
of the Portfolio relative to the return of the Russell Midcap Index
will be applied to the base fee for the performance period. The
following table sets forth the calculation of the performance
adjustment:

<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE
VS. THE RUSSELL MIDCAP INDEX PERFORMANCE ADJUSTMENT
------------------------------- ----------------------------------------
<S> <C>
Less than -12% -0.50 X Base Fee for Performance Period
Between -12% and -6% -0.25 X Base Fee for Performance Period
Between -6% and +6% 0 X Base Fee for Performance Period
Between +6% and +12% 0.25 X Base Fee for Performance Period
More than +12% 0.50 X Base Fee for Performance Period
</TABLE>

Until the quarter ending April 30, 1999, the performance
adjustment for BHM&S will be calculated according to the following
transition rules:

(ii-a) March 1, 1996 through April 30, 1999. Beginning with the
quarter ending April 30, 1997, and until the quarter ending April
30, 1999, the Performance adjustment will be computed based upon a
comparison of the investment performance of the Portfolio and that
of the Russell Midcap Index over the number of months that have
elapsed between March 1, 1996 and the end of the quarter for which
the fee is computed. The number of percentage points by which the
investment performance of the Portfolio must exceed the investment
record of the Russell Midcap Index shall increase proportionately
from 4.67% and 2.33%, respectively, for the fourteen months ending
April 30, 1997, to 12% and 6%, for the thirty-six months ending
April 30, 1999.

(ii-b) After April 30, 1999. For the quarter ending July 31, 1999
and thereafter, the period used to calculate the incentive/penalty
adjustment shall be the 36 months preceding the end of the quarter
for which the fee is being computed and the number of percentage
points used shall be twelve and six.

CALCULATING RELATIVE INVESTMENT PERFORMANCE

The investment performance of the Portfolio for such period, expressed as a
percentage of the net asset value per share of the Portfolio at the beginning of
such period, shall be the sum of: (i) the change in the net

10
<PAGE> 57

asset value per share of the Portfolio during such period; (ii) the value of the
cash distributions per share of the Portfolio accumulated to the end of such
period; and (iii) the value of capital gains taxes per share paid or payable by
the Portfolio on undistributed realized long-term capital gains accumulated to
the end of such period.

The investment record of the Russell Midcap Index will be calculated
monthly by (i) multiplying the total return for the month (change in market
price plus dividends) of each stock included in the Russell Midcap Index by its
weighting in the Russell Midcap Index at the beginning of the month, and (ii)
adding the values discussed in (i). For any period, therefore, the investment
record of the Russell Midcap Index will be the compounded monthly returns of the
Russell Midcap Index.

For the period February 15 to October 31, 1996, the Fund paid approximately
$190,000 to BHM&S for investment advisory services.

RELATED INFORMATION CONCERNING BHM&S. BHM&S, One McKinney Plaza, 3232
McKinney Avenue, Dallas, Texas, 75204, is an independent, owner-managed
investment management firm founded in 1979 which provides investment advisory
services to individuals, employee benefit plans, investment companies and other
institutions. As of December 31, 1996, BHM&S provided investment advisory
services to clients having assets with an approximate value of $20.5 billion.

The agreement will continue until January 30, 1998 and will be renewable
thereafter, for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including the
affirmative votes of a majority of the Directors who are not parties to the
agreement or "interested persons" (as defined in the Investment Company Act of
1940) of any such party cast in person at a meeting called for the purpose of
considering such approval. In addition, the question of continuance of the
agreement may be presented to the shareholders of the Fund; in such event
continuance shall be effected only if approved by the affirmative vote of a
majority of the outstanding voting securities of the Fund. If the holders of any
Portfolio fail to approve the agreement, BHM&S may continue to serve as
investment adviser to each Portfolio which approved the agreement, and to any
Portfolio which did not approve the agreement until new arrangements have been
made. The agreement is automatically terminated if assigned, and may be
terminated by any Portfolio without penalty, at any time, (1) either by vote of
the Board of Directors or by vote of the outstanding voting securities of the
Portfolio on sixty (60) days' written notice to BHM&S, or (2) by BHM&S upon
ninety (90) days' written notice to the Fund.

SECURITIES TRANSACTIONS

The investment advisory agreements with BHM&S authorizes the investment
adviser (with the approval of the Fund's Board of Directors) to select the
brokers or dealers that will execute the purchases and sales of securities for
the Fund and directs each investment adviser to use its best efforts to obtain
the best available price and most favorable execution with respect to all
transactions for the Fund. The 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.
During the period February 15, 1996 to October 31, 1996 the Fund paid $161,469
in brokerage commissions.

In placing portfolio transactions, the Selected Value Portfolio's
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 Portfolio and/or the investment adviser. The
investment adviser considers the investment services it receives 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.

11
<PAGE> 58

The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, the investment adviser may cause the
Portfolio 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 investment adviser to the Fund and the other Funds in
the Group.

Currently, it is the Portfolio's policy that the 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
Portfolio. 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 the investment
adviser and/or the Fund. However, the investment adviser has informed the
Portfolio that it will not pay higher commission rates specifically for the
purpose of obtaining research services.

Since the Portfolio does not market its shares through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Portfolio may place portfolio orders with qualified
broker-dealers who recommend the sale of shares of the Portfolio and may, when a
number of brokers and dealers can provide comparable best price and execution on
a particular transaction, consider the sale of Portfolio shares by a broker or
dealer in selecting among qualified broker-dealers.

Some securities considered for investment by the Portfolio may also be
appropriate for the other Vanguard Portfolios and/or other clients served by the
investment adviser. If purchase or sale of securities consistent with the
investment policies of a Portfolio, the other Vanguard Portfolios and/or one or
more of these other clients are considered at or about the same time,
transactions in such securities will be allocated among the Vanguard Portfolios
and clients in a manner deemed equitable by the investment adviser. Although
there will be no specified formula for allocating such transactions, the
allocation methods used, and the results of such allocations, will be subject to
periodic review by the Fund's Board of Directors.

YIELD AND TOTAL RETURN

The yield of the Fund for the 30-day period ended October 31, 1996 was
.62%. Yields are calculated daily and premiums and discounts on asset-backed
accounts are not amortized. The annualized total return for the Selected Value
Portfolio since its inception on February 15, 1996 was .07%.

PURCHASE OF SHARES

The Fund 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 Fund or any Portfolio,
and (iii) to reduce or waive the minimum for initial and subsequent investments
as well as redemption fees for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of the Fund's shares.

REDEMPTION OF SHARES

The Fund 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 Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.

12
<PAGE> 59

The Fund 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% or the net assets of the Fund 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 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 a
practice detrimental to the best interests of the Fund. If redemptions are paid
in investment securities, such securities will be valued as set forth in the
Prospectus under "The Share Price of Each Portfolio" and a redeeming shareholder
would normally incur brokerage expenses if he converted these securities to
cash.

FINANCIAL STATEMENTS

The Fund's Financial Statements for the period February 15, 1996
(commencement of operations) through October 31, 1996, including the financial
highlights for the period February 15, 1996 through October 31, 1996, appearing
in the Vanguard Selected Value Portfolio 1996 Annual Report to Shareholders and
the report thereon of Price Waterhouse LLP, independent accountants, also
appearing therein, are incorporated by reference in this Statement of Additional
Information. The Fund's 1996 Annual Report to Shareholders is enclosed with this
Statement of Additional Information.

COMPARATIVE INDEXES

Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.

The Fund may 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.

WILSHIRE 5000 EQUITY INDEX -- consists of approximately 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.

MORGAN STANLEY CAPITAL INTERNATIONAL ALL COUNTRY INDEX -- is an arithmetic,
market value-weighted average of the performance of over 2,427 securities listed
on the stock exchanges of countries included in the EAFE Index, United States,
Canada, and Emerging Markets.

CAPITAL OPPORTUNITIES FUND STOCK INDEX -- the Index is composed of the various
common stocks that are held in the largest aggressive growth stock mutual funds,
using year-end net assets, monitored by Morningstar, Inc.

GLOBAL BALANCED INDEX -- a fixed weighted index of global stocks, bonds and U.S.
cash reserves, the component parts of which are derived from the adjusted
capitalization weighted averages of individual currency adjusted local country
indices.

MORGAN STANLEY CAPITAL INTERNATIONAL WORLD INDEX -- an arithmetic, market
value-weighted average of the performance of over 1,460 securities listed on the
stock exchanges of 23 countries.

SALOMON BROTHERS WORLD GOVERNMENT BOND INDEX -- a market capitalization-weighted
index consisting of government bond markets of 14 countries.

13
<PAGE> 60

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 -- 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 -- 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.

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, non-callable 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.

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.

14
<PAGE> 61

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 SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)

RUSSELL 3000 INDEX -- consists of approximately the 3,000 largest stocks of U.S.
domiciled companies commonly traded on the New York and American Stock Exchanges
or the NASDAQ over-the-counter market, accounting for over 90% of the market
value of publicly traded Stocks in the U.S.

RUSSELL 2000 STOCK INDEX -- composed of the 2,000 smallest securities in the
Russell 3000 Index, representing approximately 7% of the Russell 3000 total
market capitalization.

RUSSELL 2000(R) VALUE INDEX -- contains stocks from the Russell 2000 Index with
a less-than-average growth orientation.

RUSSELL MIDCAP(TM) INDEX -- composed of all medium and medium/small companies in
the Russell 1000 Index.

Advertisements which refer to the use of the Fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon
compounding of dividends on which it is presumed no Federal income tax applies.

In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Fund's Portfolio and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its yield. In addition there can be no assurance that the Fund
will continue its performance as compared to such other averages.