VANGUARD TRUSTEES EQUITY FUND, 497, 1997-05-05

VANGUARD TRUSTEES EQUITY FUND
497, 1997-05-05

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<PAGE> 1

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A
REGISTRATION STATEMENT (NO. 2-65955) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 21
AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 20
VANGUARD/TRUSTEES' EQUITY FUND
(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 PROPOSED THAT THIS FILING BECOME EFFECTIVE:

IT IS PROPOSED THAT THE AMENDMENT BECOME EFFECTIVE:
on April 30, 1997, pursuant to paragraph (a) of Rule 485 of the Securities Act
of 1933.

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

WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. WE FILED OUR RULE
24f-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1996 ON FEBRUARY 28, 1997.

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<PAGE> 2

VANGUARD TRUSTEES' EQUITY FUND

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

<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;
General Information
Item 13. Investment Objective and Policies............. Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund; Investment
Advisory Services
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other Services........ Management of the Fund; Investment
Advisory Services
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ General Information; Financial
Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares;
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
VANGUARD/TRUSTEES'
EQUITY FUND-
U.S. PORTFOLIO

[VANGUARD GROUP LOGO]

Prospectus
April 30, 1997

A Portfolio of Vanguard/ Trustees' Equity Fund

This prospectus contains financial data for the Portfolio through the fiscal
year ended December 31, 1996.
<PAGE> 4
VANGUARD/TRUSTEES' EQUITY FUND-
U.S. PORTFOLIO A Growth and Income Stock Mutual Fund

CONTENTS

Portfolio Expenses 2

Financial Highlights 3

A Word About Risk 4

The Portfolio's
Objectives 4

Who Should Invest 4

Investment Strategy 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 OBJECTIVES AND POLICIES

Vanguard/Trustees' Equity Fund-U.S. Portfolio (the "Portfolio") is a diversified
mutual fund, a part of Vanguard/Trustees' Equity Fund (the "Fund"), an open-end
investment company.

The Portfolio seeks to provide long-term capital growth and a modest amount
of income by investing in equity securities of U.S. companies. The Portfolio
uses both "value" and "growth" investment strategies. About 50% to 70% of the
Portfolio's assets are invested in companies whose stocks, according to the
Portfolio's adviser, are undervalued; these companies tend to be currently out
of favor with investors. The remaining 30% to 50% of assets are invested in
companies with a history of sales and earnings growth or, the adviser believes,
an expectation of growth.

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 April 30, 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 objectives, risks, and strategy of the U.S.
Portfolio of Vanguard/Trustees' Equity Fund. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk" explanations
along the way. Reading the prospectus will help you to decide whether the
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/Trustees' Equity Fund-U.S. Portfolio

WHO SHOULD INVEST (page 4)

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

- - Investors seeking capital growth and some income over the long term--at least
five years.

- - Investors seeking a fund that employs both value and growth investment
strategies.

WHO SHOULD NOT INVEST

- - Investors seeking significant current income.

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

RISKS OF THE PORTFOLIO (pages 4-7)

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 subject
to manager risk (the chance that poor security selection will cause it to lag
the stock market as a whole) and to objective risk (the chance that returns from
either value stocks or growth stocks will trail returns from the overall stock
market).

DIVIDENDS AND CAPITAL GAINS (page 9)

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

INVESTMENT ADVISER (page 10) Geewax, Terker & Company, Phoenixville, PA.

INCEPTION DATE: January 31, 1980

NET ASSETS AS OF 12/31/96: $157.7 million

PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 12/31/96: 0.49%

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: TrUS

VANGUARD FUND NUMBER: 025

ACCOUNT FEATURES (page 12)

- - Telephone Redemption

- - Vanguard Direct Deposit Service(sm)

- - Vanguard Automatic Exchange Service(sm)

- - Vanguard Fund Express(R)

- - Vanguard Dividend Express(sm)

AVERAGE ANNUAL TOTAL RETURN--
PERIODS ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------------------------------------
<S> <C> <C> <C>
U.S. Portfolio 21.3% 14.1% 12.8%
S&P 500 Index 23.0 15.2 15.3
</TABLE>

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

[GRAPH]

In evaluating past performance, remember that it is not indicative of future
performance and that returns from stocks before adjusting for inflation were
relatively high during the periods shown. 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 investors' shares, when redeemed, may be worth more or
less than their original cost.

1
<PAGE> 6
PLAIN TALK ABOUT

THE COSTS OF INVESTING

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

PLAIN TALK ABOUT

FUND EXPENSES

All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. The U.S. Portfolio's expense ratio in fiscal year 1996 was 0.49%, or
$4.90 per $1,000 of average net assets. The average growth and income equity
mutual fund had expenses in 1996 of 1.23%, or $12.30 per $1,000 of average net
assets, according to Lipper Analytical Services, Inc., which reports on the
mutual fund industry.

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:

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

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 for the fiscal year ended December 31, 1996.

<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES
<S> <C> <C>
Management and Administrative Expenses: 0.21%
Investment Advisory Expenses: 0.22%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.04%
----
Total Other Expenses: 0.06%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.49%
====
</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>
$5 $16 $27 $62
---------------------------------------------
</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 each of the last ten years ended December 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, along
with the audit report from Price Waterhouse, in the Portfolio's most recent
Annual Report to shareholders. The Annual Report is incorporated by reference in
the Statement of Additional Information and in this prospectus, and contains a
more complete discussion of the 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>
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $37.01 $29.09 $ 30.65 $28.43 $28.20 $22.90 $ 26.15 $26.35 $22.77 $28.69
------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .65 .62 .34 .43 .68 .71 1.02 .87 1.02 .92
Net Realized and
Unrealized Gain (Loss)
on Investments 6.87 8.96 (1.53) 4.38 1.08 5.30 (3.19) 3.62 4.53 (.24)
------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 7.52 9.58 (1.19) 4.81 1.76 6.01 (2.17) 4.49 5.55 .68
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.67) (.61) (.34) (.43) (.67) (.71) (1.08) (.88) (.97) (.72)
Distributions from
Realized Capital Gains (6.78) (1.05) (.03) (2.16) (.86) -- -- (3.81) (1.00) (5.88)
------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (7.45) (1.66) (.37) (2.59) (1.53) (.71) (1.08) (4.69) (1.97) (6.60)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $37.08 $37.01 $ 29.09 $30.65 $28.43 $28.20 $ 22.90 $26.15 $26.35 $22.77
==================================================================================================================================
TOTAL RETURN 21.30% 33.21% -3.91% 17.24% 6.45% 26.57% -8.33% 17.23% 24.64% 1.68%
==================================================================================================================================
Ratios/Supplemental Data
Net Assets, End of
Period (Millions) $ 158 $ 137 $ 113 $ 119 $ 68 $ 115 $ 100 $ 121 $ 115 $ 122
Ratio of Expenses to
Average Net Assets 0.49% 0.56% 0.73% 0.90% 0.65% 0.44% 0.52% 0.51% 0.58% 0.52%
Ratio of Net Investment
Income to Average
Net Assets 1.68% 1.79% 1.14% 1.43% 2.33% 2.67% 4.18% 2.90% 3.86% 2.77%
Portfolio Turnover Rate 114% 77% 151% 139% 209% 84% 81% 72% 90% 44%
Average Commission
Rate Paid $.0534 N/A N/A N/A N/A N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

PLAIN TALK ABOUT

HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Portfolio began fiscal 1996 with a net asset value (price) of $37.01 per
share. During the year, the Portfolio earned $0.65 per share from investment
income (interest and dividends) and $6.87 per share from investments that had
appreciated in value or that were sold for higher prices than the Portfolio paid
for them. Of those total earnings of $7.52 per share, $7.45 per share was
returned to shareholders in the form of distributions ($0.67 in dividends, $6.78
in capital gains). The earnings ($7.52 per share) less distributions ($7.45 per
share) resulted in a share price of $37.08 at the end of the year, an increase
of $0.07 per share (from $37.01 at the beginning of the period to $37.08 at the
end of the period). Assuming that the shareholder had reinvested the
distribution in the purchase of more shares, total return from the Portfolio was
21.30% for the year. As of December 31, 1996, the Portfolio had $158 million in
net assets; an expense ratio of 0.49% ($4.90 per $1,000 of net assets); and net
investment income amounting to 1.68% of its average net assets. It sold and
replaced securities valued at 114% of its total net assets.

3
<PAGE> 8
A WORD ABOUT RISK

This prospectus describes the risks you will face as an investor in the U.S.
Portfolio of Vanguard/Trustees' Equity Fund. It is important to keep in mind one
of the main axioms of investing: the higher the risk of losing money, the higher
the potential reward. The reverse, also, is generally true: the lower the risk,
the lower the potential reward. However, as you consider an investment in the
U.S. 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.

PLAIN TALK ABOUT

INVESTING FOR THE LONG TERM

The 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.

THE PORTFOLIO'S OBJECTIVES

Vanguard/Trustees' Equity Fund-U.S. Portfolio seeks to provide long-term capital
growth and a modest amount of income. These objectives are fundamental, which
means that they cannot be changed unless a majority of shareholders vote to do
so.

[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE 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 growth and income stock fund 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 looking for some dividend income.

- - You characterize your investment temperament as "relatively 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

4
<PAGE> 9
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 STRATEGY

This section explains how the Portfolio's investment adviser pursues the
objectives of long-term capital growth and some income. It also explains three
important risks--market risk, objective risk, and manager risk--faced by
investors in the Portfolio. Unlike the Portfolio's investment objectives, the
adviser's investment strategies are not fundamental and can be changed by the
Portfolio's board of trustees 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 in common stocks of U.S. companies. Between 50% and 70% of
the Portfolio's assets are invested in common stocks that display value
investment characteristics; the remaining portion of the Portfolio's assets are
invested in growth-oriented common stocks.

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>

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

PLAIN TALK ABOUT

COSTS AND MARKET TIMING

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

PLAIN TALK ABOUT

VALUE FUNDS AND GROWTH
FUNDS

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

5
<PAGE> 10
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.

PLAIN TALK ABOUT

PORTFOLIO DIVERSIFICATION

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

for all of the 5-year periods was 10.4%, returns for these 5-year periods ranged
from a -12.5% average (from 1928 through 1932), to 23.9% (from 1950 through
1954). These average returns reflect past performance on common stocks and
should not be regarded as an indication of future returns from either the stock
market as a whole or this Portfolio in particular.

Finally, the U.S. Portfolio invests in large-, mid-, and small-capitalization
stocks. 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. For this reason and because the U.S. Portfolio does not hold
the same securities held in the S&P 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 either value or growth stocks will trail returns from the
overall stock market. As groups, value stocks and growth 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

Geewax, Terker & Company (Geewax, Terker), adviser to the Portfolio, uses a
multi-step process in evaluating and picking stocks for the Portfolio.

In screening stocks for the value portion of the Portfolio, Geewax, Terker
examines a company's financial statements; measures the market's response to the
company's recent earnings announcements; and reviews analyst data to find
problems that may not be detected from the company's financial reports.

To be considered for the U.S. Portfolio's growth portion, a company must, in
Geewax, Terker's opinion, be financially sound and have the ability to finance
future growth; be considered a "growth stock" by the general market; and have
earnings that are growing at a higher-than-expected rate.

All value and growth stocks that pass this screening process are owned by the
Portfolio. The top ten holdings (which amounted to 21% of the Portfolio's total
net assets) as of December 31, 1996, follow.

1. Philip Morris Cos., Inc.
2. Exxon Corp.
3. Merck & Co., Inc.
4. Intel Corp.
5. Microsoft Corp.
6. International Business Machine Corp.
7. American Home Products Corp.
8. PepsiCo, Inc.
9. E.I. du Pont de Nemours & Co.
10. GTE Corp.

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.

The Portfolio is run by Geewax, Terker according to traditional methods of
active investment management, which means securities are bought and sold
according to Geewax, Terker'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
GEEWAX, TERKER 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 for the past ten years has been high--about
106%--and has exceeded 100% in four of the past five years. (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 growth companies, the Portfolio may follow
a number of investment policies to achieve its objectives.

[FLAG]ALTHOUGH IT HAS NOT DONE SO IN THE PAST, THE PORTFOLIO RESERVES THE RIGHT
TO INVEST, TO A LIMITED EXTENT, IN STOCK FUTURES AND OPTIONS CONTRACTS,
WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.

Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a Portfolio. 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 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.

- - 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.

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.

<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.

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 25% of its assets in any one industry.

- Borrow money, except for temporary or emergency purposes.

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

----------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 12/31/96
----------------------------

<TABLE>
<CAPTION>
U.S. Portfolio S&P Index
<S> <C> <C>
1 Year 21.3% 23.0%

5 Year 14.1% 15.2%

10 Year 12.8% 15.3%
</TABLE>

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

In weighing these performance figures, note that the U.S. Portfolio has been
in operation since January 31, 1980, and managed by Geewax, Terker since April
1, 1992.

8
<PAGE> 13
SHARE PRICE

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

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

The daily net asset value, or NAV, is useful to you as a shareholder because
the NAV, multiplied by the number of 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.

DIVIDENDS, CAPITAL GAINS, AND TAXES

Each June and December, the Portfolio distributes to shareholders virtually all
of its income from interest and dividends. Any capital gains realized from the
sale of securities are distributed in December. In addition, the Portfolio may
occasionally be required to make supplemental dividend or capital gains
distributions at some other time during the year (usually in March). Your
distributions of income and capital gains will be automatically invested in more
shares of the Portfolio, unless you elect to receive 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.

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.

PLAIN TALK ABOUT
The Portfolio's Adviser

Geewax, Terker & Company, an investment advisory firm founded in 1982, currently
manages about $1.8 billion in assets for institutional endowment and pension
funds. The manager responsible for overseeing the implementation of Geewax,
Terker's strategy for Vanguard/Trustees' Equity Fund-U.S. Portfolio is:

JOHN J. GEEWAX, Partner and Founder, Geewax, Terker & Company; 17 years
investment experience; B.S., M.B.A., and J.D. from the University of
Pennsylvania.

Mr. Geewax has served in this capacity since Geewax, Terker became the
Portfolio's adviser in April 1992.

- 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.

- 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 $250 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 trustees 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 Geewax, Terker & Company, 99 Starr Street, Phoenixville,
PA 19460, as its investment adviser. Geewax, Terker manages the Portfolio
subject to the control of the officers and trustees of the Fund.

Geewax, Terker is paid an advisory fee at the end of each fiscal quarter. The
fee is based on the Portfolio's average month-end net assets during the quarter,
multiplied by an annual percentage rate of 0.40%.

The advisory fee may be increased or decreased by an incentive/ penalty fee
based on the difference between the Portfolio's cumulative 36-month total return
performance and that of the S&P 500 Index.

For the year ended December 31, 1996, the investment advisory fee paid to
Geewax, Terker was $319,000.

10
<PAGE> 15
If more than one broker can obtain the best available price and favorable
execution of a transaction, then Geewax, Terker is authorized to choose a broker
who, in addition to executing the transaction, will provide research services to
Geewax, Terker or the Portfolio. However, Geewax, Terker will not pay higher
commissions specifically for the purpose of obtaining research services. The
Portfolio may direct Geewax, Terker to use a particular broker for certain
transactions in exchange for commission rebates or research services provided to
the Portfolio.

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

GENERAL INFORMATION

The U.S. Portfolio is one of two Portfolios of Vanguard/Trustees' Equity Fund, a
Pennsylvania business trust. The other Portfolio is Vanguard International Value
Portfolio. The Portfolios are combined under one business trust for
administrative purposes, but in virtually all respects operate like separate
business trusts.

Shareholders of the U.S. Portfolio have rights and privileges similar to
those enjoyed by corporate shareholders. For example, shareholders will not be
responsible for any liabilities of the business trust. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of trustees), 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 trustee) if the holders of
at least 10% of the Portfolio's shares request a meeting in writing.

<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/Trustees' Equity Fund- U.S. Portfolio
shareholder. Booklets providing detailed information are available on the
services marked with a [BOOK]. Please call us to request copies.

SERVICES AND ACCOUNT FEATURES

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

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

VANGUARD DIRECT DEPOSIT
SERVICE Automatic method for depositing your
[BOOK] 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
[BOOK] of money from one Vanguard fund account to
another.*

VANGUARD FUND EXPRESS Electronic method for buying or selling
[BOOK] 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
[BOOK] 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,
[BOOK] and options on major exchanges, the Nasdaq
Stock Market, and other domestic
over-the-counter markets at reduced rates,
and to buy and sell shares of non-Vanguard
mutual funds. Call VBS (1-800-992-8327) for
additional information and the appropriate
forms.

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

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
[BOOK] 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.
[BOOK] $3,000 minimum initial investment.

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

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

RETIREMENT

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

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

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

13
<PAGE> 18
TYPES OF ACCOUNTS (continued)

FOR A SAVINGS INCENTIVE MATCH
PLAN FOR EMPLOYEES ACCOUNT
(SIMPLE-IRA)
(Vanguard Fiduciary Trust
Company is the custodian.) To open a retirement account in the name of
an employee. Created as part of the Small
Business Job Protection Act of 1996, SIMPLEs
replace SAR-SEPs. SIMPLEs are exclusively
for employers that had 100 or fewer
employees in the most recent calendar year
and that do not maintain another
employer-sponsored retirement plan. A SIMPLE
can be established by people who are
self-employed, small-business owners,
partnerships, or corporations. Salary
reduction contributions may be made by the
employee, with matching or non-matching
contributions from the employer.

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

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

DISTRIBUTION OPTIONS

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

REINVESTMENT Dividends and capital gains are
automatically reinvested in additional
shares of the 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 IN CASH Both dividends and capital gains are paid by
check and mailed to your account's address
of record.

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

BUYING SHARES

You buy your shares at the 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.

14
<PAGE> 19
Buying Shares (continued)
<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
application form. Invest-By-Mail form detached
[ENVELOPE] from your confirmation statement
Make your check payable to: The to the address listed on the
FIRST-CLASS mail to: Vanguard Group-25 form.
The Vanguard Group
P.O. Box 2600 All purchases must be made in Make your check payable to: The
Valley Forge, PA 19482 U.S. dollars, and checks must be Vanguard Group-25
EXPRESS or REGISTERED drawn on U.S. banks.
mail to: All purchases must be made in
The Vanguard Group U.S. dollars, and checks must be
455 Devon Park Drive drawn on U.S. banks.
Wayne, PA 19087

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

BY TELEPHONE

[PHONE]

1-800-662-6273 Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
Vanguard Tele-Account hours a day-or Client Services hours a day-or Client Services
1-800-662-2739 during business hours to during business hours to
Client Services exchange from another Vanguard exchange from another Vanguard
fund account with the same fund account with the same
registration (name, address, registration (name, address,
taxpayer I.D., and account taxpayer I.D., and account
type). 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
your wire transaction. your wire transaction.
Wire to:
CoreStates Bank, N.A. Wire transactions are not Wire transactions are not
ABA 031000011 available for retirement available for retirement
CoreStates No 01019897 accounts. accounts.
[Temporary Account Number]
Vanguard/Trustees' Equity
Fund-U.S. Portfolio
[Account Registration]
Attention: Vanguard
</TABLE>

15
<PAGE> 20
Buying Shares (continued)

<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT

<S> <C> <C>
AUTOMATICALLY -- Vanguard offers a variety of
ways that you can add to your
account automatically. See
"Services and Account Features."
</TABLE>

You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar 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.

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:

[X] Portfolio name.
[X] 10-digit account number.
[X] Name and address exactly as registered on that account.
[X] Social Security or employer identification number as registered
on that account.

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

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.

<PAGE> 21

Redeeming Shares (continued)

Good order means that the request includes:
x Portfolio name and account number.
x Amount of the transaction (in dollars or shares).
x Signatures of all owners exactly as registered on the account.
x Signature guarantees (if required).
x Any supporting legal documentation that may be required.
x Any certificates you are holding for the account.

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

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 financial ..institution. A notary public cannot provide a
signature guarantee.

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 GRAPHIC] Call Vanguard Tele-Account* 24 hours a
1-800-662-6273 day-or Client Services during business
Vanguard Tele-Account hours-to sell or exchange shares. You can
1-800-662-2739 exchange shares from this Portfolio to
Client Services open an account in another Vanguard fund
or to add to an existing Vanguard fund
account with an identical registration.

RETIREMENT:

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

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

17
<PAGE> 22

REDEEMING SHARES (CONTINUED)

SELLING OR EXCHANGING SHARES ACCOUNT TYPE

BY MAIL ALL TYPES EXCEPT RETIREMENT:
[ENVELOPE ICON] Send a letter of instruction signed by
FIRST-CLASS mail to: all registered account holders. Include
The Vanguard Group the Portfolio name and account number and
Vanguard/Trustees' Equity Fund- (if you are selling) a dollar amount or
U.S. Portfolio number of shares OR (if you are
P.O. Box 1120 exchanging) the name of the fund you want
Valley Forge, PA 19482 to exchange into and a dollar amount or
number of shares.
EXPRESS or REGISTERED mail to:
The Vanguard Group Retirement:
Vanguard/Trustees' Equity Fund- For information on how to request
U.S. Portfolio distributions from
455 Devon Park Drive - IRAs, call Client Services.
Wayne, PA 19087 - SEP-IRAs, SIMPLE-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:
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 this feature when you opened your
account.

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/Trustees' Equity Fund-U.S. Portfolio account throughout
the year as well as when you are preparing your income tax returns.

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

<PAGE> 23
FUND AND ACCOUNT UPDATES (continued)

<TABLE>
<S> <C>
CONFIRMATION STATEMENT Sent each time you buy, sell, or
exchange shares; confirms the trade
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 February and August 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
[BOOK] accounts (accompanies your
Portfolio Summary); shows the
average cost of shares that you
redeemed during the previous
calendar year, using the average
cost single category method.

AUTOMATED TELEPHONE ACCESS

VANGUARD TELE-ACCOUNT Toll-free access to Vanguard fund
1-800-662-6273 and account information-as well as
Any time, seven days a week, some transactions-through any
from anywhere in the continental Touch-Tone(TM) telephone.
United States and Canada. Tele-Account provides total return,
[BOOK] 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 ON THE Use your personal computer to visit
WORLD WIDE WEB Vanguard's education- oriented
http://www.vanguard.com 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.

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

19
<PAGE> 24
PROSPECTUS POSTSCRIPT

This prospectus is designed to provide you with pertinent information about
Vanguard/Trustees' Equity Fund-U.S. Portfolio, including its investment
objectives, risks, strategy, 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 objectives? (page 4)

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

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

/ / The risks associated with the Portfolio? (pages 4-7)

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

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

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

/ / 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)

PLAIN TALK ABOUT

KEEPING YOUR PROSPECTUS

Reading this prospectus will help you to decide whether Vanguard/ Trustees'
Equity Fund-U.S. 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.

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 AND INCOME STOCK FUND

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

GROWTH STOCK FUND

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

INVESTMENT ADVISER

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

MUTUAL FUND

An investment company that pools the money of many people and invests it in a
variety of securities in an 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; these companies often pay
regular dividend income to shareholders.

VOLATILITY

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

YIELD

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

Post Office Box 2600
Valley Forge, PA 19482

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

P025N
</TABLE>
<PAGE> 27
VANGUARD/TRUSTEES'
EQUITY FUND -
U.S. PORTFOLIO

Institutional Prospectus
April 30, 1997

A Portfolio of Vanguard/
Trustees' Equity Fund

This prospectus contains
financial data for the
Portfolio through the
fiscal year ended
December 31, 1996.

A member of

[VANGUARD LOGO]

<PAGE> 28
Vanguard/Trustees' Equity Fund -
U.S. Portfolio A Growth and Income 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 Strategy 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

Investment Primer 16

Glossary Inside Back Cover

INVESTMENT OBJECTIVE AND POLICIES

Vanguard/Trustees' Equity Fund - U.S. Portfolio (the "Portfolio") is a
diversified mutual fund, a part of Vanguard/Trustees' Equity Fund (the "Fund"),
an open-end investment company.

The Portfolio seeks to provide long-term capital growth and a modest amount
of income by investing in equity securities of U.S. companies. The Portfolio
uses both "value" and "growth" investment strategies. About 50% to 70% of the
Portfolio's assets are invested in companies whose stocks, according to the
adviser, are undervalued. The remaining assets are invested in companies with a
history of sales and earnings growth or, the adviser believes, an expectation of
growth.

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

IMPORTANT NOTE

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

ADDITIONAL INFORMATION ABOUT THE PORTFOLIO

WHY READING THIS PROSPECTUS IS IMPORTANT

This prospectus explains the objective, risks, and strategy of the U.S.
Portfolio of Vanguard/Trustees' Equity Fund. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk" explanations
along the way. Reading the prospectus will help you to decide whether the
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> 29
PORTFOLIO PROFILE Vanguard/Trustees' Equity Fund - U.S. Portfolio

WHO SHOULD INVEST (page 4)

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

- - Investors seeking capital growth and some income over the long term -- at
least five years.

- - Investors seeking a fund that employs both value and growth investment
strategies.

WHO SHOULD NOT INVEST

- - Investors seeking significant current income.

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

RISKS OF THE PORTFOLIO (pages 4 - 7)

DIVIDENDS AND CAPITAL GAINS (page 9)

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

INVESTMENT ADVISER (page 10)
Geewax, Terker & Company, Phoenixville, PA.

INCEPTION DATE: January 31, 1980

NET ASSETS AS OF 12/31/96: $157.7 million

PORTFOLIO'S EXPENSE RATIO FOR THE
YEAR ENDED 12/31/96: 0.49%

LOADS, 12B-1 MARKETING FEES: None

NEWSPAPER ABBREVIATION: TrUS

VANGUARD FUND NUMBER: 025

AVERAGE ANNUAL TOTAL RETURN --
PERIODS ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
---------------------------------
<S> <C> <C> <C>
U.S. Portfolio 21.3% 14.1% 12.8%
S&P 500 Index 23.0 15.2 15.3
</TABLE>

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

[GRAPH]

Quarterly Return

1
<PAGE> 30
PLAIN TALK ABOUT

THE COSTS OF INVESTING

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

ANNUAL PORTFOLIO OPERATING EXPENSES

<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.21%
Investment Advisory Expenses: 0.22%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.04%
----
Total Other Expenses: 0.06%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.49%
====
</TABLE>

<TABLE>
<CAPTION>
- -------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------
<S> <C> <C> <C>
$5 $16 $27 $62
- -------------------------------------------------------
</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

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $37.01 $29.09 $30.65 $28.43 $28.20 $22.90 $26.15 $26.35 $22.77 $28.69
----------------------------------------------------------------------------------------------------------

INVESTMENT OPERATIONS
Net Investment Income .65 .62 .34 .43 .68 .71 1.02 .87 1.02 .92
Net Realized and
Unrealized Gain (Loss)
on Investments 6.87 8.96 (1.53) 4.38 1.08 5.30 (3.19) 3.62 4.53 (.24)
----------------------------------------------------------------------------------------------------------

TOTAL FROM INVESTMENT
OPERATIONS 7.52 9.58 (1.19) 4.81 1.76 6.01 (2.17) 4.49 5.55 .68
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.67) (.61) (.34) (.43) (.67) (.71) (1.08) (.88) (.97) (.72)
Distributions from
Realized Capital Gains (6.78) (1.05) (.03) (2.16) (.86) -- -- (3.81) (1.00) (5.88)
----------------------------------------------------------------------------------------------------------

TOTAL DISTRIBUTIONS (7.45) (1.66) (.37) (2.59) (1.53) (.71) (1.08) (4.69) (1.97) (6.60)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $37.08 $37.01 $29.09 $30.65 $28.43 $28.20 $22.90 $26.15 $26.35 $22.77
====================================================================================================================================
TOTAL RETURN 21.30% 33.21% -3.91% 17.24% 6.45% 26.57% -8.33% 17.23% 24.64% 1.68%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 158 $ 137 $ 113 $ 119 $ 68 $ 115 $ 100 $ 121 $ 115 $ 122
Ratio of Expenses to
Average Net Assets 0.49% 0.56% 0.73% 0.90% 0.65% 0.44% 0.52% 0.51% 0.58% 0.52%
Ratio of Net Investment
Income to Average
Net Assets 1.68% 1.79% 1.14% 1.43% 2.33% 2.67% 4.18% 2.90% 3.86% 2.77%
Portfolio Turnover Rate 114% 77% 151% 139% 209% 84% 81% 72% 90% 44%
Average Commission
Rate Paid $.0534 N/A N/A N/A N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

PLAIN TALK ABOUT

HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Portfolio began fiscal 1996 with a net asset value (price) of $37.01 per
share. During the year, the Portfolio earned $0.65 per share from investment
income (interest and dividends) and $6.87 per share from investments that had
appreciated in value or that were sold for higher prices than the Portfolio paid
for them. Of those total earnings of $7.52 per share, $7.45 per share was
returned to shareholders in the form of distributions ($0.67 in dividends, $6.78
in capital gains). The earnings ($7.52 per share) less distributions ($7.45 per
share) resulted in a share price of $37.08 at the end of the year, an increase
of $0.07 per share (from $37.01 at the beginning of the period to $37.08 at the
end of the period). Assuming that the shareholder had rein-vested the
distribution in the purchase of more shares, total return from the Portfolio was
21.30% for the year.

As of December 31, 1996, the Portfolio had $158 million in net assets; an
expense ratio of 0.49% ($4.90 per $1,000 of net assets); and net investment
income amounting to 1.68% of its average net assets. It sold and replaced
securities valued at 114% of its total net assets.

3
<PAGE> 32
PLAIN TALK ABOUT

INVESTING FOR THE LONG TERM

The 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] 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 OBJECTIVES

Vanguard/Trustees' Equity Fund - U.S. Portfolio seeks to provide long-term
capital growth and a modest amount of income. These objectives are fundamental,
which means that they cannot be changed unless a majority of shareholders vote
to do so.

[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE 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 growth and income stock fund 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 looking for some dividend income.

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

- - 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. If you own shares of

4
<PAGE> 33
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.

- - There is a limit on the number of times you can exchange into or out of the
Portfolio.

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

INVESTMENT STRATEGY

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

MARKET EXPOSURE

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

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

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

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 tries to discourage short-term trading by closely
monitoring daily transactions.

PLAIN TALK ABOUT

VALUE FUNDS AND
GROWTH FUNDS

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

5
<PAGE> 34
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.

PLAIN TALK ABOUT

PORTFOLIO DIVERSIFICATION

for all of the
5-year periods was 10.4%, returns for these 5-year periods ranged from a -12.5%
average (from 1928 through 1932), to 23.9% (from 1950 through 1954). These
average returns reflect past performance on common stocks and should not be
regarded as an indication of future returns from either the stock market as a
whole or this Portfolio in particular.

Finally, the U.S. Portfolio invests in large-, mid-, and small-capitalization
stocks. 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. For this reason and because the U.S. Portfolio does not
hold the same securities held in the S&P 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 EITHER VALUE OR GROWTH STOCKS WILL TRAIL RETURNS FROM
THE OVERALL STOCK MARKET. AS GROUPS, VALUE STOCKS AND GROWTH 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

Geewax, Terker & Company (Geewax, Terker), adviser to the Portfolio, uses a
multi-step process in evaluating and picking stocks for the Portfolio.

1. Philip Morris Cos., Inc.

2. Exxon Corp.

3. Merck & Co., Inc.

4. Intel Corp.

5. Microsoft Corp.

6. International Business Machine Corp.

7. American Home Products Corp.

8. Pepsico, Inc.

9. E.I. du Pont de Nemours & Co.

10. GTE Corp.

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.

[FLAG] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT
GEEWAX, TERKER 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 for the past ten years has been high -- about
106% -- and has exceeded 100% in four of the past five years. (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 growth companies, the Portfolio may follow
a number of investment policies to achieve its objectives.

Although it has not done so in the past, the Portfolio reserves the right
to invest, to a limited extent, in stock futures and options contracts,
which are traditional types of derivatives.

Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a Portfolio. 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 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.

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

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

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

-----------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 12/31/96
-----------------------------
<TABLE>
<CAPTION>
U.S. PORTFOLIO S&P 500 INDEX
<S> <C>
1 Year 21.3% 23.0%

5 Years 14.1% 15.2%

10 Years 12.8% 15.3%
</TABLE>

In weighing these performance figures, note that the U.S. Portfolio has been
in operation since January 31, 1980, and managed by Geewax, Terker since April
1, 1992.

8
<PAGE> 37

SHARE PRICE

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

DIVIDENDS, CAPITAL GAINS, AND TAXES

If you own shares of the Portfolio as an investment option in an
employer-sponsored retirement or savings plan, these dividend and capital gains
distributions will be reinvested in additional Portfolio 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/Trustees' Equity Fund - U.S. 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 Portfolio. Both dividend and capital gains distributions --
whether received in cash or reinvested in additional shares -- are subject to
federal (and possibly state and local) income taxes, no matter how long you have
held the shares in the Portfolio. You should consult your own tax adviser about
other tax consequences of an investment in the Portfolio.

PLAIN TALK ABOUT
Distributions

9
<PAGE> 38

PLAIN TALK ABOUT
Vanguard's Unique
Corporate Structure

PLAIN TALK ABOUT
The Portfolio's Adviser

JOHN J. GEEWAX, Partner and Founder, Geewax, Terker & Company; 17 years
investment experience; B.S., M.B.A., and J.D. from the University of
Pennsylvania.

Mr. Geewax has served in this capacity since Geewax, Terker became the
Portfolio's adviser in April 1992.

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 trustees 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 advisory fee may be increased or decreased by an incentive/ penalty fee
based on the difference between the Portfolio's cumulative 36-month total return
performance and that of the S&P 500 Index.

For the year ended December 31, 1996, the investment advisory fee paid to
Geewax, Terker was $319,000.

The agreement authorizes Geewax, Terker to choose brokers or dealers to
handle the purchase and sale of the Portfolio's securities, and directs Geewax,
Terker to get the best available price and most favorable execution from these
brokers with respect to all transactions. At times, Geewax, Terker 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 Geewax, Terker is
authorized to choose a broker who, in addition to executing the transaction,
will provide research services to Geewax, Terker or the Portfolio. However,
Geewax, Terker will not pay higher commissions specifically for the purpose of
obtaining research services. The Portfolio may direct Geewax, Terker to use a
particular broker for certain transactions in exchange for commission rebates or
research services provided to the Portfolio.

10
<PAGE> 39

GENERAL INFORMATION

Shareholders of the U.S. Portfolio have rights and privileges similar to
those enjoyed by corporate shareholders. For example, shareholders will not be
responsible for any liabilities of the business trust. If any matters are to be
voted on by shareholders (such as a change in a fundamental investment objective
or the election of trustees), 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 trustee) if the holders of at least
10% of the Portfolio's shares request a meeting in writing.

11
<PAGE> 40
INVESTING WITH VANGUARD

FOR PLAN PARTICIPANTS

Vanguard/Trustees' Equity Fund - U.S. 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 objectives, strategy, 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/Trustees' Equity Fund - U.S. 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 Fund's next-determined net asset value after
Vanguard has processed your request, provided your request has been received
before 4 p.m. Eastern time.

Vanguard must consider the interests of all 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 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.

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.

13
<PAGE> 42

PLAIN TALK ABOUT

Keeping Your Prospectus

Reading this prospectus will help you to decide whether Vanguard/ Trustees'
Equity Fund - U.S. 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/Trustees' Equity Fund - U.S. Portfolio, including its investment
objectives, risks, strategy, and expenses, as well as services available to you
as a shareholder.

IN READING THE PROSPECTUS, DID YOU LEARN . . .

- The Portfolio's objectives? (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 - 7)

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

- The Portfolio's expenses? (page 2)

- The background of the Portfolio's investment manager?
(page 10)

<PAGE> 43

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.

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

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.

<PAGE> 44

AN INVESTMENT PRIMER

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

1. INVESTMENT 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.
[GRAPH] 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.

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 (1926-1996)

Average Real
Annual Return
Rate of After
Return Inflation Inflation
------ --------- ---------
<S> <C> <C> <C>
CASH RESERVES 3.7% 3.1% 0.6%
BONDS 5.1% 3.1% 2.0%
STOCKS 10.7% 3.1% 7.5%

</TABLE>

- --------------------
Source: (C) Stocks, Bonds, Bills, and Inflation 1997 Yearbook(TM), Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved.

<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 AND INCOME STOCK FUND

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

GROWTH STOCK FUND

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

INVESTMENT ADVISER

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

MUTUAL FUND

An investment company that pools the money of many people and invests it in a
variety of securities in an 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

VALUE STOCK FUND

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

VOLATILITY

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

YIELD

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

<PAGE> 46
[GRAPHIC OF SHIP]

[VANGUARD LOGO]

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

E-mail
[email protected]
2

<PAGE> 47
Vanguard International Value Portfolio

Prospectus April 30, 1997

A Portfolio of Vanguard/Trustees' Equity Fund

This prospectus contains financial data for the Portfolio through the fiscal
year ended December 31, 1996.

Formerly known as Vanguard/Trustees' Equity Fund - International Portfolio

<PAGE> 48
Vaguard International Value Portfolio An International Stock Mutual Fund

Investment Objectives and Policies

Vanguard International Value Portfolio (the "Portfolio") is a diversified mutual
fund, a part of Vanguard/Trustees' Equity Fund (the "Fund"), an open-end
investment company. Prior to April 30, 1997, the Portfolio was known as
Vanguard/Trustees' Equity Fund International Portfolio.

The Portfolio seeks to provide long-term growth and income by investing
primarily in equity securities of large and medium-size companies located
outside the United States. The Portfolio uses a "value" investment approach,
emphasizing companies that -- considering their histories and compared to
similar companies -- are attractively priced. 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 OR FOREIGN
GOVERNMENTS. 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

ADDITIONAL INFORMATION ABOUT THE PORTFOLIO

WHY READING THIS PROSPECTUS IS IMPORTANT

This prospectus explains the objectives, risks, and strategy of Vanguard
International 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.

CONTENTS

Portfolio Expenses 2

Financial Highlights 3

A Word About Risk 4

The Portfolio's Objectives 4

Who Should Invest 4

Investment Strategy 5

Investment Policies 7

Investment Limitations 8

Investment Performance 9

Share Price 9

Dividends, Capital Gains, and Taxes 10

The Portfolio and Vanguard 11

Investment Adviser 11

General Information 12

Investing with Vanguard 13

Services and Account Features 13

Types of Accounts 14

Distribution Options 15

Buying Shares 15

Redeeming Shares 17

Fund and Account Updates 19

Glossary Inside Back Cover

WHO SHOULD INVEST (page 4)

- - Investors seeking investment opportunities outside the United States.

- - Investors seeking capital growth and some income over the long term -- at
least five years.

- - Investors willing to accept the additional risks associated with
international investing.

WHO SHOULD NOT INVEST

- - Investors seeking significant current 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. In addition to the risks
of U.S. stock funds (market risk, etc.), the Portfolio is subject to risks
associated with foreign investing. Among these are country risk (the chance that
a country's economy will be hurt by political or financial problems or natural
disasters) and currency risk (the chance that Americans investing abroad could
lose money because of a rise in the value of the U.S. dollar versus foreign
currencies).

DIVIDENDS AND CAPITAL GAINS (page 10)

Paid annually in December.

INVESTMENT ADVISER (page 11)

UBS International Investment London Limited, London, England.

INCEPTION DATE: May 16, 1983

NET ASSETS AS OF 12/31/96: $916.6 million

PORTFOLIO'S EXPENSE RATIO FOR THE
YEAR ENDED 12/31/96: 0.50%

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: IntlVal

VANGUARD FUND NUMBER: 046

ACCOUNT FEATURES (page 13)

- - Telephone Redemption

- - Vanguard Direct Deposit Service(sm)

- - Vanguard Automatic Exchange Service(sm)

- - Vanguard Fund Express(R)

- - Vanguard Dividend Express(sm)

AVERAGE ANNUAL TOTAL RETURN --
PERIODS ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
---------------------------------
<S> <C> <C> <C>
Vanguard International
Value Portfolio* 10.2% 8.7% 10.5%
MSCI - EAFE Index 6.4 8.5 8.7
</TABLE>

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

[GRAPH]

*Formerly known as Vanguard/Trustees' Equity Fund - International Portfolio.

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
investors' shares, when redeemed, may be worth more or less than their original
cost.

1
<PAGE> 50
PLAIN TALK ABOUT

THE COSTS OF INVESTING

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 International Value Portfolio's expense ratio in fiscal year
1996 was 0.50%, or $5.00 per $1,000 of average net assets. The average actively
managed international equity mutual fund had expenses in 1996 of 1.70%, or
$17.00 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

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

ANNUAL PORTFOLIO OPERATING EXPENSES

<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.25%
Investment Advisory Expenses: 0.14%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.09%
----
Total Other Expenses: 0.11%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.50%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------
<S> <C> <C> <C>
$5 $16 $28 $63
</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.

<PAGE> 51

FINANCIAL HIGHLIGHTS

The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended December 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, along
with the audit report from Price Waterhouse, in the Portfolio's most recent
annual report to shareholders. The annual report is incorporated by reference in
the Statement of Additional Information and in this prospectus, and contains a
more complete discussion of the 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>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 31.11 $ 31.48 $ 31.04 $ 24.44 $ 27.78 $ 26.58
----------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .82 .75 .55 .50 .66 .78
Net Realized and
Unrealized Gain (Loss)
on Investments 2.20 2.185 1.08 6.91 (3.05) 1.80
----------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 3.02 2.935 1.63 7.41 (2.39) 2.58
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.82) (.79) (.56) (.81) (.67) (.77)
Distributions from Realized
Capital Gains (5.77) (2.515) (.63) -- (.28) (.61)
----------------------------------------------------------------------------------------
TOTAL DISTRIBUTION (6.59) (3.305) (1.19) (.81) (.95) (1.38)

NET ASSET VALUE,
END OF PERIOD $ 27.54 $ 31.11 $ 31.48 $ 31.04 $ 24.44 $ 27.78
=========================================================================================================================
TOTAL RETURN 10.22% 9.65% 5.25% 30.49% -8.72% 9.96%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 917 $ 988 $ 1,053 $ 982 $ 678 $ 878
Ratio of Expenses to
Average Net Assets 0.50% 0.47% 0.34% 0.40% 0.42% 0.38%
Ratio of Net Investment
Income to Average
Net Assets 2.50% 2.29% 1.71% 1.76% 2.48% 2.87%
Portfolio Turnover Rate 82% 47% 40% 39% 51% 46%
Average Commission
Rate Paid $ .0582 N/A N/A N/A N/A N/A

<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1991 1990 1989 1988 1987
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 26.58 $ 32.44 $ 28.27 $ 28.66 $ 38.68
----------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .78 1.02 .82 .77 1.14
Net Realized and
Unrealized Gain (Loss)
on Investments 1.80 (4.92) 6.22 4.41 7.91
----------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 2.58 (3.90) 7.04 5.18 9.05
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.77) (.95) (.79) (.99) (.75)
Distributions from Realized
Capital Gains (.61) (1.01) (2.08) (4.58) (18.32)
----------------------------------------------------------------------
TOTAL DISTRIBUTION (1.38) (1.96) (2.87) (5.57) (19.07)

NET ASSET VALUE,
END OF PERIOD $ 27.78 $ 26.58 $ 32.44 $ 28.27 $ 28.66
=======================================================================================================
TOTAL RETURN 9.96% -12.26% 25.97% 18.78% 23.88%
=======================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 878 $ 796 $ 646 $ 467 $ 657
Ratio of Expenses to
Average Net Assets 0.38% 0.44% 0.46% 0.51% 0.50
Ratio of Net Investment
Income to Average
Net Assets 2.87% 3.62% 2.61% 2.55% 2.44%
Portfolio Turnover Rate 46% 18% 25% 14% 48%
Average Commission
Rate Paid N/A N/A N/A N/A N/A
</TABLE>
- --------------------------------------------------------------------------------

PLAIN TALK ABOUT

HOW TO READ THE FINANCIAL
HIGHLIGHTS TABLE

The Portfolio (known as the International Portfolio of Vanguard/Trustees' Equity
Fund until April 30,1997) began fiscal 1996 with a net asset value (price) of
$31.11 per share. During the year, the Portfolio earned $0.82 per share from
investment income (interest and dividends) and $2.20 per share from investments
that had appreciated in value or that were sold for higher prices than the
Portfolio paid for them. Of those total earnings of $3.02 per share, $6.59 per
share was returned to shareholders in the form of distributions ($0.82 in
dividends, $5.77 in capital gains). The earnings ($3.02 per share) less
distributions ($6.59 per share) resulted in a share price of $27.54 at the end
of the year, a decrease of $3.57 per share (from $31.11 at the beginning of the
period to $27.54 at the end of the period). Assuming that the shareholder had
reinvested the distribution in the purchase of more shares, total return from
the Portfolio was 10.22% for the year.

As of December 31, 1996, the Portfolio had $917 million in net assets; an
expense ratio of 0.50% ($5.00 per $1,000 of net assets); and net investment
income amounting to 2.50% of its average net assets. It sold and replaced
securities valued at 82% of its total net assets.

3
<PAGE> 52
PLAIN TALK ABOUT

INVESTING FOR THE LONG TERM

The 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
International 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 Vanguard
International 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 OBJECTIVES

Vanguard International Value Portfolio seeks to provide long-term capital growth
and income. These objectives are fundamental, which means that they cannot be
changed unless a majority of shareholders vote to do so.

[FLAG]BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE 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 are seeking investment opportunities outside the United States.

- - You wish to add a value-oriented international stock fund to your existing
holdings, which could include U.S. stock, bond, money market, and tax-exempt
investments.

- - You are willing to accept the additional risks (country risk, currency risk,
etc.) associated with international investments.

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

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

4
<PAGE> 53
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 STRATEGY

This section explains how the Portfolio's investment adviser pursues the
objectives of long-term growth and income. It also explains several of the risks
- -- market risk, objective risk, country risk, manager risk, and currency risk --
faced by investors in the Portfolio. Unlike the Portfolio's investment
objectives, the adviser's investment strategy is not fundamental and can be
changed by the Portfolio's board of trustees without shareholder approval.
However, before making any important change in its policies, the Portfolio will
give shareholders 30-days notice, in writing.

MARKET EXPOSURE

The Portfolio is a value-oriented fund that invests primarily in the stocks of
large and medium-size non-U.S. companies. Under normal circumstances, at least
65% of the Portfolio's assets will be invested in foreign stocks in at least
three different countries.

[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. IN ADDITION, INVESTMENTS IN FOREIGN
STOCK MARKETS CAN BE AS RISKY, IF NOT MORE RISKY, THAN U.S. STOCK
INVESTMENTS.

To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns (dividend income plus
change in market value) for foreign stock markets over various periods as
measured by the Morgan Stanley Capital International - Europe, Australasia, and
Far East (MSCI-EAFE) Index, a widely used barometer of international 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>
- -----------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969 - 1996)
- -----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2% 1.5% 7.0% 12.0%
Average 15.0% 13.9% 15.8% 14.9%
- -----------------------------------------------------------------
</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

VALUE FUNDS AND
GROWTH FUNDS

5
<PAGE> 54
PLAIN TALK ABOUT

THE RISKS OF
INTERNATIONAL INVESTING

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

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 foreign equity mutual fund
has about 25% of its assets invested in its ten largest holdings, while some
less-diversified international mutual funds have 40% or more of their assets
invested in the stocks of just ten companies.

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1996. Keep in mind that this was a particularly favorable period for
foreign markets. For instance, over 10-year periods, foreign stocks provided an
average return of 15.8%, compared to 13.2% for U.S. stocks (as measured by the
Standard & Poor's 500 Composite Stock Price Index) during the same time frame.
These average returns reflect past performance and should not be regarded as an
indication of future returns from either foreign markets as a whole or this
Portfolio in particular.

Note, too, that, while the Portfolio emphasizes stocks of large and
medium-size companies, it also includes stocks of small companies. Stocks of
small companies have historically been more volatile than -- and at times have
performed quite differently from -- the stocks of larger companies. Keep in
mind, too, that classifications of companies as large, medium, or small vary
from country to country. For instance, a large company in one country could be
considered a small company in another.

For these reasons and because Vanguard International Value Portfolio does not
hold the same securities held in the MSCI-EAFE 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 INTERNATIONAL STOCKS WILL TRAIL RETURNS FROM THE U.S. STOCK
MARKETS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES OF U.S. STOCKS
HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.

SECURITY SELECTION

UBS International Investment London Limited (UBSII), adviser to the Portfolio,
believes that research is the key to selecting securities for an international
stock portfolio. Much of this research takes the form of on-site visits. In
1996, for instance, UBSII's investment analysts visited some 1,600 companies.

To be considered for Vanguard International Value Portfolio, a company must
- -- looking at its history and compared to similar companies -- be cheap
statistically (that is, it has an above-average yield and a relatively low price
considering its earnings, book value, and cash flow); be out of favor with
investors; and appear to have a management that is motivated to make positive
changes.

The adviser decides whether -- and how much -- to invest in each country by
first determining how many of a country's companies meet UBSII's value criteria.
Other factors in UBSII's country selection process include the size of the
market and the variety of investment opportunities available within the market.

6
<PAGE> 55
PLAIN TALK ABOUT
PORTFOLIO TURNOVER

PLAIN TALK ABOUT
FORWARD FOREIGN
CURRENCY CONTRACTS

A forward foreign currency contract is an agreement to buy or sell a country's
currency at a specific price usually 30, 60, or 90 days in the future. In other
words, the contract guarantees an exchange rate on a given date. Managers of
international stock funds use these contracts to guard against sudden,
unfavorable changes in U.S. dollar/foreign currency exchange rates. The
contracts will not prevent the fund's securities from falling in value during
foreign market declines.

[FLAG] THE PORTFOLIO IS SUBJECT TO COUNTRY RISK, WHICH IS THE POSSIBILITY THAT
POLITICAL EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL PROBLEMS
(RISING INFLATION, GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN
EARTHQUAKE, A POOR HARVEST) WILL WEAKEN A COUNTRY'S ECONOMY AND CAUSE
INVESTMENTS IN THAT COUNTRY TO LOSE MONEY.

The Portfolio typically holds some 150 securities, with the top ten holdings
making up about 20% of the Portfolio's net assets. The stocks are chosen from a
diverse range of industries.

The Portfolio's top ten holdings (which amounted to 23.3% of the Portfolio's
net assets) as of December 31, 1996, follow.

1. Elf Aquitaine SA
2. British Gas PLC
3. Total SAB Shares
4. Groupe Danone SA
5. Nestle SA (Registered)
6. BTR PLC
7. Bayer AG
8. Yamanouchi Pharmaceuticals Co., Ltd.
9. MEPCPLC
10. Mount Isa Mines Holdings Ltd.

The Portfolio is run by UBSII according to traditional methods of active
investment management, which means that securities are bought and sold according
to UBSII's judgments about companies and their financial prospects, and about
foreign stock markets and economies in general.

[FLAG] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT
UBSII MAY DO A POOR JOB OF EVALUATING FOREIGN MARKETS AND 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 for the past ten years has been about 41%. (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.)

Because of the Portfolio's March 1996 change in investment adviser, the
Portfolio's turnover rate last year was 82%. Now that this transition year is
over, however, UBSII expects the Portfolio's turnover rate for the fiscal year
ending December 31, 1997, to be approximately 30%.

INVESTMENT POLICIES

Besides investing in stocks of foreign companies, the Portfolio may follow a
number of investment policies to achieve its objectives.

7
<PAGE> 56
PLAIN TALK ABOUT
DERIVATIVES

PLAIN TALK ABOUT
CASH RESERVES

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

The Portfolio may enter into forward foreign currency contracts, which help
protect the Portfolio's securities against unfavorable short-term changes in
exchange rates. UBSII will use these contracts to eliminate some of the
uncertainty of foreign exchange rates -- but will not speculate on changes in
the market.

[FLAG] THE PORTFOLIO IS SUBJECT TO CURRENCY RISK, WHICH IS THE POSSIBILITY
THAT A "STRONGER" U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS
INVESTING OVERSEAS. GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST A
FOREIGN CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE
ITS CURRENCY IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A "WEAKER"
DOLLAR GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.

The Portfolio may also invest in derivatives.

[FLAG] ALTHOUGH IT HAS NOT DONE SO IN THE PAST, THE PORTFOLIO RESERVES THE
RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK FUTURES AND OPTIONS
CONTRACTS, WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.

Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a Portfolio. 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 -- 5% -- may be applied to futures
contracts deposits, and no more than 20% of total assets may be committed to
such contracts.

The reasons for which the 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.
- - 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.

8
<PAGE> 57
PLAIN TALK ABOUT
PAST PERFORMANCE

- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for temporary or emergency purposes. 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 International Value Portfolio invests in foreign stocks, so its
performance is tied to the performance of many stock markets outside the United
States. Historically, stock market performance, both foreign and domestic, has
been characterized by sharp up-and-down swings in the short term and by more
stable growth over the long term.

- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 12/31/96
- --------------------------------------------------------------------------------
VANGUARD INTERNATIONAL MSCI-EAFE INDEX
VALUE PORTFOLIO*

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------

<S> <C> <C>
10.2% 6.4% 8.7% 8.5% 10.5% 8.7%
</TABLE>
- --------------------------------------------------------------------------------

*Formerly known as Vanguard/Trustees' Equity Fund - International Portfolio.

The results shown above represent the Portfolio's "average annual total
return" performance, which assumes that any distributions of capital gains and
dividends were reinvested for the indicated periods. Also included is
comparative information on the unmanaged Morgan Stanley Capital International -
Europe, Australasia, and Far East (MSCI-EAFE) Index. The chart does not make any
allowance for federal, state, or local income taxes that shareholders must pay
on a current basis.

In weighing these performance figures, note that Vanguard International
Value Portfolio was managed by Batterymarch Financial Management, Inc., from the
Portfolio's inception on May 16, 1983, until March 31, 1996, when UBS
International Investment London Limited became the Portfolio's investment
adviser.

SHARE PRICE

9
<PAGE> 58
PLAIN TALK ABOUT
DISTRIBUTIONS

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.

calculated by adding up the total assets of the Portfolio, subtracting all of
its liabilities, or debts, and then dividing by the total number of Portfolio
shares outstanding:

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

To help determine its daily share price, the Portfolio calculates the value
of its foreign securities in U.S. dollars. The Portfolio uses the daily exchange
rate employed by Morgan Stanley Capital International in the calculation of its
own indexes. If Morgan Stanley's exchange rate is not available, the Portfolio
uses a rate according to policies set by the Fund's board of trustees.

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
Intlval. (Note that, prior to April 30, 1997, the Portfolio was known as
Vanguard/Trustees' Equity Fund - International Portfolio, with a newspaper
abbreviation of TrIntl.).

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. In addition, the Portfolio may occasionally be required
to make supplemental dividend or capital gains distributions at some other time
during the year (usually in March). Your distributions of income and capital
gains will be automatically invested in more shares of the Portfolio, 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

10
<PAGE> 59
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, a group of individuals, or by investors who bought the management
company's publicly traded stock. Because of its structure, Vanguard operates its
funds at cost. Instead of distributing profits from operations to a separate
management company, Vanguard returns profits to fund shareholders in the form of
lower operating expenses.

the Portfolio. Consequently, distributions may vary considerably from year
to year.

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

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

The Portfolio may "pass through" to shareholders any foreign income taxes it
is required to pay. As a shareholder, you need to report your "share" of these
taxes as part of your gross income. You can treat the tax either as an itemized
deduction or as a foreign tax credit on your tax return.

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

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 trustees 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 UBS International Investment London Limited (UBSII),
Triton Court, 14 Finsbury Square, London EC2A 1PD, as its investment adviser.
UBSII manages the Portfolio subject to the control of the officers and trustees
of the Fund.

UBSII's advisory fee is calculated at the end of each fiscal quarter and is
based on the Portfolio's average month-end net assets during that quarter:

<TABLE>
<CAPTION>
-------------------------------
NET ASSETS ANNUAL FEE
-------------------------------
<S> <C>
First $50 million 0.475%
Next $450 million 0.150
Next $500 million 0.120
Assets over $1 billion 0.110
-------------------------------
</TABLE>

11
<PAGE> 60
PLAIN TALK ABOUT
THE PORTFOLIO'S ADVISER

UBS International Investment London Limited (UBSII) traces its roots to the
British brokerage firm, Phillips & Drew, which was acquired by the Union Bank of
Switzerland in 1985. UBSII, which was created two years later to provide
investment management services to clients outside the United Kingdom, currently
manages some $7 billion in assets. Although the adviser uses a team approach,
the managers with primary responsibility for Vanguard International Value
Portfolio are:

WILSON PHILLIPS, CFA, Investment Manager, UBSII; 17 years investment
experience (15 years with the firm); B.S., Glasgow University.

ROBIN APPS, Investment Manager and Investment Committee Member, UBSII; 13
years investment experience (11 years with the firm); B. Soc. SC., Birmingham
University.

The advisory fee may be increased or decreased by an incentive/ penalty fee
based on the Portfolio's total return performance as compared to that of the
MSCI - EAFE Index. Under the fee schedule, the basic fee may be increased or
decreased by as much as 50%. The incentive/penalty fee will not be fully
operable until June 30, 1999. Until that date, the incentive/penalty fee will be
calculated using certain transition rules that are explained in the Statement of
Additional Information.

The agreement authorizes UBSII to choose brokers or dealers to handle the
purchases and sales of the Portfolio's securities, and directs UBSII to use
every effort to get the best available price and most favorable execution from
these brokers with respect to all transactions. At times, UBSII 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 UBSII is
authorized to choose a broker who, in addition to executing the transaction,
will provide research services to UBSII or the Portfolio. However, UBSII will
not pay higher commissions specifically for the purpose of obtaining research
services. The Portfolio may direct UBSII to use a particular broker for certain
transactions in exchange for commission rebates or research services provided to
the Portfolio.

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

GENERAL INFORMATION

Vanguard International Value Portfolio is one of two Portfolios of Vanguard/
Trustees' Equity Fund, a Pennsylvania business trust. The other Portfolio is the
U.S. Portfolio. The Portfolios are combined under one business trust for
administrative purposes, but in virtually all respects operate like separate
business trusts.

Shareholders of Vanguard International Value Portfolio have rights and
privileges similar to those enjoyed by corporate shareholders. For example,
shareholders will not be responsible for any liabilities of the business trust.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of trustees), 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
trustee) if the holders of at least 10% of the Portfolio's shares request a
meeting in writing.

12
<PAGE> 61
INVESTING WITH VANGUARD

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 International Value Portfolio shareholder. Booklets
providing detailed information are available on the services marked with a [BOOK
GRAPHIC]. Please call us to request copies.

SERVICES AND ACCOUNT FEATURES

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

<TABLE>
<S> <C>
TELEPHONE REDEMPTIONS Automatically set up for this Portfolio unless
(SALES AND EXCHANGES) you notify us otherwise.

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

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

VANGUARD FUND EXPRESS Electronic method for buying or selling shares.
[BOOK GRAPHIC] 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
[BOOK GRAPHIC] 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 A cost-effective way to trade stocks, bonds,
(VBS) and options on major exchanges, the Nasdaq
[BOOK GRAPHIC] Stock Market, 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.
</TABLE>

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

13
<PAGE> 62
TYPES OF ACCOUNTS

INDIVIDUAL OR OTHER ENTITY

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

<TABLE>
<S> <C>
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
[BOOK GRAPHIC] 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.
[BOOK GRAPHIC] $3,000 minimum initial investment.

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

FOR AN ORGANIZATION To open an account as a corporation,
[BOOK GRAPHIC] 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.
</TABLE>

RETIREMENT

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

<TABLE>
<S> <C>
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 roll- over from an
Company is the custodian.) employer's plan, such as a 401(k), or an asset
transfer or rollover from another financial
institution, such as a bank or mutual fund
company. $1,000 minimum initial investment.

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

14
<PAGE> 63
Types of Accounts (continued)

<TABLE>
<S> <C>
For a Savings Incentive Match To open a retirement account in the name of an
Plan for Employees Account employee. Created as part of the Small Business
(SIMPLE-IRA) Job Protection Act of 1996, SIMPLEs replace
(Vanguard Fiduciary Trust SAR-SEPs. SIMPLEs are exclusively for employers
Company is the custodian.) that had 100 or fewer employees in the most
recent calendar year and that do not maintain
another employer-sponsored retirement plan. A
SIMPLE can be established by people who are
self-employed, small business owners,
partnerships, or corporations. Salary reduction
contributions may be made by the employee, with
matching or non-matching contributions from the
employer.

For a Qualified Retirement To open a retirement account that allows
Program Account small-business owners or people who are
(Vanguard Fiduciary self-employed to make tax-deductible Trust
Company can be the custodian.) retirement contributions for themselves and
their employees into Profit-Sharing and Money
Purchase Pension (Keogh) plans.

For a 403(b)(7) Custodial Account To open a retirement account that allows
(Vanguard Fiduciary Trust employees of tax- exempt institutions (for
Company is the custodian.) example, schools or hospitals) to make pre-tax
retirement contributions.
</TABLE>

DISTRIBUTION OPTIONS

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

<TABLE>
<S> <C>
Reinvestment Dividends and capital gains are automatically
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.
</TABLE>

BUYING SHARES

15
<PAGE> 64
BUYING SHARES (continued)

<TABLE>
<S> <C> <C>
Open A New Account Add To An Existing Account

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 application Mail your check with an
[ENVELOPE] form. Invest-By-Mail form detached from
FIRST-CLASS MAIL to: your confirmation statement to the
The Vanguard Group address listed on the form.
P.O. Box 2600
Valley Forge, PA 19482 Make your check payable to: Make your check payable to:
The Vanguard Group - 46 The Vanguard Group - 46
Express or Registered mail to:
The Vanguard Group All purchases must be made in U.S. All purchases must be made in U.S.
455 Devon Park Drive dollars, and checks must be drawn dollars, and checks must be drawn
Wayne, PA 19087 on U.S. banks. on U.S. banks.
</TABLE>

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

<TABLE>
<S> <C> <C>
BY TELEPHONE Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
[TELEPHONE RECEIVER] hours a day -- or Client Services hours a day -- or Client Services
1-800-662-6273 during business hours -- to during business hours -- to
Vanguard Tele-Account(R) exchange from another Vanguard fund exchange from another Vanguard fund
1-800-662-2739 account with the same registration account with the same registration
Client Services (name, address, taxpayer I.D., and (name, address, taxpayer I.D., and
account type). 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.
</TABLE>

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

<TABLE>
<S> <C> <C>
By Wire Call Client Services to arrange Call Client Services to arrange
[WIRE] your wire transaction. your wire transaction.
Wire to:
CoreStates Bank, N.A. Wire transactions are not available Wire transactions are not available
ABA 031000011 for retirement accounts. for retirement accounts.
CoreStates No 01019897
[Temporary Account Number]
Vanguard International
Value Portfolio
[Account Registration]
Attention: Vanguard
</TABLE>

16
<PAGE> 65

Buying Shares (continued)

<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT

<S> <C> <C>
AUTOMATICALLY -- Vanguard offers a variety of ways
[Graphic of Arrows in a Circle] that you can add to your account
automatically. See "Services and
Account Features."
</TABLE>

You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar 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.

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.

- 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.

HOW TO SELL SHARES

17
<PAGE> 66

REDEEMING SHARES (CONTINUED)

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 Fund will
deduct a $10 annual fee if your non-retirement account balance falls below
$2,500 or if your UGMA/UTMA account balance falls below $500. The fee is waived
if your total Vanguard account assets are $50,000 or more.

SOME WRITTEN REQUESTS REQUIRE A SIGNATURE GUARANTEE FROM A BANK, BROKER, OR
OTHER ACCEPTABLE FINANCIAL INSTITUTION. A NOTARY PUBLIC CANNOT PROVIDE A
SIGNATURE GUARANTEE.

HOW TO EXCHANGE SHARES

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

Because excessive exchanges can potentially disrupt the management of the
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.

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

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

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

<PAGE> 67

REDEEMING SHARES (continued)

SELLING OR EXCHANGING SHARES ACCOUNT TYPE

BY MAIL ALL TYPES EXCEPT RETIREMENT: Send a letter
[ENVELOPE] of instruction signed by all registered
First-class mail to: account holders. Include the fund name and
The Vanguard Group account number and (if you are selling) a
Vanguard International dollar amount or number of shares OR (if
Value Portfolio you are exchanging) the name of the fund
P.O. Box 1120 you want to exchange into and a dollar
Valley Forge, PA 19482 amount or number of shares.
EXPRESS or Registered mail to:
The Vanguard Group
Vanguard International
Value Portfolio RETIREMENT: For information on how to
455 Devon Park Drive request distributions from . . . - IRAs,
Wayne, PA 19087 call Client Services. - SEP-IRAs,
SIMPLE-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:

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

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 International Value Portfolio account throughout the year
as well as when you are preparing your income tax returns.

19
<PAGE> 68

FUND AND ACCOUNT UPDATES (CONTINUED)

CONFIRMATION STATEMENT Sent each time you buy, sell, or exchange
shares; confirms the trade 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 February and August 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
[BOOK] (accompanies your Portfolio Summary); shows
the average cost of shares that you
redeemed during the previous calendar year,
using the average cost single category
method.

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 Touch-Tone(TM)
from anywhere in the continental telephone. Tele-Account provides total
United States and Canada. return, share price, price change, and
[BOOK] 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 ON THE Use your personal computer to visit
WORLD WIDE WEB Vanguard's education- oriented website,
http://www.vanguard.com which provides timely news and infor-
mation about Vanguard funds and services;
an on-line "university" that offers a
variety of mutual fund classes; and
easy-to-use, interactive tools to help you
create your own investment and retirement
strategies.

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.

<PAGE> 69

GLOSSARY OF INVESTMENT TERMS

CAPITAL GAINS DISTRIBUTION

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

CASH RESERVES

Cash reserves 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.

COUNTRY RISK

The possibility that events such as changes in regulation, political or
financial troubles, or natural disasters will weaken a country's economy and
adversely effect the market value of securities issued by companies or
governments in that country.

CURRENCY RISK

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

DIVIDEND INCOME

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

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.

INTERNATIONAL STOCK FUND

A mutual fund that invests in the stocks of companies located outside the United
States.

INVESTMENT ADVISER

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

NET ASSET VALUE (NAV)

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

PORTFOLIO DIVERSIFICATION

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

PRINCIPAL

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

TOTAL RETURN

VALUE STOCK FUND

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

VOLATILITY

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

YIELD

Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 70
<TABLE>
<S> <C> <C>
[THE VANGUARD FUND GROUP LOGO]
POST OFFICE BOX 2600
VALLEY FORGE, PA 19482

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

P046N
</TABLE>
<PAGE> 71
VANGUARD
INTERNATIONAL VALUE
PORTFOLIO

Institutional Prospectus
April 30, 1997

A Portfolio of Vanguard/ Trustees' Equity Fund

This prospectus contains financial data for the Portfolio through the fiscal
year ended December 31, 1996.

Formerly known as Vanguard/Trustees' Equity Fund - International Portfolio

[GRAPHIC OF SHIP]
[VANGUARD LOGO]
<PAGE> 72
VANGUARD INTERNATIONAL VALUE PORTFOLIO An International Stock Mutual Fund

CONTENTS

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

Financial Highlights 3

A Word About Risk 4

The Portfolio's
Objectives 4

Who Should Invest 4

Investment Strategy 5

Investment Policies 8

Investment Limitations 9

Investment
Performance 9

Share Price 10

Dividends, Capital
Gains, and Taxes 10

The Portfolio and
Vanguard 11

Investment Adviser 11

General Information 12

Investing
with Vanguard

- - For Plan Participants 13

- - For Other
Institutional Investors 13

Accessing Fund Information
by Computer 14

Prospectus Postscript 15

Risk Quiz 16

Glossary Inside Back Cover
</TABLE>

INVESTMENT OBJECTIVES AND POLICIES

FEES AND EXPENSES

IMPORTANT NOTE

ADDITIONAL INFORMATION ABOUT THE PORTFOLIO

WHY READING THIS PROSPECTUS IS IMPORTANT

4-5
<PAGE> 73
PORTFOLIO PROFILE Vanguard International Value Portfolio

WHO SHOULD INVEST (page 4)

- - Investors seeking investment opportunities outside the United States.

- - Investors seeking capital growth and some income over the long term--at
least five years.

- - Investors willing to accept the additional risks associated with
international investing.

WHO SHOULD NOT INVEST

- - Investors seeking significant current income.

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

RISKS OF THE PORTFOLIO (pages 4-8)

DIVIDENDS AND CAPITAL GAINS (page 10)

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

INVESTMENT ADVISER (page 11)

UBS International Investment London Limited, London, England.

INCEPTION DATE: May 16, 1983

NET ASSETS AS OF 12/31/96: $916.6 million

PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 12/31/96: 0.50%

LOADS, 12b-1 MARKETING FEES: None

NEWSPAPER ABBREVIATION: IntlVal

VANGUARD FUND NUMBER: 046

AVERAGE ANNUAL TOTAL RETURN--
PERIODS ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
1 Year 5 Year 10 Years
- -------------------------------------------------------------
<S> <C> <C> <C>
Vanguard International Value
Portfolio* 10.2% 8.7% 10.5%
MSCI-EAFE Index 6.4 8.5 8.7
</TABLE>

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

[GRAPH]

<TABLE>
<CAPTION>
QUARTERLY RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
"1987" 15.1 23.4 12.6 7.1 8.6 5.7 -12 -10.5
"1988" 8.7 15.3 2.3 -4.3 -1.9 0.7 8.9 15.7
"1989" 2.5 0.3 0.9 -6.1 17.6 12.5 3.6 4.6
"1990" -5 -19.7 8.5 9.6 -18 -21.1 3.8 10.6
"1991" 3.9 7.5 -3.3 -5.4 7.5 8.7 1.9 1.8
"1992" -5.5 -11.8 4.9 2.2 -5 1.6 -3.2 -3.8
"1993" 10 12.1 7.1 10.1 6.5 6.7 4 1
"1994" 2.8 3.6 3.7 5.2 1.3 0.2 -2.5 -1
"1995" 0.1 1.9 3.3 0.8 2.9 4.3 3 4.1
"1996" 3.86 2.96 1.75 1.66 -0.03 -0.05 4.33 1.67
</TABLE>

*Formerly known as Vanguard/Trustees' Equity Fund-International Portfolio.

1
<PAGE> 74
PLAIN TALK ABOUT

THE COSTS OF INVESTING

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:

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

<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES
<S> <C> <C>
Management and Administrative Expenses: 0.25%
Investment Advisory Expenses: 0.14%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.09%
----
Total Other Expenses: 0.11%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.50%
====
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------
<S> <C> <C> <C>
$5 $16 $28 $63
------------------------------------------
</TABLE>

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

2
<PAGE> 75
FINANCIAL HIGHLIGHTS

The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended December 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, along
with the audit report from Price Waterhouse, in the Portfolio's most recent
annual report to shareholders. The annual report is incorporated by reference in
the Statement of Additional Information and in this prospectus, and contains a
more complete discussion of the Portfolio's performance. You may have the Report
sent to you without charge by writing to or calling Vanguard (see back cover).

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

NET ASSET VALUE,
BEGINNING OF PERIOD $31.11 $ 31.48 $31.04 $24.44 $ 27.78 $26.58 $ 32.44 $28.27 $28.66 $ 38.68
------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .82 .75 .55 .50 .66 .78 1.02 .82 .77 1.14
Net Realized and
Unrealized Gain (Loss)
on Investments 2.20 2.185 1.08 6.91 (3.05) 1.80 (4.92) 6.22 4.41 7.91
------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 3.02 2.935 1.63 7.41 (2.39) 2.58 (3.90) 7.04 5.18 9.05
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.82) (.79) (.56) (.81) (.67) (.77) (.95) (.79) (.99) (.75)
Distributions from
Realized Capital Gains (5.77) (2.515) (.63) -- (.28) (.61) (1.01) (2.08) (4.58) (18.32)
------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (6.59) (3.305) (1.19) (.81) (.95) (1.38) (1.96) (2.87) (5.57) (19.07)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $27.54 $ 31.11 $31.48 $31.04 $ 24.44 $27.78 $ 26.58 $32.44 $28.27 $ 28.66
===================================================================================================================================
TOTAL RETURN 10.22% 9.65% 5.25% 30.49% -8.72% 9.96% -12.26% 25.97% 18.78% 23.88%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 917 $ 988 $1,053 $ 982 $ 678 $ 878 $ 796 $ 646 $ 467 $ 657
Ratio of Expenses to
Average Net Assets 0.50% 0.47% 0.34% 0.40% 0.42% 0.38% 0.44% 0.46% 0.51% 0.50%
Ratio of Net Investment
Income to Average
Net Assets 2.50% 2.29% 1.71% 1.76% 2.48% 2.87% 3.62% 2.61% 2.55% 2.44%
Portfolio Turnover Rate 82% 47% 40% 39% 51% 46% 18% 25% 14% 48%
Average Commission
Rate Paid $.0582 N/A N/A N/A N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

PLAIN TALK ABOUT

HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Portfolio (known as the International Portfolio of Vanguard/ Trustees'
Equity Fund until April 30, 1997) began fiscal 1996 with a net asset value
(price) of $31.11 per share. During the year, the Portfolio earned $0.82 per
share from investment income (interest and dividends) and $2.20 per share from
investments that had appreciated in value or that were sold for higher prices
than the Portfolio paid for them. Of those total earnings of $3.02 per share,
$6.59 per share was returned to shareholders in the form of distributions ($0.82
in dividends, $5.77 in capital gains). The earnings ($3.02 per share) less
distributions ($6.59 per share) resulted in a share price of $27.54 at the end
of the year, a decrease of $3.57 per share (from $31.11 at the beginning of the
period to $27.54 at the end of the period). Assuming that the shareholder had
reinvested the distribution in the purchase of more shares, total return from
the Portfolio was 10.22% for the year.

3
<PAGE> 76
PLAIN TALK ABOUT

INVESTING FOR THE LONG TERM

The 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]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 OBJECTIVES

[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 are seeking investment opportunities outside the United States.

- - You wish to add a value-oriented international stock fund to your existing
holdings, which could include U.S. stock, bond, money market and tax-exempt
investments.

- - You are willing to accept the additional risks (country risk, currency risk,
etc.) associated with international investments.

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

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

4
<PAGE> 77
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. 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.

- - There is a limit on the number of times you can exchange into or out of the
Portfolio.

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

INVESTMENT STRATEGY

This section explains how the Portfolio's investment adviser pursues the
objectives of long-term growth and income. It also explains several of the
risks--market risk, objective risk, country risk, manager risk, and currency
risk--faced by investors in the Portfolio. Unlike the Portfolio's investment
objectives, the adviser's investment strategy is not fundamental and can be
changed by the Portfolio's board of trustees without shareholder approval.
However, before making any important change in its policies, the Portfolio will
give shareholders 30-days notice, in writing.

MARKET EXPOSURE

[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. IN ADDITION, INVESTMENTS IN FOREIGN
STOCK MARKETS CAN BE AS RISKY, IF NOT MORE RISKY, THAN U.S. STOCK
INVESTMENTS.

To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns (dividend income plus
change in market value) for foreign stock markets over various periods as
measured by the Morgan Stanley Capital International-Europe, Australasia, and
Far East (MSCI-EAFE) Index, a widely used barometer of international 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.

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 tries to discourage short-term trading by closely
monitoring daily transactions.

PLAIN TALK ABOUT

VALUE FUNDS AND GROWTH FUNDS

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

5
<PAGE> 78
PLAIN TALK ABOUT

THE RISKS OF INTERNATIONAL INVESTING

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

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 foreign equity mutual fund
has about 25% of its assets invested in its ten largest holdings, while some
less-diversified international mutual funds have 40% or more of their assets
invested in the stocks of just ten companies.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1996)
- ------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2% 1.5% 7.0% 12.0%
Average 15.0% 13.9% 15.8% 14.9%
- ------------------------------------------------------------------
</TABLE>

Note, too, that, while the Portfolio emphasizes stocks of large and
medium-size companies, it also includes stocks of small companies. Stocks of
small companies have historically been more volatile than--and at times have
performed quite differently from--the stocks of larger companies. Keep in mind,
too, that classifications of companies as large, medium, or small vary from
country to country. For instance, a large company in one country could be
considered a small company in another.

[FLAG] THE PORTFOLIO IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY THAT
RETURNS FROM INTERNATIONAL STOCKS WILL TRAIL RETURNS FROM THE U.S. STOCK
MARKETS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES OF U.S. STOCKS
HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.

SECURITY SELECTION

To be considered for Vanguard International Value Portfolio, a company
must--looking at its history and compared to similar companies--be cheap
statistically (that is, it has an above-average yield and a relatively low price
considering its earnings, book value, and cash flow); be out of favor with
investors; and appear to have a management that is motivated to make positive
changes.

6
<PAGE> 79
The adviser decides whether--and how much--to invest in each country by first
determining how many of a country's companies meet UBSII's value criteria. Other
factors in UBSII's country selection process include the size of the market and
the variety of investment opportunities available within the market.

[FLAG] THE PORTFOLIO IS SUBJECT TO COUNTRY RISK, WHICH IS THE POSSIBILITY THAT
POLITICAL EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL PROBLEMS (RISING
INFLATION, GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN EARTHQUAKE, A
POOR HARVEST) WILL WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN
THAT COUNTRY TO LOSE MONEY.

The Portfolio typically holds some 150 securities, with the top ten holdings
making up about 20% of the Portfolio's net assets. The stocks are chosen from a
diverse range of industries.

The Portfolio's top ten holdings (which amounted to 23.3% of the Portfolio's
assets) as of December 31, 1996, follow.

1. Elf Aquitaine SA
2. British Gas PLC
3. Total SA B Shares
4. Groupe Danone SA
5. Nestle SA (Registered)
6. BTR PLC
7. Bayer AG
8. Yamanouchi Pharmaceuticals Co., Ltd.
9. MEPC PLC
10. Mount Isa Mines Holdings Ltd.

[FLAG] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT
UBSII MAY DO A POOR JOB OF EVALUATING FOREIGN MARKETS AND 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 for the past ten years has been about 41%. (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.)

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
international stock funds is 57%.

7
<PAGE> 80
PLAIN TALK ABOUT

FORWARD FOREIGN CURRENCY CONTRACTS

PLAIN TALK ABOUT

DERIVATIVES

INVESTMENT POLICIES

Besides investing in stocks of foreign companies, the Portfolio may follow a
number of investment policies to achieve its objectives.

[FLAG] THE PORTFOLIO IS SUBJECT TO CURRENCY RISK, WHICH IS THE POSSIBILITY THAT
A "STRONGER" U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING
OVERSEAS. GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST A FOREIGN
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS
CURRENCY IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A "WEAKER"
DOLLAR GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.

The Portfolio may also invest in derivatives.

[FLAG] ALTHOUGH IT HAS NOT DONE SO IN THE PAST, THE PORTFOLIO RESERVES THE RIGHT
TO INVEST, TO A LIMITED EXTENT, IN STOCK FUTURES AND OPTIONS CONTRACTS,
WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.

Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a Portfolio. 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--5%--may be applied to futures contracts
deposits, and no more than 20% of total assets may be committed to such
contracts.

The reasons for which the 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.

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

8
<PAGE> 81
PLAIN TALK ABOUT

CASH RESERVES

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

PLAIN TALK ABOUT

PAST PERFORMANCE

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 temporary or emergency purposes.

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

[GRAPH]

<TABLE>
<CAPTION>
- ------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 12/31/96
- ------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD INTERNATIONAL
VALUE PORTFOLIO* 10.2% 8.7% 10.5%

MSCI-EAFE INDEX 6.4% 8.5% 8.7%
- ------------------------------------------------------------
</TABLE>

*Formerly known as Vanguard/Trustees' Equity Fund-International Portfolio.

The results shown above represent the Portfolio's "average annual total
return" performance, which assumes that any distributions of capital gains and
dividends were reinvested for the indicated periods. Also included is
comparative information on the unmanaged Morgan Stanley Capital
International-Europe, Australasia, and Far East (MSCI-EAFE) Index. The chart
does not make any allowance for federal, state, or local income taxes that
shareholders must pay on a current basis.

9
<PAGE> 82
In weighing these performance figures, note that Vanguard International Value
Portfolio was managed by Batterymarch Financial Management, Inc., from the
Portfolio's inception on May 16, 1983, until March 31, 1996, when UBS
International Investment London Limited became the Portfolio's investment
adviser.

PLAIN TALK ABOUT

DISTRIBUTIONS

SHARE PRICE

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

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

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 Intlval.
(Note that, prior to April 30, 1997, the Portfolio was known as
Vanguard/Trustees' Equity Fund-International Portfolio, with a newspaper
abbreviation of TrIntl.)

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. In addition, the Portfolio may occasionally be required
to make supplemental dividend or capital gains distributions at some other time
during the year (usually in March).

10
<PAGE> 83
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 International 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 Portfolio. Both dividend and capital gains distributions--whether received
in cash or reinvested in additional shares--are subject to federal (and possibly
state and local) income taxes, no matter how long you have held the shares in
the Portfolio. You should consult your own tax adviser about other tax
consequences of an investment in the Portfolio.

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, a group of individuals, or by investors who bought the management
company's publicly traded stock. Because of its structure, Vanguard operates its
funds at cost. Instead of distributing profits from operations to a separate
management company, Vanguard returns profits to fund shareholders in the form of
lower operating expenses.

PLAIN TALK ABOUT

THE PORTFOLIO'S ADVISER

WILSON PHILLIPS, CFA, Investment Manager, UBSII; 17 years investment
experience (15 years with the firm); B.S., Glasgow University.

ROBIN APPS, Investment Manager and Investment Committee Member, UBSII; 13
years investment experience (11 years with the firm); B. Soc. SC., Birmingham
University.

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 trustees 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

UBSII's advisory fee is calculated at the end of each fiscal quarter and is
based on the Portfolio's average month-end net assets during that quarter:

<TABLE>
<CAPTION>
-------------------------------------
NET ASSETS ANNUAL FEE
-------------------------------------
<S> <C>
First $50 million 0.475%
Next $450 million 0.150
Next $500 million 0.120
Assets over $1 billion 0.110
-------------------------------------
</TABLE>

11
<PAGE> 84
Until that date, the incentive/penalty fee will be calculated using certain
transition rules that are explained in the Statement of Additional Information.

GENERAL INFORMATION

<PAGE> 85

INVESTING WITH VANGUARD

FOR PLAN PARTICIPANTS

Vanguard International 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, strategy, or risks, contact Vanguard's
Participant Services Department, toll-free, at 1-800-523-1188.

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

INVESTMENT OPTIONS AND ALLOCATIONS

TRANSACTIONS

EXCHANGES

Before making an exchange, you should consider the following:

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

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

FOR OTHER INSTITUTIONAL INVESTORS

If you have questions about Vanguard International 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

13
<PAGE> 86
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

<TABLE>
<S> <C>
VANGUARD ON THE Use your personal computer to visit Vanguard's education-oriented website,
WORLD WIDE WEB which provides timely news and information about Vanguard funds and services;
http://www.vanguard.com 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.

VANGUARD ONLINE(SM) Use your personal computer to learn more about Vanguard funds and services;
KEYWORD: Vanguard 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.
</TABLE>

14
<PAGE> 87

PROSPECTUS POSTSCRIPT

This prospectus is designed to provide you with pertinent information about
Vanguard International Value Portfolio, including its investment objectives,
risks, strategy, and expenses, as well as services available to you as a
shareholder.

IN READING THE PROSPECTUS, DID YOU LEARN . . .

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

/ / The Portfolio's investment strategy? (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)

PLAIN TALK ABOUT

KEEPING YOUR PROSPECTUS

Reading this prospectus will help you to decide whether Vanguard International
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.

15
<PAGE> 88
ABOUT THE QUIZ

HOW TO SCORE THE QUIZ

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

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

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

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

A SIMPLE RISK QUIZ

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

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

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

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

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

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

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

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

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

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

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

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

G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.

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

<PAGE> 89
GLOSSARY OF INVESTMENT TERMS

CAPITAL GAINS DISTRIBUTION

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

CASH RESERVES

Cash reserves 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.

COUNTRY RISK

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

CURRENCY RISK

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

DIVIDEND INCOME

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

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.

INTERNATIONAL STOCK FUND

A mutual fund that invests in the stocks of companies located outside the United
States.

INVESTMENT ADVISER

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

NET ASSET VALUE (NAV)

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

PORTFOLIO DIVERSIFICATION

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

PRINCIPAL

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

TOTAL RETURN

VALUE STOCK FUND

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

VOLATILITY

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

YIELD

Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 90
[THE VANGUARD GROUP LOGO]

Institutional Division
Post Office Box 2900
Valley Forge, PA 19482

<TABLE>
<S> <C> <C>
FOR PARTICIPANTS IN FOR OTHER INSTITUTIONAL ELECTRONIC ACCESS TO THE
EMPLOYER-SPONSORED PLANS INVESTORS VANGUARD MUTUAL FUND
1-800-523-1036 EDUCATION AND INFORMATION
Participant Services Department For information on Vanguard CENTER
1-800-523-1188 funds and services World Wide Web
Text Telephone: http://www.vanguard.com
1-800-523-8004
For information on the E-mail
Vanguard funds in your plan, [email protected]
Monday through Friday
8:30 a.m. to 7 p.m.,
Eastern time
</TABLE>

I046N

<PAGE> 91

PART B

VANGUARD/TRUSTEES' EQUITY FUND

STATEMENT OF ADDITIONAL INFORMATION

APRIL 30, 1997

This Statement is not a prospectus but should be read in conjunction with
the Fund's Prospectus dated April 30, 1997. To obtain the Prospectus, please
call the Investor Information Department:

1-800-662-7447

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................................... B-1
Purchase of Shares........................................................................ B-5
Redemption of Shares...................................................................... B-5
Yield and Total Return.................................................................... B-6
Investment Limitations.................................................................... B-6
Management of the Fund.................................................................... B-8
Investment Advisory Services.............................................................. B-11
Portfolio Transactions.................................................................... B-14
Performance Measures...................................................................... B-14
General Information....................................................................... B-16
Financial Statements...................................................................... B-17
</TABLE>

INVESTMENT OBJECTIVE AND POLICIES

The following policies supplement the investment objective and policies set
forth in the Fund's Prospectus:

FOREIGN INVESTMENTS. Under normal circumstances, at least 65% of Vanguard
International Value Portfolio's assets will be invested in foreign stocks. The
Portfolio will invest in at least three different countries outside of the
United States. Investors should recognize that investing in foreign companies
involves certain special considerations which are not typically associated with
investing in U.S. companies. Since the stocks of foreign companies are
frequently denominated in foreign currencies, and since the Vanguard
International Value Portfolio may temporarily hold uninvested reserves in bank
deposits in foreign currencies, the Portfolio will be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and may incur costs in connection with conversions between various currencies.
The investment policies of the Vanguard International Value Portfolio permit it
to enter into forward foreign currency exchange contracts in order to hedge the
Portfolio's holdings and commitments against changes in the level of future
currency rates. Such contracts involve an obligation to purchase or sell a
specific currency at a future date at a price set at the time of the contract.

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

Although Vanguard International Value Portfolio will endeavor to achieve
most favorable execution costs in its portfolio transactions, fixed commissions
on many foreign stock exchanges are generally higher than

B-1
<PAGE> 92

negotiated commissions on U.S. exchanges. In addition, it is expected that the
expenses for custodian arrangements of the Portfolio's foreign securities will
be somewhat greater than the expenses for the custodian arrangements for
handling the U.S. Portfolio's securities of equal value.

Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies comprising Vanguard International Value
Portfolio.

FUTURES CONTRACTS. Each Portfolio may enter into futures contracts,
options, options on futures contracts and foreign currency 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 delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.

Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin
deposits that may range upward from less than 5% of the value of the contract
being traded.

After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, 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 Portfolios
expect to earn interest income on their margin deposits.

The Portfolios will not use futures and options for speculative purposes. A
Portfolio will use futures and options to simulate full investment in underlying
securities while retaining a cash balance for fund management purposes.

Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. Each Portfolio
will only sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, a
Portfolio expects that approximately 75% of its futures contract purchases will
be "completed"; that is, equivalent amounts of related securities will have been
purchased or are being purchased by the Portfolio upon sale of open futures
contracts.

Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of Portfolio income to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While the Portfolios will incur commission expenses in
both opening and

B-2
<PAGE> 93

closing out futures positions, these costs are lower than transaction costs
incurred in the purchase and sale of U.S. Government securities.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. A 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 the Portfolio's total assets. In addition, a Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts would exceed 20% of the Portfolio's
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, a Portfolio would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if a 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, a
Portfolio may be required to make delivery of the instruments underlying
interest rate futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge its portfolio. A Portfolio will minimize the risk that it will
be unable to close out a futures contract by only entering into futures
contracts which are traded on national futures exchanges and for which there
appears to be a liquid secondary market.

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. 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 Portfolios are engaged in only for hedging purposes, the
Advisers do not believe that the Portfolios are 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 security and sold it after the decline.

Utilization of futures transactions by a 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 a 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 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 futures positions and subjecting some futures
traders to substantial losses.

FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. A Portfolio is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts as of the end of the year as
well as those actually realized during the year. In most cases, any gain or loss
recognized with respect to a futures contract is considered to be 60% long-term
capital gain or loss and 40% short-term

B-3
<PAGE> 94

capital gain or loss, without regard to the holding period of the contract.
Furthermore, sales of futures contracts which are intended to hedge against a
change in the value of securities held by a Portfolio may affect the holding
period of such securities and, consequently, the nature of the gain or loss on
such securities upon disposition. A Portfolio may be required to defer the
recognition of losses on futures contracts to the extent of any unrecognized
gains on related positions held by the Portfolio.

In order for a 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
Portfolio'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, a 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 a 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.

A 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 Portfolio'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 distributions.

REPURCHASE AGREEMENTS. Each 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 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 Trustees will monitor a
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 the Portfolio. No more than an aggregate of 15% of a Portfolio's assets, at
the time of investment, will be invested in repurchase agreements having
maturities longer than seven days and in securities subject to legal or
contractual restrictions on resale for which there are no readily available
market quotations. From time to time, the Fund's Board of Trustees may determine
that certain restricted securities known as Rule 144A securities are liquid and
not subject to the 15% limitation described above.

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, a
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 a Portfolio on such
collateral may be automatically stayed. Finally, it is possible that a 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.

B-4
<PAGE> 95

LENDING OF SECURITIES. Each Portfolio may lend its investment 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 investment securities, a Portfolio attempts 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. Each
Portfolio may lend its investment 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. The Commission
currently requires that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash, an irrevocable letter of credit issued by a
domestic U.S. bank, 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 receive 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. Loan arrangements made by a 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
creditworthiness of the broker, dealer or institution, will be considered in
making decisions with respect to the lending of securities, subject to review by
the Fund's Board of Trustees.

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

PURCHASE OF SHARES

The purchase price of shares of each Portfolio of the Fund is the net asset
value next determined after the order is received. The net asset value is
calculated as of the close of regular trading on the New York Stock Exchange on
each day the Exchange is open for business, and on any other day on which there
is sufficient trading in a Portfolio's investment securities to materially
affect the Portfolio's net asset value per share. An order received prior to the
close of the Exchange will be executed at the price computed on the date of
receipt; and an order received after the close of the Exchange will be executed
at the price computed on the next day the Exchange is open.

Each Portfolio 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, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of a Portfolio's shares.

REDEMPTION OF SHARES

Each Portfolio 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 a Portfolio 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.

B-5
<PAGE> 96

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% of 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 Trustees
may deem advisable; however, payment will be made wholly in cash unless the
Trustees believe that economic or market conditions exist which would make such
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.

No charge is made by a Portfolio for redemptions. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.

SIGNATURE GUARANTEES. To protect your account, the Fund and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Fund to verify the identity of the person who has
authorized a redemption from your account. Signature guarantees are required in
connection with: (1) all redemptions, regardless of the amount involved, when
the proceeds are to be paid to someone other than the registered owner(s) and/or
to an address other than the address of record; and (2) share transfer requests.
These requirements may be waived by the Fund in certain instances.

A guarantor must be a bank, a trust company, a member firm of a domestic
stock exchange, or a foreign branch of any of the foregoing. Notaries public are
not acceptable guarantors.

YIELD AND TOTAL RETURN

The yield of the U.S. Portfolio of the Fund for the 30-day period ended
December 31, 1996 was 1.46%.

The average annual total return of each Portfolio of the Fund for the
following periods ending December 31, 1996 is set forth below:

<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
12/31/96 12/31/96 12/31/96
------------ ------------- --------------
<S> <C> <C> <C>
U.S. Portfolio................................. +21.30% +14.14% +12.82%
Vanguard International Value Portfolio......... +10.22% + 8.67% +10.48%
</TABLE>

Total return is computed by finding the average compounded rates of return
over the periods set forth above that would equate an initial amount invested at
the beginning of the periods to the ending redeemable value of the investment.

INVESTMENT LIMITATIONS

Each Portfolio of the Fund is subject to the following limitations which
(except as indicated otherwise below) may not be changed without the approval of
at least a majority of the outstanding voting securities (as defined in the
Investment Company Act of 1940 (the "1940 Act")) of the Fund. A Portfolio will
not:

(1) Borrow money except that the Portfolio may borrow from banks (or
through reverse repurchase agreements), for temporary or emergency
(not leveraging) purposes, including the meeting of redemption
requests which might otherwise require the untimely disposition of
securities, in an amount not exceeding 10% of the value of the
Portfolio's net assets (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
Portfolio's net assets, the Portfolio will not make any additional
investments;

(2) 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;

B-6
<PAGE> 97

(3) Invest in companies for the purpose of exercising control;

(4) Invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
or otherwise to the extent permitted by Section 12 of the 1940 Act.
The Portfolio will invest only in investment companies which have
investment objectives and investment policies consistent with those of
the Portfolio;

(5) Engage in the business of underwriting securities issued by other
persons, 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;

(6) 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 discussed on page B-9);

(7) Purchase or sell real estate although it may purchase and sell
securities of companies which deal in real estate or interests
therein;

(8) Purchase securities on margin or sell any securities short except that
each Portfolio may invest in stock futures contracts, stock options,
options on stock futures contracts and foreign currency futures
contracts to the extent that not more than 5% of its total assets are
required as margin deposit to secure obligations under futures
contracts and not more than 20% of its total assets are committed to
such transactions at any time;

(9) Invest more than 5% of the value of the total assets of the Portfolio
at the time of investment in the securities of any issuers which have
records of less than three years' continuous operation, including the
operation of any predecessor, but this limitation does not apply to
securities issued or guaranteed as to interest and principal by the
United States Government or its agencies or instrumentalities;

(10) Make loans except by (i) purchasing a portion of an issue of bonds,
debentures or similar obligations which are either publicly
distributed or customarily purchased by institutional investors, (ii)
entering into repurchase agreements, provided, however, that
repurchase agreements maturing in more than seven days, together with
securities which do not have readily available market quotations, will
not exceed 15% of a Portfolio's total assets, and (iii) lending its
securities as provided under "Investment Objective and Policies";

(11) Purchase or write put or call options except as specified in "(8)"
above;

(12) Invest in interests in oil, gas, or other mineral exploration or
development programs;

(13) Purchase or sell commodities or commodity contracts except as
specified in "(8)" above; and

(14) Concentrate its investments in a particular industry, although it may
invest up to 25% of the value of the Portfolio's total assets, taken
at market, in securities of issuers all of which conduct their
principal business activities in the same industry.

Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, or make loans to, or contribute to the costs or other
financial requirements of any company which will be wholly owned by the Fund and
one or more other investment companies and is primarily engaged in the business
of

B-7
<PAGE> 98

providing, at-cost, management, administrative or related services to the Fund
and other investment companies. See below for "MANAGEMENT OF THE FUND."

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

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Trustees. The Trustees set broad policies for
the Fund and choose its Officers. Following is a list of Trustees and Officers
of the Fund and a statement of their present positions and principal occupations
during the past five years. The mailing address of the Fund's Trustees and
Officers is Post Office Box 876, Valley Forge, PA 19482.

JOHN C. BOGLE, Chairman and Trustee*
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 & Trustee*
President, Chief Executive Officer and Director of The Vanguard Group,
Inc., and of each of the other investment companies in The Vanguard Group.

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

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

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

BURTON G. MALKIEL, Trustee
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., Trustee
Chairman, President and Chief Executive Officer of NACCO Industries Inc.;
Director of The BFGoodrich Company and The Standard Products Company.

JOHN C. SAWHILL, Trustee
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., Trustee
Retired Chairman of Nabisco Brands Inc., retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc.; and Director of Kmart
Corporation.

J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company and Trustee of Vanderbilt University.

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.

B-8
<PAGE> 99

THE VANGUARD GROUP

Vanguard/Trustees' Equity Fund is a member of The Vanguard Group of
Investment Companies. Through their jointly-owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other Funds in the Group obtain at
cost virtually all of their corporate management, administrative and
distribution services. Vanguard also provides investment advisory services on an
at-cost basis to several of the Vanguard Funds.

Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's net expenses which are allocated among the
Funds under methods approved by the Board of Trustees (Directors) of each Fund.
In addition, each Fund bears its own direct expenses, such as legal, auditing
and custodian fees.

The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.

The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds has invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At December 31, 1996, the
Fund had contributed capital of $98,000 to Vanguard, representing .5% of
Vanguard's capitalization. The Funds' 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.

MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended December 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 $2,676,000.

DISTRIBUTION. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of Vanguard, acts as Sales Agent for shares of the Funds in
connection with any sales made directly to investors in the states of Florida,
Missouri, New York, Ohio, Texas and such other states as it may be required.

The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.

One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remaining
one half of these expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of 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 fiscal year ended December 31,
1996, the Fund paid approximately $221,000 of the Group's distribution and
marketing expenses.

B-9
<PAGE> 100

INVESTMENT ADVISORY SERVICES. Vanguard provides investment advisory
services to Vanguard Money Market Reserves, Vanguard Municipal Bond Fund,
Vanguard Admiral Funds, several Portfolios of Vanguard Fixed Income Securities
Fund, Vanguard Treasury 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 Index Trust, Vanguard International Equity Index Fund,
Vanguard Balanced Index Fund, Vanguard Bond Index Fund, Vanguard Institutional
Index Fund, Vanguard Tax-Managed Fund, the Aggressive Growth Portfolio of
Vanguard Horizon Fund, the REIT Index Portfolio of Vanguard Specialized
Portfolios, several Portfolios of Vanguard Variable Insurance Fund, the Total
International Portfolio of Vanguard STAR Fund, a portion of Vanguard/Windsor II
and a portion of Vanguard/Morgan Growth Fund, as well as several indexed
separate accounts. These services are provided on an at-cost basis from a money
management staff employed directly by Vanguard. The compensation and other
expenses of this staff are paid by the Funds utilizing these services.

REMUNERATION OF TRUSTEES AND OFFICERS. The Fund pays each Trustee, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. 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 fiscal year ended December 31, 1996, the Fund paid approximately
$4,000 in fees and expenses to its "non-interested" Trustees. The Fund's
proportionate share of remuneration paid by Vanguard (and reimbursed by the
Fund) during the fiscal year to all Officers of the Fund, as a group, was
approximately $33,423.

Trustees who are not Officers are paid an annual fee upon retirement equal
to $1,000 for each year of service on the Board up to a maximum of $15,000.
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 the 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 eligible officers
are permitted to make pre-tax contributions in an amount equal to 4% of total
compensation which are matched by Vanguard 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 eligible Officers of the Fund, as a
group, during the 1996 fiscal year was approximately $750.

The following table provides detailed information with respect to the
amounts paid or accrued for the Trustees for the fiscal year ended December 31,
1996.

VANGUARD/TRUSTEES' EQUITY FUND
COMPENSATION TABLE

<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF TRUSTEES FROM TRUST PART OF TRUST EXPENSES UPON RETIREMENT PAID TO TRUSTEES(2)
- --------------------------- ------------ ---------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) -- -- -- --
John J. Brennan(1) -- -- -- --
Barbara Barnes Hauptfuhrer $391 $ 61 $15,000 $65,000
Robert E. Cawthorn $391 $ 50 $13,000 $65,000
Bruce K. MacLaury $426 $ 59 $12,000 $60,000
Burton G. Malkiel $391 $ 41 $15,000 $65,000
Alfred M. Rankin, Jr. $391 $ 32 $15,000 $65,000
John C. Sawhill $391 $ 38 $15,000 $65,000
James O. Welch, Jr. $391 $ 47 $15,000 $65,000
J. Lawrence Wilson $391 $ 34 $15,000 $65,000
</TABLE>

(1) As "Interested Trustees," Messrs. Bogle and Brennan receive no compensation
for their service as Trustees.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Director or Trustee of 34 Vanguard Funds
(33 in the case of Mr. Malkiel; 27 in the case of Mr. MacLaury).

B-10
<PAGE> 101

INVESTMENT ADVISORY SERVICES

VANGUARD INTERNATIONAL VALUE PORTFOLIO INVESTMENT ADVISER

The investment adviser to Vanguard International Value Portfolio is a
wholly-owned subsidiary of UBS Asset Management London Ltd. doing business under
the name "UBS International Investment London Ltd." (UBSII), Triton Court, 14
Finsbury Square, London, England EC2A 1PD. UBSII provides investment management
services to numerous institutional accounts, such as corporate pension plans,
endowment funds and individual investors. Under an Investment Advisory Agreement
with the Fund, dated April 1, 1996, UBSII, subject to the control and
supervision of the Fund's Board of Trustees and in conformance with the stated
investment objective and policies of Vanguard International Value Portfolio,
manages the investment and reinvestment of the assets of Vanguard International
Value Portfolio. In this regard, it is the responsibility of UBSII to make
investment decisions for Vanguard International Value Portfolio and to place the
Portfolio's purchase and sale orders for investment securities.

As compensation for the services rendered by UBSII under the Agreement, and
the assumption by UBSII of the expenses related thereto (other than the cost of
securities purchased for Vanguard International Value Portfolio and the taxes
and brokerage commissions, if any, payable in connection with the purchase
and/or sale of such securities), the Portfolio pays UBSII an advisory fee
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end assets of Vanguard International
Value Portfolio, for the quarter.

<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------------------- ------
<S> <C>
First $50 million............................................... 0.475%
Next $450 million............................................... 0.150%
Next $500 million............................................... 0.120%
Over $1 billion................................................. 0.110%
</TABLE>

Effective with the quarter ending June 30, 1997, the basic fee paid to
UBSII ("Basic Fee"), shall be increased or decreased by applying an
incentive/penalty adjustment to the Basic Fee reflecting the investment
performance of the Portfolio relative to the return of the Morgan Stanley
Capital International Europe, Australasia and Far East ("MSCI-EAFE") Index. The
following table sets forth the fee payable by the Fund to UBSII, Inc. based upon
the incentive/penalty adjustment:

<TABLE>
<CAPTION>
THREE-YEAR CUMULATIVE PERFORMANCE PERFORMANCE FEE
DIFFERENTIAL VERSUS MSCI-EAFE INDEX ADJUSTMENT*
----------------------------------------------------- -------------------
<S> <C>
+13.5% points or more above.......................... +0.50 X Basic Fee
Between +4.5% points and
+13.5% points above................................ +0.25 X Basic Fee
Between +4.5% points and
-0% points......................................... 0 X Basic Fee
Between 0% points and
-9% points below................................... -0.25 X Basic Fee
-9% points or more below............................. -0.50 X Basic Fee
</TABLE>

* For purposes of this calculation, the Basic Fee is calculated by applying the
quarterly rate based on the Annual Basic Fee Rate using average assets over
the same time period which the performance is measured.

Through the quarter ending June 30, 1997, the incentive/penalty fee for
UBSII will be calculated according to the following transition rules:

(a) April 1, 1997 through June 30, 1999. Beginning with the quarter
ending June 30, 1997 and through the quarter ending June 30, 1999, the
incentive/penalty fee will be computed based upon a comparison of the
investment performance of the Portfolio and that of the MSCI-EAFE over the
number of months that have elapsed between July 1, 1996 and the end of the
quarter for which the fee is computed. Performance differentials vs. the
MSCI-EAFE listed above shall increase proportionately from quarter to

B-11
<PAGE> 102

quarter from 4.5% and -3%, respectively, for the twelve months ending June
30, 1997, to 13.5% and -9%, respectively, for the thirty-six months ending
June 30, 1999.

(b) On and after June 30, 1999. For the quarter ending June 30, 1999
and thereafter, the period used to calculate the incentive/penalty fee
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 13.5%
and -9%.

The investment performance of the Portfolio, for any period, expressed as a
percentage of the "Portfolio Unit Value" at the beginning of such period, will
be the sum of: (i) the change in the Portfolio Unit Value during such period;
(ii) the unit value of the Fund's cash distributions from the Portfolio's net
investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and (iii)
the unit value of taxes paid including withholding taxes and capital gains taxes
paid or accrued during such period by the Fund for undistributed realized
long-term capital gains realized from the Portfolio.

The "Portfolio Unit Value" will be determined by dividing the total net
assets of the Portfolio by a given number of units. On the initial date of the
agreement, the number of units in the Portfolio will equal the total shares
outstanding of the Fund. After such initial date, as assets are added to or
withdrawn from the Portfolio, the number of units of the Portfolio will be
adjusted based on the unit value of the Portfolio on the day such changes are
executed.

For the purposes of determining the incentive/penalty fee adjustment, the
Portfolio's net assets will be averaged over the same period as the investment
performance of those assets and the investment record of the MSCI-EAFE Index are
computed.

During the period beginning April 1, 1996 through December 31, 1996,
Vanguard International Value Portfolio paid UBSII advisory fees totaling
$1,086,000 (.11 of 1% of average net assets).

PRIOR INVESTMENT ADVISER FOR VANGUARD INTERNATIONAL VALUE PORTFOLIO

From its inception until April 1, 1996, Vanguard International Value
Portfolio employed Batterymarch Financial Management as its investment adviser.
During the years ended December 31, 1994 and 1995, and during the period
beginning January 1, 1996 through April 1, 1996, Vanguard International Value
Portfolio paid Batterymarch Financial Management advisory fees totaling
$1,622,000 (.15 of 1% of average net assets), $1,516,000 (.15 of 1% of average
net assets), and $378,000 (.04 of 1% of average net assets) before a decrease of
$94,000 (.01%) based on performance, respectively.

U.S. PORTFOLIO INVESTMENT ADVISER

On April 1, 1992, the U.S. Portfolio entered into an Investment Advisory
Agreement with Geewax, Terker & Co. ("Geewax Terker"), 99 Starr Street,
Phoenixville, Pa. 19460. Under the terms of the Agreement, Geewax Terker,
subject to the control and supervision of the Fund's Board of Trustees and in
conformance with the Fund's investment objective and policies, manages the
investment and reinvestment of the assets of the Fund's U.S. Portfolio. In this
regard, it is the responsibility of Geewax Terker to make investment decisions
for the U.S. Portfolio and to place the Portfolio's purchase and sale orders for
investment securities. For the fiscal years ended December 31, 1994, 1995 and
1996, the U.S. Portfolio paid Geewax advisory fees totaling $563,000 (.45 of 1%
of average net assets), $383,000 (.31 of 1% of average net assets) and $511,000
(.35 of 1% of average net assets) before a decrease of $192,000 (.13%) based on
performance, respectively.

As compensation for the services rendered by Geewax Terker under the
Agreement, and the assumption by Geewax Terker of the expenses related thereto
(other than the cost of securities purchased for the U.S. Portfolio and the
taxes and brokerage commissions, if any, payable in connection with such
transactions), the U.S. Portfolio pays Geewax Terker at the end of each of the
Portfolio's fiscal quarter, a Basic Fee calculated by applying a quarterly rate,
based on an annual percentage rate of 0.40%, to the Portfolio's average
month-end assets for the quarter.

B-12
<PAGE> 103

The Basic Fee, as provided above, shall be increased or decreased by
applying an incentive/penalty fee adjustment based on the investment performance
of the Portfolio relative to the investment performance of the Standard & Poor's
500 Composite Stock Price Index ("S&P 500") over the preceding 36-month period
as follows:

<TABLE>
<CAPTION>
CUMULATIVE THREE-YEAR PERFORMANCE PERFORMANCE FEE
DIFFERENTIAL VS. THE S&P 500 ADJUSTMENT*
------------------------------------------------------- -----------------
<S> <C>
+4.5% points or more................................... 0.50 X Basic Fee
+2.25% points but less than +4.5% points............... 0 X Basic Fee
Less than +2.25% points................................ -0.50 X Basic Fee
</TABLE>

* For purposes of this calculation, the Basic Fee is calculated by applying the
quarterly rate against average assets over the 36-month period.

MORE INFORMATION ON ADVISERS' INCENTIVE/PENALTY FEES

In April 1972, the Securities and Exchange Commission ("SEC") issued
Release No. 7113 under the Investment Company Act of 1940 to call attention of
directors and investment advisers to certain factors which must be considered in
connection with investment company incentive fee arrangements. One of these
factors is to "avoid basing significant fee adjustments upon random or
insignificant differences" between the investment performance of a fund and that
of the particular index with which it is being compared. The Release provides
that "preliminary studies (of the SEC staff) indicate that as a 'rule of thumb'
the performance difference should be at least +10 percentage points" annually
before the maximum performance adjustment may be made. However, the Release also
states that "because of the preliminary nature of these studies, the Commission
is not recommending, at this time, that any particular performance difference
exist before the maximum fee adjustment may be made". The Release concludes that
the directors of a fund "should satisfy themselves that the maximum performance
adjustment will be made only for performance differences that can reasonably be
considered significant." The Board of Trustees of the Fund has fully considered
the SEC Release and believes that the performance adjustments as included in the
advisory agreements are entirely appropriate although not within the +10
percentage points per year range suggested in the Release. Under the Fund's
investment advisory agreement with Geewax Terker, the maximum performance
adjustment is made at a difference of +4.5 percentage points from the
performance of the index over a thirty-six month period, which would effectively
be the equivalent of approximately +1.478 percentage points difference per year.
The Fund's investment advisory agreements provide for no performance adjustment
at a difference of less than +2.25 percentage points from the performance of the
index over a thirty-six month period, which would be the equivalent of
approximately +0.744 percentage points per year. Under the Fund's investment
advisory agreement with UBSII the maximum performance adjustment is made at a
difference of +/-13.5 percentage points from the performance of the index over a
thirty-six month period, which would effectively be the equivalent of
approximately +/-4.5 percentage points difference per year.

DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS

Both agreements continue until March 31, 1998. The agreements are renewable
thereafter, for successive one-year periods, if specifically approved at least
annually by vote of the Board of Trustees of the Fund at a meeting called for
the purpose of considering such approval. The Board's approval must include the
affirmative votes of a majority of the Trustees who are neither parties to the
agreement or interested persons of such parties. In addition, the question of
continuing an agreement may be presented to shareholders. In such an event, the
agreement would be continued only if approved by vote of a majority of the
outstanding shares of the respective Portfolio. If the holders of the Portfolio
fail to approve the agreement, the adviser of the Portfolio may continue to
serve as investment adviser until new arrangements have been made. The
agreements may be terminated at any time, without penalty, by vote of the Board
of Trustees of the Fund or by vote of a majority of the outstanding shares of
the Portfolio on 60 days' written notice to the investment advisers, or by the
investment advisers on 90 days' written notice to the Fund. An agreement will
automatically terminate in the event of its assignment.

B-13
<PAGE> 104

The Fund's Board of Trustees may, without the approval of shareholders,
provide for:

(i) the employment of a new investment adviser pursuant to the terms
of a new advisory agreement, either as a replacement for an existing
adviser or as an additional adviser;

(ii) a change in the terms of an advisory agreement; and

(iii) the continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned because of a
change in control of the adviser.

Any such change will only be made upon not less than 30 days' prior written
notice to shareholders of the affected Portfolio, which shall include the
information concerning the adviser that would have normally been included in a
proxy statement.

CONTROL OF THE ADVISERS

John J. Geewax and Bruce E. Terker, Partners, are the "controlling persons"
(as that term is defined in the rules and regulations of the Securities and
Exchange Commission) of Geewax Terker.

UBS Asset Management London Ltd., owner of UBS International Investment
London Ltd. is the "controlling person" (as that term is defined in the rules
and regulations of the Securities and Exchange Commission) of UBSII. Union Bank
of Switzerland is the beneficial owner of 100% of the outstanding equity
securities of UBS UK Holdings, Ltd., which in turn is the 100% beneficial owner
of UBS Asset Management London, the 100% shareholder of UBSII.

PORTFOLIO TRANSACTIONS

The investment advisory agreements authorize the investment advisers to
select the brokers or dealers that will execute the purchases and sales of
investment securities for the Portfolios, and direct the investment adviser to
use their best efforts to obtain the best available price and most favorable
execution with respect to all transactions for the Portfolios.

Since the Fund 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 Fund may place portfolio orders with qualified
broker-dealers who recommend the Fund to clients, and may, when a number of
brokers and dealers can provide comparable best price and execution on a
particular transaction, consider the sale of Fund shares by a broker or dealer
in selecting among qualified broker-dealers.

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

During the years ended December 31, 1994, 1995 and 1996 the Fund paid
$257,044, $2,173,469 and $13,290,992 respectively, in brokerage commissions.

PERFORMANCE MEASURES

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

B-14
<PAGE> 105

Vanguard/Trustees' Equity Fund may use one or more, of the following
unmanaged indexes for comparative performance purposes:

STANDARD & 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 more than 6,000 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.

RUSSELL 3000 STOCK INDEX -- a diversified portfolio of approximately 3,000
common stocks 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 stocks contained in
the Russell 3000 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.

MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australasia and the Far East.

GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.

SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.

SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.

LEHMAN LONG-TERM TREASURY BOND INDEX -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.

MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.

LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.

LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rated,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.

BOND BUYER MUNICIPAL BOND INDEX -- is a yield index on current coupon high-grade
general obligation municipal bonds.

STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield of 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.

B-15
<PAGE> 106

COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and
35% of a blended equity composite (75% Standard & Poor's/BARRA Value Index,
12.5% Standard and Poor's Utilities Index, and 12.5% Standard & Poor's Telephone
Index).

COMPOSITE INDEX -- 65% Standard and Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond 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 $1.6 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 $700 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 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.)

LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.

LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.

LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.

GENERAL INFORMATION

DESCRIPTION OF SHARES AND VOTING RIGHTS

The Fund was established as a "business trust" under Pennsylvania law under
a Declaration of Trust dated May 16, 1984. The Declaration of Trust permits the
Trustees to issue an unlimited number of shares of beneficial interest, without
par value, from an unlimited number of separate classes ("Portfolios") of
shares. Currently the Fund is offering shares of two Portfolios.

The shares of each Portfolio are fully paid and non-assessable, except as
set forth below under "Shareholder and Trustee Liability," and have no
preference as to conversion, exchange, dividends, retirement or other features.
The shares have no preemptive rights. The shares have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting for
the election of Trustees can elect 100% of the Trustees if they choose to do so.
A shareholder is entitled to one vote for each full share held (and a fractional

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<PAGE> 107

vote for each fractional share held), then standing in his name on the books of
the Fund. On any matter submitted to a vote of shareholders, all shares of the
Fund then issued and outstanding and entitled to vote, irrespective of the
class, shall be voted in the aggregate and not by class: except (i) when
required by the Investment Company Act of 1940, shares shall be voted by
individual class; and (ii) when the matter does not affect any interest of a
particular class, then only shareholders of the affected class or classes shall
be entitled to vote thereon.

The Fund will continue without limitation of time, provided however that:

1) Subject to the majority vote of the holders of shares of any
Portfolio of the Fund outstanding, the Trustees may sell or convert the
assets of such Portfolio to another investment company in exchange for
shares of such investment company, and distribute such shares, ratably
among the shareholders of such Portfolio; and

2) Subject to the majority of shares of any Portfolio of the Fund
outstanding, the Trustees may sell and convert into money the assets of
such Portfolio and distribute such assets ratably among the shareholders of
such Portfolio.

Upon completion of the distribution of the remaining proceeds or the
remaining assets of any Portfolio as provided in paragraphs 1) and 2) above, the
Fund shall terminate as to that Portfolio and the Trustees shall be discharged
of any and all further liabilities and duties hereunder and the right, title and
interest of all parties shall be cancelled and discharged.

SHAREHOLDER AND TRUSTEE LIABILITY

Under Pennsylvania law, shareholders of a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Trust. Therefore, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Fund or the Trustees. The Declaration of Trust
provides for indemnification out of the Fund property of any shareholder held
personally liable for the obligations of the Fund. The Declaration of Trust also
provides that the Fund shall, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of the Fund and satisfy any
judgment thereon. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the Fund
itself would be unable to meet its obligations. The Trustees and Officers of the
Fund believe that, in view of the above, the risk of personal liability to
shareholders is remote.

The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.

FINANCIAL STATEMENTS

The Fund's financial statements for the year ended December 31, 1996,
including the financial highlights for each of the five years in the year ended
December 31, 1996, appearing in the Fund's 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.

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