VANGUARD TRUSTEES EQUITY FUND, 497, 1998-05-05

VANGUARD TRUSTEES EQUITY FUND
497, 1998-05-05

Previous: KESTREL ENERGY INC, S-8, 1998-05-05

Next: FLEETWOOD ENTERPRISES INC/DE/, S-3, 1998-05-05

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

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. 22
and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940

Amendment No. 21

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, 1998, pursuant to paragraph (b) 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, 1997 on March 30, 1998.

================================================================================
<PAGE>
VANGUARD TRUSTEES' EQUITY FUND

CROSS REFERENCE SHEET

Form N-1A
Item Number Location in Prospectus
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 5A. Management's Discussion of Fund Performance.............Herein incorporated by reference to
Registrant's Annual Reports to
Shareholders dated December 31, 1997
filed with the Securities and Exchange
Commission's EDGAR system on February
20, 1998 (U.S. Portfolio) & March 2,
1998 (International Value
Portfolio)
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

Form N-1A Location in Statement
Item Number of Additional Information
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 Registrant............................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. Calculation of Performance Data.........................Not Applicable
Item 23. Financial Statements Financial Statements
</TABLE>

<PAGE>

VANGUARD/TRUSTEES'
EQUITY FUND-
U.S. PORTFOLIO
Prospectus
April 30, 1998

A Portfolio of Vanguard/
Trustees' Equity Fund

This prospectus contains financial data for the Portfolio through the fiscal
year ended December 31, 1997.

[VANGUARD GROUP LOGO]

VANGUARD/TRUSTEES' EQUITY FUND-
U.S. PORTFOLIO A Growth and Income Stock Mutual Fund

CONTENTS
Portfolio Profile 1
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 10
Investment Adviser 11
General Information 12
Investing with Vanguard 13
Services and Account Features 13
Types of Accounts 14
Distribution Options 15
Buying Shares 16
Redeeming Shares 17
Transferring Registration 20
Portfolio and Account Updates 20
Prospectus Postscript 22
Investment Primer 23
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 the stocks 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, 1998) containing more
information about the Portfolio is, by reference, part of this prospectus and
may be obtained without charge by writing to Vanguard, calling our Investor
Information Department at 1-800-662-7447, or visiting the Securities and
Exchange Commission's website (www.sec.gov).

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 youR NEEDS. We suggest that you keep it
for future reference.

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

<PAGE>

PORTFOLIO PROFILE Vanguard/Trustees' Equity Fund-U.S. Portfolio

WHO SHOULD INVEST (page 4)

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

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

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

WHO SHOULD NOT INVEST

o Investors seeking significant current income.

o Investors unwilling to accept significant fluctuations in share price.

RISKS OF THE PORTFOLIO (pages 4-8)

The 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 10)

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

INVESTMENT ADVISER (page 11)

Geewax, Terker & Company, Phoenixville, Pa.

INCEPTION DATE: January 31, 1980

NET ASSETS AS OF 12/31/1997: $174 million

PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 12/31/1997: 0.53%

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

CUSIP NUMBER: 921939104

QUOTRON SYMBOL: VTRSX.Q

ACCOUNT FEATURES (page 13)

o Telephone Redemption

o Vanguard Direct Deposit Service(TM)

o Vanguard Automatic Exchange Service(SM)

o Vanguard Fund Express(R)

o Vanguard Dividend Express(SM)

AVERAGE ANNUAL TOTAL RETURNS--YEARS ENDED DECEMBER 31, 1997
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
--------------------------
U.S. Portfolio 29.5% 18.7% 15.6%
S&P 500 Index 33.4 20.3 18.1
</TABLE>

QUARTERLY RETURNS (%) 1988-1997 (intended to show volatility of returns)

[CHART]

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 DIVIDEND 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.

<PAGE>

PORTFOLIO EXPENSES

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

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

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

The next table illustrates the operating expenses that you would incur as a
shareholder of the Portfolio. These expenses are deducted from the Portfolio's
income before it is paid to you. Expenses include investment advisory fees as
well as the costs of maintaining accounts, administering the Portfolio,
providing shareholder services, and other activities. The expenses shown in the
table are based upon those incurred in the fiscal year ended December 31, 1997.

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.
<TABLE>
<S> <C> <C>

ANNUAL PORTFOLIO OPERATING EXPENSES
Management and Administrative Expenses: 0.25%
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): 0.53%
====

</TABLE>

The following example is intended to help you compare the cost of investing
in the Portfolio with the cost of investing in other mutual funds, by
illustrating the hypothetical expenses that you would incur on a $1,000
investment over various periods. The example assumes that (1) the Portfolio
provides a return of 5% a year and (2) you redeem your investment at the end of
each period.
<TABLE>
<CAPTION>

-----------------------------------
<S> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------
$5 $17 $30 $66
-----------------------------------
</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.

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 1997 was 0.53%, or
$5.30 per $1,000 of average net assets. The average growth
and income equity mutual fund had expenses in 1997 of 1.20%,
or $12 per $1,000 of average net assets, according to Lipper
Analytical Services, which reports on the mutual fund
industry.

<PAGE>

FINANCIAL HIGHLIGHTS

The following financial highlights table shows the results for a share
outstanding of the Portfolio for each of the fiscal years in the decade ended
December 31, 1997. The financial statements that include these 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 LLP, 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.

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

- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $37.08 $37.01 $29.09 $30.65 $28.43 $28.20 $22.90 $26.15 $26.35 $22.77
----------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .44 .65 .62 .34 .43 .68 .71 1.02 .87 1.02
Net Realized and Unrealized
Gain (Loss) on Investments 9.64 6.87 8.96 (1.53) 4.38 1.08 5.30 (3.19) 3.62 4.53
----------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 10.08 7.52 9.58 (1.19) 4.81 1.76 6.01 (2.17) 4.49 5.55
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.43) (.67) (.61) (.34) (.43) (.67) (.71) (1.08) (.88) (.97)
Distributions from Realized
Capital Gains (9.91) (6.78) (1.05) (.03) (2.16) (.86) -- -- (3.81) (1.00)
----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (10.34) (7.45) (1.66) (.37) (2.59) (1.53) (.71) (1.08) (4.69) (1.97)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $36.82 $37.08 $37.01 $29.09 $30.65 $28.43 $28.20 $22.90 $26.15 $26.35
====================================================================================================================================
TOTAL RETURN 29.48% 21.30% 33.21% -3.91% 17.24% 6.45% 26.57% -8.33% 17.23% 24.64%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $174 $158 $137 $113 $119 $68 $115 $100 $121 $115
Ratio of Total Expenses to
Average Net Assets 0.53% 0.49% 0.56% 0.73% 0.90% 0.65% 0.44% 0.52% 0.51% 0.58%
Ratio of Net Investment Income to
Average Net Assets 1.09% 1.68% 1.79% 1.14% 1.43% 2.33% 2.67% 4.18% 2.90% 3.86%
Portfolio Turnover Rate 139% 114% 77% 151% 139% 209% 84% 81% 72% 90%
Average Commission Rate Paid $.0480 $.0534 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 1997 with a net asset value
(price) of $37.08 per share. During the year, the Portfolio
earned $0.44 per share from investment income (interest and
dividends) and $9.64 per share from investments that had
appreciated in value or that were sold for higher prices
than the Portfolio paid for them. In all, $10.34 per share
was returned to shareholders in the form of distributions
($0.43 in dividends, $9.91 in capital gains). This resulted
in a share price of $36.82 at the end of the year, a
decrease of $0.26 per share (from $37.08 at the beginning of
the year to $36.82 at the end of the year). Assuming that
the shareholder had reinvested the distribution in the
purchase of more shares, total return from the Portfolio was
29.48% for the year.

As of December 31, 1997, the Portfolio had $174 million
in net assets; an expense ratio of 0.53% ($5.30 per $1,000
of net assets); and net investment income amounting to 1.09%
of its average net assets. It sold and replaced securities
valued at 139% of its total net assets.

<PAGE>

A WORD ABOUT RISK

This prospectus describes the risks you would 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, would 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.

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 inves-tors with a
means of speculating on short-term fluctuations in the stock
market.

WHO SHOULD INVEST

The Portfolio may be a suitable investment for you if:

o 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.

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

o You are looking for some dividend income.

o 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:

o 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.

<PAGE>

o 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).

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

INVESTMENT STRATEGY

This section explains how the investment adviser pursues the Portfolio's
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 strategy is not fundamental and can be changed by the
Fund's Board of Trustees without shareholder approval. However, before making
any important change in its strategy, the Portfolio will give shareholders 30
days' notice, in writing.

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 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.

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 (1926-1997)
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------
Best 53.9% 23.9% 20.1% 16.9%
Worst -43.3 -12.5 -0.9 3.1
Average 13.0 10.5 10.9 10.9
- --------------------------------------------------------------
</TABLE>

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1997. For example, while the average return on stocks for all of the
5-year periods was 10.5%, 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 the Portfolio in particular.

PLAIN TALK ABOUT

GROWTH FUNDS AND
VALUE FUNDS

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

<PAGE>

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.

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 $7.5 billion. Mid-cap funds hold stocks of
companies with a median market value between $1 billion and
$7.5 billion. Small-cap funds hold stocks of companies with
a median market value of less than $1 billion.

SECURITY SELECTION

Geewax, Terker & Company ("Geewax, Terker"), adviser to the Portfolio, uses a
multistep 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 owned by the Portfolio must pass this screening
process. The top ten holdings (which amounted to 21.8% of the Portfolio's total
net assets) as of December 31, 1997, follow.

1. Intel Corp.
2. General Electric Co.
3. Merck & Co., Inc.
4. Procter & Gamble Co.
5. Wal-Mart Stores, Inc.
6. Bristol-Myers Squibb Co.
7. Standard & Poor's Depositary Receipts
8. Morgan Stanley, Dean Witter, Discover and Co.
9. Cisco Systems, Inc.
10. Exxon Corp.

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.

<PAGE>

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
116%--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.)

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 all domestic stock funds is approximately
80%.

INVESTMENT POLICIES

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

The Portfolio may invest up to 20% of its assets in securities of companies
based outside the United States. These securities may be traded in either U.S.
or foreign markets.

Because of its investments in foreign securities, the Portfolio is subject to
foreign market risk. Investments in foreign stock markets can be as volatile, if
not more volatile, than investments in U.S. stock markets. Over the years, the
prices of foreign stocks and the prices of U.S. stocks have often moved in
opposite directions. However, a portfolio that invests in both U.S. and foreign
stocks may benefit from diversification and have less volatility than a
portfolio made up strictly of foreign stocks.

In addition, the Portfolio is subject to country and currency risk. Country
risk is the possibility that political events (such as a war), financial
problems (such as government default), or natural disasters (such as an
earthquake) will weaken a country's economy and cause investments in that
country to lose money. Currency risk is the possibility that a "stronger" U.S.
dollar will reduce returns for Americans investing overseas. Generally, when the
dollar rises in value against a foreign currency, your investment in that
country loses value because its currency is worth fewer U.S. dollars. On the
other hand, a "weaker" U.S. dollar generally leads to higher returns for
Americans holding foreign investments.

The Portfolio may also invest in derivatives.

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 their
counterparts in the United States. These factors, among
others, could negatively impact the returns Americans
receive from a foreign investment. For more information, see
the Portfolio's Statement of Additional Information.

<PAGE>

[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 toward the deposits
required on futures contracts, and the value of all futures contracts in which
the Portfolio acquires an interest cannot exceed 20% of the Portfolio's total
assets.The reasons for which the Portfolio will invest in futures and options
are:

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

o To reduce the Portfolio's transaction costs or add value when these
instruments are favorably priced.

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

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
types of derivatives. If used for speculation or as
leveraged investments, derivatives can carry considerable
risks.

Investment Limitations

The Portfolio has adopted limitations on some of its investment policies. Some
of these limitations are that the Portfolio will not:

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

o Borrow money, except for temporary or emergency purposes in an amount not
exceeding 10% of its net assets. Whenever the Portfolio's outstanding
borrowing is more than 5% of its assets, it will stop making investments.

With respect to 75% of its assets, this Portfolio will not:

o Invest more than 5% of its assets in the securities of any one company.

o Buy more than 10% of the outstanding voting securities of any company.

A complete list of the Portfolio's investment limitations can be found in the
Statement of Additional Information. These limitations are fundamental and may
be changed only by approval of a majority of the Portfolio's shareholders.

<PAGE>

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 YEARS ENDED DECEMBER 31, 1997
<S> <C> <C> <C>

1 YEAR 5 YEARS 10 YEARS
U.S. Portfolio 29.5% 18.7% 15.6%
S&P 500 Index 33.4% 20.3% 18.1%

</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.

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.

SHARE PRICE

The Portfolio's share price, called its net asset value, or NAV, is calculated
each business day after the close of trading on the New York Stock Exchange,
generally 4 p.m. Eastern time. 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 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.

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
income dividends or capital gains distributions. 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.

<PAGE>

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 other times during the year. You can choose to receive your
distributions of income and/or capital gains in cash, or you can have them
automatically invested in more shares of the Portfolio. In either case, these
distributions are taxable to you. It is important to note that distributions of
dividends and capital gains that are declared in December--if paid to you by the
end of January--are taxed as if they had been paid to you in December. Each year
Vanguard will send you a statement showing the tax status of all your
distributions.

o 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. Long-term
capital gains may be taxed at different rates depending on how long the
Portfolio held the securities. 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 by-products of the ordinary investment
activities of the Portfolio. Consequently, distributions may vary
considerably from year to year.

o 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.

o 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 tax adviser about the tax consequences of an
investment in the Portfolio.

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.

THE PORTFOLIO AND VANGUARD

The U.S. Portfolio of Vanguard/Trustees' Equity Fund is a member of The Vanguard
Group, a family of more than 30 investment companies with more than 95 distinct
investment portfolios and total net assets of more than $360 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.

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.

<PAGE>

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 ("Geewax, Terker"), 99 Starr
Street, Phoenixville, PA 19460, as its investment adviser. Geewax, Terker
manages the Portfolio subject to the control of the Trustees and officers 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, 1997, the advisory fee represented an
effective annual basic rate of 0.40% of the Portfolio's average net assets
before a decrease of 0.18% based on performance.

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.

The Fund's 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.

PLAIN TALK ABOUT

THE PORTFOLIO'S ADVISER

Geewax, Terker & Company, an investment advisory firm
founded in 1982, currently manages about $3 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; has worked in investment management since 1980;
B.S., M.B.A., and J.D., University of Pennsylvania.

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

<PAGE>

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 and trust shareholders. For example, shareholders
will not be responsible for any liabilities of the Portfolio. 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 to vote on the removal of a Trustee if the holders of at least 10% of
the Fund's shares request a meeting in writing.

"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc.

<PAGE>

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

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

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

VANGUARD FUND EXPRESS(R) 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(SM) Electronic method for transferring dividend
[BOOK] dividend and/or capital gains distributions
directly from your Vanguard fund account to
your bank, savings and loan, or credit union
account.

VANGUARD BROKERAGE SERVICES A cost-effective way to trade stocks, bonds,
(VBS) and options on major exchanges, Nasdaq, and
[BOOK] 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.

<PAGE>

TYPES OF ACCOUNTS

INDIVIDUAL OR OTHER ENTITY Vanguard's account registration form can be used to
establish a variety of nonretirement 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
[BOOK] (Uniform Gifts/Transfers to Minors Act). Age
of majority and other requirements are set by
state law. $1,000 minimum initial investment.

FOR A MINOR CHILD To open an account as an Education IRA.
(Vanguard Fiduciary Trust Eligibility and other requirements are
Company is the custodian.) established by federal tax law and the
[BOOK] law and the Vanguard Education IRA. (Note:
You should establish this type of account
with a Vanguard adoption agreement--not an
account registration form.) Please call
Investor Information to request the
appropriate brochure and forms. $500 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 To open an account as a retirement trust or
RETIREMENT INVESTMENTS plan based on an existing corporate or
(Vanguard is not the custodian institutional plan. These accounts are
or trustee.) established by the custodian or trustee of
1-800-662-2003 the existing plan. $1,000 minimum initial
Individual Retirement Plans investment.

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 A TRADITIONAL INDIVIDUAL To open a retirement account in the name of
RETIREMENT ACCOUNT an individual. Traditional IRAs can be
(TRADITIONAL IRA) established with a contribution, a direct
(Vanguard Fiduciary Trust rollover from an employer's plan such as a
Company is the custodian.) 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 ROTH INDIVIDUAL To open an after-tax retirement savings
RETIREMENT ACCOUNT account in the name of an individual. Roth
(ROTH IRA) IRAs can be established with an after-tax
(Vanguard Fiduciary Trust contribution, an asset transfer or rollover
Company is the custodian.) from another financial institution such as a
bank or mutual fund company, or a conversion
of an existing IRA. Eligibility and other
requirements are established by federal tax
law. $1,000 minimum initial investment.

<PAGE>

TYPES OF ACCOUNTS (continued)

FOR A SIMPLIFIED EMPLOYEE To open a retirement account in the name of
PENSION PLAN ACCOUNT (SEP-IRA) an employee. SEPs allow employers to make
(Vanguard Fiduciary Trust deductible contributions directly to IRAs
Company is the custodian.) established by their employees. SEPs can be
1-800-662-2003 established by people who are self-employed,
Individual Retirement Plans small-business owners, partnerships, or
corporations.

FOR A SAVINGS INCENTIVE MATCH To open a retirement account in the name of
PLAN FOR EMPLOYEES ACCOUNT an employee. Created as part of the Small
(SIMPLE IRA) Business Job Protection Act of 1996, SIMPLEs
(Vanguard Fiduciary Trust replace SAR-SEPs. SIMPLEs are exclusively for
Company is the custodian.) employers that had 100 or fewer employees in
1-800-662-2003 the most recent calendar year and that do not
Individual Retirement Plans maintain another employer-sponsored
retirement plan. SIMPLEs 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
nonmatching contributions from the employer.

FOR A QUALIFIED RETIREMENT To open a retirement account that allows
PROGRAM ACCOUNT small-business owners or people who are self-
(Vanguard Fiduciary Trust employed to make tax-deductible retirement
Company can be the trustee.) contributions for themselves and their
1-800-662-2003 employees into Profit-Sharing and Money
Individual Retirement Plans 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 pretax
1-800-662-2003 pretax retirement contributions.
Individual Retirement Plans

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.

CAPITAL GAINS IN CASH Capital gains distributions are paid by check
and mailed to your account's address of
record, and dividends are reinvested in
additional shares of the Portfolio.

DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains
IN CASH distributions 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, see Vanguard Dividend Express under
"Services and Account Features." To transfer cash dividends and/or capital gains
to another Vanguard fund, call Client Services.

<PAGE>

DISTRIBUTION OPTIONS (continued)

If you have elected to receive dividend and/or capital gains distributions in
cash, but the Postal Service is unable to make delivery to your address of
record, your distribution option will be changed to reinvestment. No interest
will accrue on amounts represented by uncashed distribution checks.

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 the
close of trading on the New York Stock Exchange (the "Exchange"), generally 4
p.m. Eastern time. The Portfolio is offered on a no-load basis, meaning that you
do not pay sales commissions or 12b-1 marketing fees.

OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT

MINIMUM INVESTMENT $3,000 (regular account); $100 by mail or exchange;
$1,000 (Traditional IRAs, $1,000 by wire.
Roth IRAs, and custodial
accounts for minors);
$500 (Education IRAs).

BY MAIL Complete and sign the Mail your check with an
[ENVELOPE] application form. Invest-By-Mail form
FIRST-CLASS mail to: detached from your
The Vanguard Group confirmation statement to
P.O. Box 2600 the address listed on the
Valley Forge, form.
PA 19482-2600
Make your check payable to: Make your check payable
EXPRESS or REGISTERED The Vanguard Group-25 to: The Vanguard Group-25
mail to:
The Vanguard Group All purchases must be made All purchases must be made
455 Devon Park Drive in U.S. dollars, and in U.S. dollars, and
Wayne, PA 19087-1815 checks must be drawn on checks must be drawn on
U.S. banks. U.S. banks.

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

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

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

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

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

<PAGE>

BUYING SHARES (continued)

OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT

BY WIRE Call Client Services to Call Client Services to
[WIRE] arrange your wire arrange your wire
Wire to: transaction. transaction.
CoreStates Bank, N.A.
ABA 031000011 Wire transactions are not Wire transactions are not
CoreStates No. 0101 9897 available for retirement available for retirement
[Temporary Account accounts, except for asset accounts, except for asset
Number] Vanguard/ transfers and direct transfers and direct
Trustees' Equity rollovers. rollovers.
Fund- U.S. Portfolio
[Account Registration]
Attention: Vanguard

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

You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, 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.

IMPORTANT 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 nonretirement 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 nonretirement 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:

[CHECK] Portfolio name.

[CHECK] 10-digit account number.

[CHECK] Name and address exactly as registered on that account.

[CHECK] 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.

<PAGE>

REDEEMING SHARES (continued)

HOW TO SELL SHARES

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

Good order means that the request includes:

[CHECK] Portfolio name and account number.

[CHECK] Amount of the transaction (in dollars or shares).

[CHECK] Signatures of all owners exactly as registered on the account.

[CHECK] Signature guarantees (if required).

[CHECK] Any supporting legal documentation that may be required.

[CHECK] Any certificates you are holding for the account.

Sales or exchange requests received after the close of trading on the
Exchange are processed at the next business day's net asset value. No interest
will accrue on amounts represented by uncashed redemption checks. The Portfolio
will not cancel any trade (e.g., purchase, redemption, or exchange) believed to
be authentic once the trade request has been received in writing or by
telephone.

The Portfolio reserves the right to close any nonretirement or UGMA/UTMA
account in which the balance falls below the minimum initial investment. The
Portfolio will deduct a $10 annual fee in either June or December if your
nonretirement 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 or a
series of movements between Vanguard funds that Vanguard determines, in its sole
discretion, could have an adverse impact on the management of the Portfolio.

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.

<PAGE>

REDEEMING SHARES (continued)

SELLING OR EXCHANGING SHARES ACCOUNT TYPE

BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[TELEPHONE] 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
Client Services 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.

BY MAIL ALL TYPES EXCEPT RETIREMENT:
[ENVELOPE] Send a letter of instruction signed by all
FIRST-CLASS mail to: registered account holders. Include the
The Vanguard Group Portfolio name and account number and (if you
Vanguard/Trustees' Equity Fund- are selling) a dollar amount or number of
U.S. Portfolio shares OR (if you are exchanging) the name of
P.O. Box 1120 the fund you want to exchange into and a
Valley Forge, PA 19482-1120 dollar amount or number of shares. To
exchange into an account with a different
EXPRESS or REGISTERED mail to: registration (including a different name,
The Vanguard Group address, or taxpayer identification number),
Vanguard/Trustees' Equity Fund- you must provide Vanguard with written
U.S. Portfolio instructions that include the guaranteed
455 Devon Park Drive signatures of all current account owners.
Wayne, PA 19087-1815
RETIREMENT:
For information on how to request
distributions from:
o Traditional IRAs, Roth IRAs, Education
IRAs--call Client Services.
o SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial
accounts, and Profit-Sharing and Money
Purchase Pension (Keogh) Plans--call
Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type,
additional documentation may be required.

EXCHANGING SHARES ONLINE You may use your personal computer to
[COMPUTER] exchange shares of most Vanguard funds by
accessing our website (www.vanguard.com). To
establish this service for your account, you
must first register through the website. We
will then send to you, by mail, an account
access password that will enable you to make
online exchanges.

The Vanguard funds that you cannot purchase
or sell through online exchange are VANGUARD
INDEX TRUST, VANGUARD BALANCED INDEX FUND,
VANGUARD INTERNATIONAL EQUITY INDEX FUND,
VANGUARD REIT INDEX PORTFOLIO, VANGUARD TOTAL
INTERNATIONAL PORTFOLIO, and VANGUARD GROWTH
AND INCOME PORTFOLIO (formerly known as
Vanguard Quantitative Portfolios). These
funds do permit online exchanges within IRAs
and other retirement accounts.

AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
[CIRCLE OF ARROWS] 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.

<PAGE>

REDEEMING SHARES (continued)

It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Portfolio shareholders and so
reserve the right to delay delivery of 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 U.S. 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.

TRANSFERRING REGISTRATION

HOW TO TRANSFER SHARES

You may transfer the registration of any of your Portfolio shares to another
owner by completing a transfer form and sending it to: The Vanguard Group,
Attention: Transfer Department, P.O. Box 1110, Valley Forge, PA 19482-1110.

PORTFOLIO 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, a listing of the Portfolio's holdings, and
other financial statements. To keep the Portfolio's costs as low as possible (so
that you and other shareholders can keep more of the Portfolio's investment
earnings), Vanguard attempts to eliminate duplicate mailings to the same
address. When we find that two or more Portfolio shareholders have the same last
name and address, we send just one Portfolio report to that address--instead of
mailing separate reports to each shareholder. If you want us to send separate
reports, however, you may notify our Investor Information Department at
1-800-662-7447.

<PAGE>

PORTFOLIO 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
[BOOK] 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 most taxable accounts
[BOOK] (accompanies your Portfolio Summary); shows
the average cost of shares that you redeemed
during the calendar year, using the average
cost single category method.

AUTOMATED TELEPHONE ACCESS

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

COMPUTER ACCESS

VANGUARD ONLINE(R) Use your personal computer to learn more
www.vanguard.com about Vanguard's funds and services; keep in
touch with your Vanguard accounts; map out a
long-term investment strategy; initiate
certain transactions; and ask questions, make
suggestions, and send messages to Vanguard.

Our education-oriented website provides
timely news and information about Vanguard's
funds and services; an online "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.

<PAGE>

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 the 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:

o The Portfolio's objectives? (page 4)

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

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

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

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

o The Portfolio's expenses? (page 2)

o The background of the Portfolio's investment manager? (page 11)

o How to open an account? (page 16)

o How to sell or exchange shares? (pages 18-20)

o How often you'll receive statements and financial reports? (page 20)

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.

<PAGE>

AN INVESTMENT PRIMER

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

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

Most people use a combination of . . .

o 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.

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

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

2. REMEMBER THAT SAFETY HAS A PRICE.

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

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
(1926-1997)

Source: [COPYRIGHT] Stocks, Bonds, Bills, and Inflation 1998 Yearbook(TM),
Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex
A. Sinquefield). Used with permission. All rights reserved.

<PAGE>

GLOSSARY OF INVESTMENT TERMS

CAPITAL GAINS DISTRIBUTION

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

CASH RESERVES

Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.

COMMON STOCK

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

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>

[VANGUARD SHIP LOGO]

Post Office Box 2600
Valley Forge, PA 19482

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

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

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

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

ELECTRONIC ACCESS TO THE VANGUARD MUTUAL FUND EDUCATION AND INFORMATION CENTER
World Wide Web
www.vanguard.com

E-mail
[email protected]

[COPYRIGHT] 1998 Vanguard Marketing Corporation, Distributor

P025N
<PAGE>

VANGUARD/TRUSTEES'
EQUITY FUND- U.S. PORTFOLIO
Institutional Prospectus
April
30, 1998

A Portfolio of Vanguard/ Trustees' Equity Fund

This prospectus contains financial data for the Portfolio through the fiscal
year ended December 31, 1997.

[VANGUARD LOGO]

<PAGE>

VANGUARD/TRUSTEES' EQUITY FUND-
U.S. Portfolio A Growth and Income Stock Mutual Fund

CONTENTS
Portfolio Profile 1
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 10
Dividends, Capital Gains, and Taxes 10
The Portfolio and Vanguard 11
Investment Adviser 11
General Information 12
Investing with Vanguard
o For Plan Participants 13
o For Other Institutional Investors 13
Accessing Fund Information by Computer 14
Prospectus Postscript 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 the stocks 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
adviser, are undervalued. 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.

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

A Statement of Additional Information (dated April 30, 1998) containing more
information about the Portfolio is, by reference, part of this prospectus and
may be obtained without charge by contacting Vanguard (see back cover) or
visiting the Securities and Exchange Commission's website (www.sec.gov).

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 your needs. We suggest that you keep it
for future reference.

<PAGE>

PORTFOLIO PROFILE Vanguard/Trustees' Equity Fund-U.S. Portfolio

WHO SHOULD INVEST (page 4)

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

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

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

WHO SHOULD NOT INVEST

o Investors seeking significant current income.

o Investors unwilling to accept significant fluctuations in share price.

RISKS OF THE PORTFOLIO (pages 4-8)

DIVIDENDS AND CAPITAL GAINS (page 10)

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

INVESTMENT ADVISER (page 11)

Geewax, Terker & Company, Phoenixville, Pa.

INCEPTION DATE: January 31, 1980

NET ASSETS AS OF 12/31/1997: $174 million

PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 12/31/1997: 0.53%

LOADS, 12B-1 MARKETING FEES: None

NEWSPAPER ABBREVIATION: TrUS

VANGUARD FUND NUMBER: 025

CUSIP NUMBER: 921939104

QUOTRON SYMBOL: VTRSX.Q

AVERAGE ANNUAL TOTAL RETURNS--YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>

1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
-----------------------------
U.S. Portfolio 29.5% 18.7% 15.6%
S&P 500 Index 33.4 20.3 18.1
</TABLE>

QUARTERLY RETURNS (%) 1988-1997 (intended to show volatility of returns)

[GRAPH]

<PAGE>

PORTFOLIO EXPENSES

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

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

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

PLAIN TALK ABOUT

THE COSTS OF INVESTING

ANNUAL PORTFOLIO OPERATING EXPENSES
<S> <C> <C>

Management and Administrative Expenses: 0.25%
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): 0.53%
====
</TABLE>

The following example is intended to help you compare the cost of investing
in the Portfolio with the cost of investing in other mutual funds by
illustrating the hypothetical expenses that you would incur on a $1,000
investment over various periods. The example assumes that (1) the Portfolio
provides a return of 5% a year and (2) you redeem your investment at the end of
each period.
<TABLE>

-----------------------------------
<S> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------
$5 $17 $30 $66
-----------------------------------
</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.

PLAIN TALK ABOUT

FUND EXPENSES

<PAGE>

FINANCIAL HIGHLIGHTS

- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $37.08 $37.01 $29.09 $30.65 $28.43 $28.20 $22.90 $26.15 $26.35 $22.77
INVESTMENT OPERATIONS
Net Investment Income .44 .65 .62 .34 .43 .68 .71 1.02 .87 1.02
Net Realized and Unrealized
Gain (Loss) on Investments 9.64 6.87 8.96 (1.53) 4.38 1.08 5.30 (3.19) 3.62 4.53
TOTAL FROM INVESTMENT OPERATIONS 10.08 7.52 9.58 (1.19) 4.81 1.76 6.01 (2.17) 4.49 5.55
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.43) (.67) (.61) (.34) (.43) (.67) (.71) (1.08) (.88) (.97)
Distributions from Realized
Capital Gains (9.91) (6.78) (1.05) (.03) (2.16) (.86) -- -- 3.81) (1.00)
TOTAL DISTRIBUTIONS (10.34) (7.45) (1.66) (.37) (2.59) (1.53) (.71) (1.08) (4.69) (1.97)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $36.82 $37.08 $37.01 $29.09 $30.65 $28.43 $28.20 $22.90 $26.15 $26.35
====================================================================================================================================
TOTAL RETURN 29.48% 21.30% 33.21% -3.91% 17.24% 6.45% 26.57% -8.33% 17.23% 24.64%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $174 $158 $137 $113 $119 $68 $115 $100 $121 $115
Ratio of Total Expenses to
Average Net Assets 0.53% 0.49% 0.56% 0.73% 0.90% 0.65% 0.44% 0.52% 0.51% 0.58%
Ratio of Net Investment Income to
Average Net Assets 1.09% 1.68% 1.79% 1.14% 1.43% 2.33% 2.67% 4.18% 2.90% 3.86%
Portfolio Turnover Rate 139% 114% 77% 151% 139% 209% 84% 81% 72% 90%
Average Commission Rate Paid $.0480 $.0534 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

<PAGE>

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, would 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:

o 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.

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

o You are looking for some dividend income.

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

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.

<PAGE>

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

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

INVESTMENT STRATEGY

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, among other things,
closely monitoring daily transactions.

MARKET EXPOSURE

- --------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1997)
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------
Best 53.9% 23.9% 20.1% 16.9%
Worst -43.3 -12.5 -0.9 3.1
Average 13.0 10.5 10.9 10.9
- --------------------------------------------------------------------
</TABLE>

PLAIN TALK ABOUT

GROWTH FUNDS AND
VALUE FUNDS

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

<PAGE>

PLAIN TALK ABOUT

LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS

SECURITY SELECTION

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

PLAIN TALK ABOUT

PORTFOLIO DIVERSIFICATION

<PAGE>

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

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 all domestic stock funds is approximately
80%.

INVESTMENT POLICIES

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

The Portfolio may invest up to 20% of its assets in securities of companies
based outside the United States. These securities may be traded in either U.S.
or foreign markets.

PLAIN TALK ABOUT

THE RISKS OF
INTERNATIONAL INVESTING

<PAGE>

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.

PLAIN TALK ABOUT

DERIVATIVES

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

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

o To reduce the Portfolio's transaction costs or add value when these
instruments are favorably priced.

INVESTMENT LIMITATIONS

The Portfolio has adopted limitations on some of its investment policies. Some
of these limitations are that the Portfolio will not:

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

<PAGE>

With respect to 75% of its assets, this Portfolio will not:

o Invest more than 5% of its assets in the securities of any one company.

o Buy more than 10% of the outstanding voting securities of any company.

INVESTMENT PERFORMANCE

AVERAGE ANNUAL TOTAL RETURNS
FOR YEARS ENDED DECEMBER 31, 1997

<TABLE>

1 YEAR 5 YEARS 10 YEARS
U.S. Portfolio 29.5% 18.7% 15.6%
S & P 500 Index 33.4% 20.3% 18.1%
</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.

PLAIN TALK ABOUT

PAST PERFORMANCE

<PAGE>

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 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 invested in more
shares of the Portfolio. Both dividend and capital gains distributions--whether
received in cash or invested 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 tax adviser about other tax
consequences of an investment in the Portfolio.

PLAIN TALK ABOUT

DISTRIBUTIONS

<PAGE>

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.

PLAIN TALK ABOUT

VANGUARD'S UNIQUE CORPORATE STRUCTURE

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, 1997, the advisory fee represented an
effective annual basic rate of 0.40% of the Portfolio's average net assets
before a decrease of 0.18% based on performance.

PLAIN TALK ABOUT

THE PORTFOLIO'S ADVISER

JOHN J. GEEWAX, Partner and Founder, Geewax, Terker &
Company; has worked in investment management since 1980;
B.S., M.B.A., and J.D., University of Pennsylvania. Mr.
Geewax has served in this capacity since Geewax, Terker
became the Portfolio's adviser in April 1992.

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

<PAGE>

GENERAL INFORMATION

Shareholders of the U.S. Portfolio have rights and privileges similar to
those enjoyed by corporate and trust shareholders. For example, shareholders
will not be responsible for any liabilities of the 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 to vote on the removal of a Trustee if the holders of at least 10% of
the Fund's shares request a meeting in writing.

"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc.

<PAGE>

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.

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

o 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. 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
its 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 or a series of
movements between Vanguard funds that Vanguard determines, in its sole
discretion, could have an adverse impact on the management of the Portfolio. 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:

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

o 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.

<PAGE>

INVESTING WITH VANGUARD (continued)

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 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 the close of trading on the New York Stock Exchange (generally 4
p.m. Eastern time).

Vanguard must consider the interests of all Portfolio shareholders and so
reserves the right to:

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

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

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

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

ACCESSING FUND INFORMATION BY COMPUTER

VANGUARD ONLINE(R)
www.vanguard.com

Use your personal computer to learn more about Vanguard's funds and services;
keep in touch with your Vanguard accounts; map out a long-term investment
strategy; initiate certain transactions; and ask questions, make suggestions,
and send messages to Vanguard.

Our education-oriented website provides timely news and information about
Vanguard's funds and services; an online "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.

<PAGE>

PROSPECTUS POSTSCRIPT

IN READING THE PROSPECTUS, DID YOU LEARN:

o The Portfolio's objectives? (page 4)

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

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

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

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

o The Portfolio's expenses? (page 2)

o The background of the Portfolio's investment manager? (page 11)

PLAIN TALK ABOUT

KEEPING YOUR PROSPECTUS

Reading this prospectus will help you 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.

<PAGE>

AN INVESTMENT PRIMER

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

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

Most people use a combination of . . .

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

o 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.

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

PLAIN TALK ABOUT

INFLATION AND YOUR INVESTMENTS

INFLATION'S EFFECT ON
INVESTMENT RETURNS
(1926-1997)

[CHART]

<PAGE>

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

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 emphasizes stocks of companies that are believed to offer
growth potential as well as market or above-average dividend income.

GROWTH STOCK FUND

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

INVESTMENT ADVISER

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

MUTUAL FUND

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

[VANGUARD SHIP LOGO]

Institutional Division
Post Office Box 2900
Valley Forge, PA 19482

FOR PARTICIPANTS IN
EMPLOYER-SPONSORED PLANS

PARTICIPANT SERVICES CENTER
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 9 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
www.vanguard.com

E-mail
[email protected]

[COPYRIGHT] 1998 Vanguard Marketing
Corporation, Distributor

I025N
<PAGE>

VANGUARD
INTERNATIONAL VALUE
PORTFOLIO
Prospectus
April 30, 1998

A Portfolio of Vanguard/ Trustees' Equity Fund

This prospectus contains financial data for the Portfolio through the
fiscal year ended December 31, 1997.

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

[VANGUARD LOGO]

<PAGE>

VANGUARD INTERNATIONAL VALUE PORTFOLIO An International Stock Mutual Fund

CONTENTS
Portfolio Profile 1
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 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
o For Plan Participants 13
o For Other
Institutional Investors 13
Accessing Fund Information by Computer 14
Prospectus Postscript 15
Investment Primer 16
Glossary Inside Back Cover

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 the stocks 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

A Statement of Additional Information (dated April 30, 1998) containing more
information about the Portfolio is, by reference, part of this prospectus and
may be obtained without charge by contacting Vanguard (see back cover), or
visiting the Securities and Exchange Commission's website (www.sec.gov).

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.

<PAGE>

PORTFOLIO PROFILE Vanguard International Value Portfolio

WHO SHOULD INVEST (page 4)

o Investors seeking investment opportunities outside the United States.

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

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

WHO SHOULD NOT INVEST

o Investors seeking significant current income.

o Investors unwilling to accept significant fluctuations in share price.

RISKS OF THE PORTFOLIO (pages 4--8)

The 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 12/31/1997: $777 million

PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 12/31/1997: 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: IntlVal

VANGUARD FUND NUMBER: 046

CUSIP NUMBER: 921939203

QUOTRON SYMBOL: VTRIX.Q

ACCOUNT FEATURES (page 14)

o Telephone Redemption

o Vanguard Direct Deposit Service(TM)

o Vanguard Automatic Exchange Service(SM)

o Vanguard Fund Express(R)

o Vanguard Dividend Express(SM)

AVERAGE ANNUAL TOTAL RETURNS--YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>

1 YEAR 5 YEARS 10 YEARS
--------------------------
Vanguard International Value
Portfolio* --4.6% 9.6% 7.6%
MSCI EAFE Index 2.1 11.7 6.6

</TABLE>

QUARTERLY RETURNS (%) 1988--1997 (intended to show volatility of returns)

[CHART]

IN EVALUATING PAST PERFORMANCE, REMEMBER THAT IT IS NOT INDICATIVE OF FUTURE
PERFORMANCE. PERFORMANCE FIGURES INCLUDE THE REINVESTMENT OF ANY DIVIDEND 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.

<PAGE>

PORTFOLIO EXPENSES

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

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

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

PLAIN TALK ABOUT

THE COSTS OF INVESTING

ANNUAL PORTFOLIO OPERATING EXPENSES
<S> <C> <C>
Management and Administrative Expenses: 0.26%
Investment Advisory Expenses: 0.15%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.06%
----
Total Other Expenses: 0.08%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.49%
====

</TABLE>

-----------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------
$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.

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
1997 was 0.49%, or $4.90 per $1,000 of average net assets.
The average actively managed international equity mutual
fund had expenses in 1997 of 1.67%, or $16.70 per $1,000 of
average net assets, according to Lipper Analytical Services,
which reports on the mutual fund industry.

<PAGE>

FINANCIAL HIGHLIGHTS

YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
NET ASSET VALUE, BEGINNING OF YEAR $27.54 $31.11 $31.48 $31.04 $24.44 $27.78 $26.58 $32.44 $28.27 $28.66
----------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .690 .82 .75 .55 .50 .66 .78 1.02 .82 .77
Net Realized and Unrealized
Gain (Loss) on Investments (1.945) 2.20 2.185 1.08 6.91 (3.05) 1.80 (4.92) 6.22 4.41
----------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (1.255) 3.02 2.935 1.63 7.41 (2.39) 2.58 (3.90) 7.04 5.18
DISTRIBUTIONS
Dividends from Net Investment Income (.690) (.82) (.79) (.56) (.81) (.67) (.77) (.95) (.79) (.99)
Distributions from Realized
Capital Gains (2.955) (5.77) (2.515) (.63) -- (.28) (.61) (1.01) (2.08) (4.58)
----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (3.645) (6.59) (3.305) (1.19) (.81) (.95) (1.38) (1.96) (2.87) (5.57)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.64 $27.54 $31.11 $31.48 $31.04 $24.44 $27.78 $26.58 $32.44 $28.27
====================================================================================================================================
TOTAL RETURN -4.58% 10.22% 9.65% 5.25% 30.49% -8.72% 9.96% -12.26% 25.97% 18.78%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $777 $917 $988 $1,053 $982 $678 $878 $796 $646 $467
Ratio of Total Expenses to
Average Net Assets 0.49% 0.50% 0.47% 0.34% 0.40% 0.42% 0.38% 0.44% 0.46% 0.51%
Ratio of Net Investment Income to
Average Net Assets 2.36% 2.50% 2.29% 1.71% 1.76% 2.48% 2.87% 3.62% 2.61% 2.55%
Portfolio Turnover Rate 37% 82% 47% 40% 39% 51% 46% 18% 25% 14%
Average Commission Rate Paid $.0147 $.0582 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 1997 with a net asset value (price) of $27.54 per
share. During the year, the Portfolio earned $0.690 per
share from investment income (interest and dividends). There
was a decline of $1.945 per share in the value of
investments held or sold by the Portfolio, resulting in a
net decline of $1.255 from investment operations. In all,
$3.645 per share was returned to shareholders in the form of
distributions ($0.690 in dividends, $2.955 in capital
gains). This resulted in a share price of $22.64 at the end
of the year, a decrease of $4.90 per share (from $27.54 at
the beginning of the year to $22.64 at the end of the year).
Assuming that the shareholder had reinvested the
distribution in the purchase of more shares, total return
from the Portfolio was --4.58% for the year.

As of December 31, 1997, the Portfolio had $777 million
in net assets; an expense ratio of 0.49% ($4.90 per $1,000
of net assets); and net investment income amounting to 2.36%
of its average net assets. It sold and replaced securities
valued at 37% of its total net assets.

<PAGE>

A WORD ABOUT RISK

This prospectus describes the risks you would 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, would 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.

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.

WHO SHOULD INVEST

The Portfolio may be a suitable investment for you if:

o You are seeking investment opportunities outside the United States.

o 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.

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

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

<PAGE>

o 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).

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

INVESTMENT STRATEGY

This section explains how the investment adviser pursues the Portfolio's
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.

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.

[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.

INTERNATIONAL STOCK MARKET RETURNS (1969--1997)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 6.6 12.0
Average 14.5 13.8 15.3 14.9
- --------------------------------------------------------------------------------
</TABLE>

<PAGE>

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1997. 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 15.3%, compared to 13.4% 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.

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 United
States. These factors, among others, could negatively impact
the returns that Americans receive from a foreign
investment. For more information, see the Portfolio's
Statement of Additional Information.

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
1997, 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, have 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.

PLAIN TALK ABOUT

PORTFOLIO DIVERSIFICATION

In general, the more diversified a fund's portfolio of
stocks, the less likely that 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% more of
their assets invested in the stocks of just ten companies.

<PAGE>

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

The Portfolio typically holds some 150 securities, with the top 10 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 10 holdings (which amounted to 29.8% of the Portfolio's
net assets) as of December 31, 1997, follow.

1. Groupe Danone SA
2. Nestle SA (Registered)
3. Bayer AG
4. Elf Aquitaine SA
5. Electrolux AB B Shares
6. BTR PLC
7. Allied Domecq PLC
8. Akzo Nobel NV
9. AXA-UAP SA
10. BG PLC

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 40%. (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. 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 international stock funds is 64%.

INVESTMENT POLICIES

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

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.

<PAGE>

[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.

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.

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

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

o To reduce the Portfolio's transaction costs or add value when these
instruments are favorably priced.

PLAIN TALK ABOUT

DERIVATIVES

INVESTMENT LIMITATIONS

The Portfolio has adopted limitations on some of its investment policies. Some
of these limitations are that the Portfolio will not:

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

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

<PAGE>

With respect to 75% of its assets, this Portfolio will not:

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

o Buy more than 10% of the outstanding voting securities of any company.

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.

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 YEARS ENDED DECEMBER 31, 1997
<S> <C> <C> <C>

1 YEAR 5 YEARS 10 YEARS
Vanguard International Value Portfolio -4.6% 9.6% 7.6%
MSCI EAFE Index 2.1% 11.7% 6.6%
</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.

PLAIN TALK ABOUT

PAST PERFORMANCE

<PAGE>

SHARE PRICE

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 Funds." 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.)

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.

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. You can choose to receive your distributions of income and/or
capital gains in cash, or you can have them automatically invested in more
shares of the Portfolio. In either case, these distributions are taxable to you.
It is important to note that distributions of dividends and capital gains that
are declared in December--if paid to you by the end of January--are taxed as if
they had been paid to you in December. Vanguard will send you a statement
showing the tax status of all your distributions.

PLAIN TALK ABOUT

"Buying a Dividend"

<PAGE>

o 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.

o 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 PORTFOLIO AND VANGUARD

Vanguard International Value Portfolio of Vanguard/Trustees' Equity Fund is a
member of The Vanguard Group, a family of more than 30 investment companies with
more than 95 distinct investment portfolios and total net assets of more than
$360 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 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 Trustees and officers
of the Fund.

PLAIN TALK ABOUT

VANGUARD'S UNIQUE CORPORATE STRUCTURE

<PAGE>

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>

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

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.

For the year ended December 31, 1997, the advisory fee represented an
effective annual basic rate of 0.15% of the Portfolio's average net assets, with
no adjustment required based on performance.

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 Fund's 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.

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 $7.9 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; has worked in
investment management since 1980; with UBSII since 1987;
B.S., Glasgow University.

ROBIN APPS, Investment Manager and Investment Committee
Member; has worked in investment management since 1984; with
UBSII since 1986; B. Soc. SC., Birmingham University.

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.

<PAGE>

Shareholders of Vanguard International Value Portfolio have rights and
privileges similar to those enjoyed by corporate and trust shareholders. For
example, shareholders will not be responsible for any liabilities of the 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 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.

"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc.

<PAGE>

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]. Please call us to request copies.

SERVICES AND ACCOUNT FEATURES

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

TELEPHONE REDEMPTIONS Automatically set up for the Portfolio unless
(SALES AND EXCHANGES) you notify us otherwise.
[BOOK]

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

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

VANGUARD DIVIDEND EXPRESS(SM) Electronic method for transferring dividend
[BOOK] and/or capital gains distributions directly
from your Vanguard fund account to your bank,
savings and loan, or credit union account.

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

<PAGE>
TYPES OF ACCOUNTS

INDIVIDUAL OR OTHER ENTITY

Vanguard's account registration form can be used to establish a variety of
nonretirement 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 A MINOR CHILD To open an account as an Education IRA.
(Vanguard Fiduciary Trust Eligibility and other requirements are
Company is the custodian) established by federal tax law and the
[BOOK] Vanguard Education IRA. (Note: You should
establish this type of account with a
Vanguard adoption agreement--not an account
registration form.) Please call Investor
Information to request the appropriate
brochure and forms. $500 minimum initial
investment.

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

RETIREMENT

FOR A TRADITIONAL INDIVIDUAL To open a retirement account in the name of
RETIREMENT ACCOUNT an individual. Traditional IRAs can be
(TRADITIONAL IRA) established with a contribution, a direct
(Vanguard Fiduciary Trust rollover from an employer's plan such as a
Company is the custodian.) 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.

<PAGE>

FOR A SAVINGS INCENTIVE MATCH To open a retirement account in the name of
PLAN FOR EMPLOYEES ACCOUNT an employee. Created as part of the Small
(SIMPLE IRA) Business Job Protection Act of 1996, SIMPLEs
(Vanguard Fiduciary Trust replace SAR-SEPs. SIMPLEs are exclusively for
Company is the custodian.) employers that had 100 or fewer employees in
1-800-662-2003 the most recent calendar year and that do not
Individual Retirement Plans not maintain another employer-sponsored
retirement plan. SIMPLEs 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
nonmatching contributions from the employer.

FOR A QUALIFIED RETIREMENT To open a retirement account that allows
PROGRAM ACCOUNT small-business owners or people who are self-
(Vanguard Fiduciary Trust employed to make tax-deductible retirement
Company can be the custodian.) contributions for themselves and their
1-800-662-2003 employees into Profit-Sharing and Money
Individual Retirement Plans 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
Company is the custodian.) (for example, schools or hospitals) to make
1-800-662-2003 pretax retirement contributions.
Individual Retirement Plans

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.

CAPITAL GAINS IN CASH Capital gains distributions are paid by check
and mailed to your account's address of
record, and dividends are reinvested in
additional shares of the Portfolio.

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

<PAGE>

DISTRIBUTION OPTIONS (continued)

BUYING SHARES

OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT

MINIMUM INVESTMENT $3,000 (regular account); $100 by mail or exchange;
$1,000 (Traditional IRAs, $1,000 by wire.
Roth IRA's, and custodial
accounts for minors); $500
(Education IRAs).

BY MAIL Complete and sign the Mail your check with an
[ENVELOPE] application form. Invest-By-Mail form
First-class mail to: detached from your
The Vanguard Group confirmation statement to
P.O. Box 2600 the address listed on the
Valley Forge, PA form.
19482-2600
Make your check payable Make your check payable
EXPRESS or REGISTERED to: The Vanguard Group--46 to: The Vanguard Group--46
mail to:
The Vanguard Group All purchases must be made All purchases must be made
455 Devon Park Drive in U.S. dollars, and in U.S. dollars, and
Wayne, PA 19087-1815 checks must be drawn on checks must be drawn on
U.S. banks. U.S. banks.

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

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

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

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

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

<PAGE>

OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT

BY WIRE Call Client Services to Call Client Services to
[WIRE] arrange your wire arrange your wire
Wire to: transaction. transaction.
CoreStates Bank, N.A.
ABA 031000011 Wire transactions are not Wire transactions are not
CoreStates No. 01019897 available for retirement available for retirement
[Temporary Account accounts, except for asset accounts, except for asset
Number] transfers and direct transfers and direct
Vanguard International rollovers. rollovers.
Value Portfolio
[Account Registration]
Attention: Vanguard

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

IMPORTANT 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 nonretirement account
could result in a taxable gain or a loss.

[CHECK] Portfolio name.

[CHECK] 10-digit account number.

[CHECK] Name and address exactly as registered on that account.

[CHECK] 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.

<PAGE>

REDEEMING SHARES (continued)

HOW TO SELL SHARES

Good order means that the request includes:

[CHECK] Portfolio name and account number.

[CHECK] Amount of the transaction (in dollars or shares).

[CHECK] Signatures of all owners exactly as registered on the account.

[CHECK] Signature guarantees (if required).

[CHECK] Any supporting legal documentation that may be required.

[CHECK] Any certificates you are holding for the account.

The Portfolio reserves the right to close any nonretirement or UGMA/UTMA
account whose balance falls below the minimum initial investment. The Portfolio
will deduct a $10 annual fee in either June or December if your nonretirement
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.

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.

<PAGE>
SELLING OR EXCHANGING SHARES ACCOUNT TYPE

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

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

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

BY MAIL ALL TYPES EXCEPT RETIREMENT:
[ENVELOPE] Send a letter of instruction signed by all
FIRST-CLASS mail to: registered account holders. Include the fund
The Vanguard Group name and account number and (if you are selling)
Vanguard International a dollar amount or number of shares OR (if you
Value Portfolio are exchanging) the name of the fund you want to
P.O. Box 1120 exchange into and a dollar amount or number of
Valley Forge, PA 19482-1120 shares. To exchange into an account with a
different registration (including a different
Express or Registered mail to: name, address, or taxpayer identification
The Vanguard Group number), you must provide Vanguard with written
Vanguard International instructions that include the guaranteed
Value Portfolio signatures of all current account owners.
455 Devon Park Drive
Wayne, PA 19087-1815 RETIREMENT:
For information on how to request distributions
from:
o Traditional IRAs, Roth IRAs, Education IRAs--
call Client Services.
o SEP--IRAs, SIMPLE IRAs, 403(b)(7) custodial
accounts, and Profit-Sharing and Money
Purchase Pension (Keogh) Plans--call
Individual Retirement Plans at 1-800-662-2003.
Depending on your account registration type,
additional documentation may be required.

EXCHANGING SHARES ONLINE You may use your personal computer to exchange
[COMPUTER] shares of most Vanguard funds by accessing our
website (www.vanguard.com). To establish this
service for your account, you must first
register through the website. We will then send
to you, by mail, an account access password that
will enable you to make online exchanges.

The Vanguard funds that you cannot purchase or
sell through online exchange are VANGUARD INDEX
TRUST, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL EQUITY INDEX FUND, VANGUARD REIT
INDEX PORTFOLIO, VANGUARD TOTAL INTERNATIONAL
PORTFOLIO, and VANGUARD GROWTH AND INCOME
PORTFOLIO (formerly known as Vanguard
Quantitative Portfolios). These funds do permit
online exchanges within IRAs and other
retirement accounts.

AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
[CIRCLE OF ARROWS] 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.

<PAGE>

REDEEMING SHARES (continued)

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.

TRANSFERRING REGISTRATION

HOW TO TRANSFER SHARES

PORTFOLIO 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.

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

PORTFOLIO SUMMARY Mailed quarterly; shows the market value of your
[BOOK] 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 most taxable accounts
[BOOK] (accompanies your Portfolio Summary); shows the
average cost of shares that you redeemed during
the calendar year, using the average cost single
category method.

AUTOMATED TELEPHONE ACCESS

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

COMPUTER ACCESS

VANGUARD ONLINE(R) Use your personal computer to learn more about
www.vanguard.com Vanguard's funds and services; keep in touch
with your Vanguard accounts; map out a long-term
investment strategy; initiate certain
transactions; and ask questions, make
suggestions, and send messages to Vanguard.

Our education-oriented website provides timely
news and information about Vanguard's funds and
services; an online "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.

<PAGE>

PROSPECTUS POSTSCRIPT

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

IN READING THE PROSPECTUS, DID YOU LEARN:

o The Portfolio's objectives? (page 4)

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

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

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

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

o The Portfolio's expenses? (page 2)

o The background of the Portfolio's investment manager? (page 12)

o How to open an account? (page 17)

o How to sell or exchange shares? (pages 18-21)

o How often you'll receive statements and financial reports? (page 21)

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.

<PAGE>

AN INVESTMENT PRIMER

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

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

Most people use a combination of . . .

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

o 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.

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

PLAIN TALK ABOUT

INFLATION AND YOUR INVESTMENTS

INFLATION'S EFFECT ON
INVESTMENT RETURNS
(1926--1997)

[CHART]

Source: [COPYRIGHT Stocks, Bonds, Bills, and Inflation 1998 Yearbook(TM),
Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex
A. Sinquefield). Used with permission. All rights reserved.

<PAGE>

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,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.

COMMON STOCK

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

COUNTRY RISK

The possibility that events 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>

Post Office Box 2600
Valley Forge, PA 19482

[VANGUARD SHIP LOGO]

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

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

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

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

ELECTRONIC ACCESS TO THE
VANGUARD MUTUAL FUND
EDUCATION AND INFORMATION
CENTER
World Wide Web
www.vanguard.com

E-mail
[email protected]

[COPYRIGHT] 1998 Vanguard Marketing
Corporation, Distributor

P046N
<PAGE>

VANGUARD
INTERNATIONAL VALUE
PORTFOLIO
Institutional Prospectus
April 30, 1998

A Portfolio of Vanguard/ Trustees' Equity Fund

This prospectus contains financial data for the Portfolio through the fiscal
year ended December 31, 1997.

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

[VANGUARD LOGO]

VANGUARD INTERNATIONAL VALUE PORTFOLIO An International Stock Mutual Fund

CONTENTS
Portfolio Profile 1
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 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
o For Plan Participants 13
o For Other Institutional Investors 13
Accessing Fund Information by Computer 14
Prospectus Postscript 15
Investment Primer 16
Glossary Inside Back Cover

INVESTMENT OBJECTIVES AND POLICIES

FEES AND EXPENSES

IMPORTANT NOTE

ADDITIONAL INFORMATION ABOUT THE PORTFOLIO

A Statement of Additional Information (dated April 30, 1998) containing more
information about the Portfolio is, by reference, part of this prospectus and
may be obtained without charge by contacting Vanguard (see back cover), or
visiting the Securities and Exchange Commission's website (www.sec.gov).

WHY READING THIS PROSPECTUS IS IMPORTANT

<PAGE>

PORTFOLIO PROFILE Vanguard International Value Portfolio

WHO SHOULD INVEST (page 4)

o Investors seeking investment opportunities outside the United States.

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

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

WHO SHOULD NOT INVEST

o Investors seeking significant current income.

o 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 12/31/1997: $777 million

PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 12/31/1997: 0.49%

LOADS, 12B-1 MARKETING FEES: None

NEWSPAPER ABBREVIATION: IntlVal

VANGUARD FUND NUMBER: 046

CUSIP NUMBER: 921939203

QUOTRON SYMBOL: VTRIX.Q
<TABLE>

AVERAGE ANNUAL TOTAL RETURNS--YEARS ENDED DECEMBER 31, 1997
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
--------------------------
Vanguard International Value
Portfolio* -4.6% 9.6% 7.6%
MSCI EAFE Index 2.1 11.7 6.6
</TABLE>

QUARTERLY RETURNS (%) 1988-1997 (intended to show volatility of returns)

[CHART]

<PAGE>

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.

PLAIN TALK ABOUT

THE COSTS OF INVESTING

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

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

ANNUAL PORTFOLIO OPERATING EXPENSES
Management and Administrative Expenses: 0.26%
Investment Advisory Expenses: 0.15%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.06%
----
Total Other Expenses: 0.08%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.49%
</TABLE>
====

-----------------------------------
<S> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------
$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.

PLAIN TALK ABOUT

FUND EXPENSES

<PAGE>

FINANCIAL HIGHLIGHTS

INVESTMENT OPERATIONS
Net Investment Income .690 .82 .75 .55 .50 .66 .78 1.02 .82 .77
Net Realized and Unrealized
Gain (Loss) on Investments (1.945) 2.20 2.185 1.08 6.91 (3.05) 1.80 (4.92) 6.22 4.41
----------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (1.255) 3.02 2.935 1.63 7.41 (2.39) 2.58 (3.90) 7.04 5.18
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.690) (.82) (.79) (.56) (.81) (.67) (.77) (.95) (.79) (.99)
Distributions from Realized
Capital Gains (2.955) (5.77) (2.515) (.63) -- (.28) (.61) (1.01) (2.08) (4.58)
----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (3.645) (6.59) (3.305) (1.19) (.81) (.95) (1.38) (1.96) (2.87) (5.57)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.64 $27.54 $31.11 $31.48 $31.04 $24.44 $27.78 $26.58 $32.44 $28.27
====================================================================================================================================
TOTAL RETURN -4.58% 10.22% 9.65% 5.25% 30.49% -8.72% 9.96% -12.26% 25.97% 18.78%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $777 $917 $988 $1,053 $982 $678 $878 $796 $646 $467
Ratio of Total Expenses to
Average Net Assets 0.49% 0.50% 0.47% 0.34% 0.40% 0.42% 0.38% 0.44% 0.46% 0.51%
Ratio of Net Investment Income to
Average Net Assets 2.36% 2.50% 2.29% 1.71% 1.76% 2.48% 2.87% 3.62% 2.61% 2.55%
Portfolio Turnover Rate 37% 82% 47% 40% 39% 51% 46% 18% 25% 14%
Average Commission Rate Paid $.0147 $.0582 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 1997 with a net asset value (price) of $27.54 per
share. During the year, the Portfolio earned $0.690 per
share from investment income (interest and dividends). There
was a decline of $1.945 per share in the value of
investments held or sold by the Portfolio, resulting in a
net decline of $1.255 from investment operations. In all,
$3.645 per share was returned to shareholders in the form of
distributions ($0.690 in dividends, $2.955 in capital
gains). This resulted in a share price of $22.64 at the end
of the year, a decrease of $4.90 per share (from $27.54 at
the beginning of the year to $22.64 at the end of the year
). Assuming that the shareholder had reinvested the
distribution in the purchase of more shares, total return
from the Portfolio was -4.58% for the year.

<PAGE>

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, would 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.

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.

WHO SHOULD INVEST

The Portfolio may be a suitable investment for you if:

o You are seeking investment opportunities outside the United States.

o 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.

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

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

<PAGE>

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

INVESTMENT STRATEGY

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.

MARKET EXPOSURE

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, by contrast, appeal to investors who will
accept more volatility in hope of a greater increase in
share price.

<PAGE>

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 United
States. These factors, among others, could negatively impact
the returns that Americans receive from a foreign
investment. For more information, see the Portfolio's
Statement of Additional Information.
<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1997)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 6.6 12.0
Average 14.5 13.8 15.3 14.9
- --------------------------------------------------------------------------------
</TABLE>

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.

SECURITY SELECTION

<PAGE>

[FLAG] THE PORTFOLIO IS SUBJECT TO COUNTRY RISK, WHICH IS THE POSSIBILITY
THAT POLITICAL EVENTS (SUCH AS A WAR), FINANCIAL PROBLEMS (SUCH AS
RISING INFLATION), OR NATURAL DISASTERS (SUCH AS AN EARTHQUAKE) 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 10 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 10 holdings (which amounted to 29.8% of the Portfolio's
net assets) as of December 31, 1997, follow.

1. Groupe Danone SA
2. Nestle SA (Registered)
3. Bayer AG
4. Elf Aquitaine SA
5. Electrolux AB B Shares
6. BTR PLC
7. Allied Domecq PLC
8. Akzo Nobel NV
9. AXA-UAP SA
10. BG PLC

[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 40%. (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 64%.

INVESTMENT POLICIES

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

<PAGE>

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.

PLAIN TALK ABOUT

FORWARD FOREIGN
CURRENCY CONTRACTS

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

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

o To reduce the Portfolio's transaction costs or add value when these
instruments are favorably priced.

PLAIN TALK ABOUT

DERIVATIVES

<PAGE>

INVESTMENT LIMITATIONS

The Portfolio has adopted limitations on some of its investment policies. Some
of these limitations are that the Portfolio will not:

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

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

o Borrow money, except for temporary or emergency purposes in an amount not
exceeding 10% of its net assets. Whenever the Portfolio's outstanding
borrowing is more than 5% of its net assets, it will stop making
investments.

With respect to 75% of its assets, this Portfolio will not:

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

o Buy more than 10% of the outstanding voting securities of any company.

PLAIN TALK ABOUT

CASH RESERVES

INVESTMENT PERFORMANCE

AVERAGE ANNUAL TOTAL RETURNS
FOR YEARS ENDED DECEMBER 31, 1997
<S> <C> <C> <C>

1 YEAR 5 YEARS 10 YEARS
Vanguard International Value Portfolio* -4.6% 9.6% 7.6%
MSCI EAFE Index 2.1% 11.7% 6.6%
</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.

PLAIN TALK ABOUT

PAST PERFORMANCE

<PAGE>

SHARE PRICE

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 Funds." 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.)

PLAIN TALK ABOUT

DISTRIBUTIONS

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.

<PAGE>

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 invested 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 tax adviser about other 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.

PLAIN TALK ABOUT

VANGUARD'S UNIQUE CORPORATE STRUCTURE

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>

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

PLAIN TALK ABOUT

THE PORTFOLIO'S ADVISER

WILSON PHILLIPS, CFA, Investment Manager; has worked in
investment management since 1980; with UBSII since 1987;
B.S., Glasgow University.

ROBIN APPS, Investment Manager and Investment Committee
Member; has worked in investment management since 1984; with
UBSII since 1986; B. Soc. SC., Birmingham University.

<PAGE>

For the year ended December 31, 1997, the advisory fee represented an
effective annual basic rate of 0.15% of the Portfolio's average net assets, with
no adjustment required based on performance.

The Fund's 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.

"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc.

<PAGE>

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.

o 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

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. 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
its 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 or series of
movements between Vanguard funds that Vanguard determines, in its sole
discretion, could have an adverse impact on the management of the Portfolio. 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:

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

o 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.

<PAGE>

INVESTING WITH VANGUARD (continued)

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 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 the close of trading on the New York Stock Exchange
(generally 4 p.m. Eastern time).

Vanguard must consider the interests of all Portfolio shareholders and so
reserves the right to:

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

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

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

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

ACCESSING FUND INFORMATION BY COMPUTER

VANGUARD ONLINE(R) Use your personal computer to learn more about
www.vanguard.com Vanguard's funds and services; keep in touch with
your Vanguard accounts; map out a long-term
investment strategy; initiate certain transactions;
and ask questions, make suggestions, and send
messages to Vanguard.

Our education-oriented website provides timely news
and information about Vanguard's funds and services;
an online "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.

<PAGE>

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:

o The Portfolio's objectives? (page 4)

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

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

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

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

o The Portfolio's expenses? (page 2)

o The background of the Portfolio's investment manager? (page 11)

PLAIN TALK ABOUT

KEEPING YOUR PROSPECTUS

<PAGE>

AN INVESTMENT PRIMER

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

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

Most people use a combination of . . .

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

o 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.

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

PLAIN TALK ABOUT

INFLATION AND YOUR
INVESTMENTS

INFLATION'S EFFECT ON
INVESTMENT RETURNS
(1926-1997)

[CHART]

Source: [COPYRIGHT] Stocks, Bonds, Bills, and Inflation 1998
Yearbook(TM), Ibbotson Associates, Chicago (annually updates
work by Roger G. Ibbotson and Rex A. Sinquefield). Used with
permission. All rights reserved.

<PAGE>

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

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

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>

[VANGUARD SHIP LOGO]

Institutional Division
Post Office Box 2900
Valley Forge, PA 19482

FOR PARTICIPANTS IN
EMPLOYER-SPONSORED PLANS

PARTICIPANT SERVICES
CENTER
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 9 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
www.vanguard.com

E-mail
[email protected]

I046N
<PAGE>

PART B

VANGUARD/TRUSTEES' EQUITY FUND

STATEMENT OF ADDITIONAL INFORMATION

April 30, 1998

This Statement is not a prospectus but should be read in conjunction with the
Fund's Prospectus dated April 30, 1998. To obtain the Prospectus, please call
the Investor Information Department:

1-800-662-7447

TABLE OF CONTENTS

Page

Investment Objective and Policies..................................... B-1
Share Price........................................................... B-5
Purchase of Shares.................................................... B-6
Redemption of Shares.................................................. B-6
Yield and Total Return................................................ B-7
Investment Limitations................................................ B-7
Management of the Fund................................................ B-8
Investment Advisory Services.......................................... B-11
Portfolio Transactions................................................ B-14
Performance Measures.................................................. B-15
General Information................................................... B-17
Financial Statements.................................................. B-18

INVESTMENT OBJECTIVE AND POLICIES

The following policies supplement the investment objective and policies set
forth in each Portfolio'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 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 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 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.

B-1
<PAGE>

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 except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of the Fund's
portfolio. 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, each 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 closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of U.S. Government
securities.

B-2
<PAGE>

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. Each 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 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.

B-3
<PAGE>

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. 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.

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 each
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.

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.

B-4

<PAGE>

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.

SHARE PRICE

Each Portfolio's share price, or "net asset value" per share, is calculated
by dividing the total assets of each Portfolio, less all liabilities, by the
total number of shares outstanding. The net asset value is determined as of the
close of the New York Stock Exchange (the "Exchange") generally 4:00 p.m.
Eastern time on each day the exchange is open for trading.

Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. Any foreign securities are valued at the latest
quoted sales price available before the time when assets are valued. Securities
may be valued on the basis of prices provided by a pricing service when such
prices are believed to reflect the fair market value of such securities.

Short-term instruments (those acquired with remaining maturities of 60 days
or less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.

Bonds and other fixed income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities. The prices provided by a pricing service may be
determined without regard to bid or last sale prices of each security, but take
into account institutional-size transactions in similar groups of securities as
well as any developments related to specific securities.

Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time each
Portfolio is valued. If events which materially affect the value of each
Portfolio's investments occur after the close of the securities markets on which
such securities are primarily traded, those investments may be valued by such
methods as the Board of Trustees deems in good faith to reflect fair value.

In determining each Portfolio's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating various benchmarking indices. This
officially quoted exchange rate may be determined prior to or after the close of
a particular securities market. If such quotations are not available, the rate
of exchange will be determined in accordance with policies established in good
faith by the Board of Trustees.

Other assets and securities for which no quotations are readily available or
which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.

The share price for each Portfolio can be found daily in the mutual fund
listings of most major newspapers under the heading of Vanguard Funds.

B-5
<PAGE>

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 trading on the New York Stock Exchange (the
"Exchange"), generally 4 p.m. Eastern time, 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.

Each Portfolio has authorized Charles Schwab & Co., Inc. ("Schwab") to accept
on its behalf purchase and redemption orders under certain terms and conditions.
Schwab is also authorized to designate other intermediaries to accept purchase
and redemption orders on each Portfolio's behalf subject to those terms and
conditions. Under this arrangement, the Fund will be deemed to have received a
purchase or redemption order when Schwab or, if applicable, Schwab's authorized
designee, accepts the order in accordance with each Portfolio's instructions.
Customer orders that are properly transmitted to each Portfolio by Schwab, or if
applicable, Schwab's authorized designee, will be priced as follows:

Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on each
Portfolio's net asset value calculated at the close of trading that day. Orders
received by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on each Portfolio's
net asset value calculated at the close of trading that day.

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.

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 "Share Price" 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.

B-6
<PAGE>

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 signature guarantors.

YIELD AND TOTAL RETURN

The yield of the U.S. Portfolio of the Fund for the 30-day period ended
December 31, 1997 was +1.11%.

The average annual total return of each Portfolio of the Fund for the
following periods ending December 31, 1997 is set forth below:

<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 year ended 5 years ended 10 years ended
12/31/97 12/31/97 12/31/97

U.S. Portfolio +29.48% +18.70% +15.58%
Vanguard International
Value Portfolio -4.58% +9.63% +7.63%

</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;

(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, 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;

B-7
<PAGE>

(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)" on
page 7;

(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)" on page 7; 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
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, (DOB: 5/8/1929) Senior Chairman and Trustee*

Senior 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, (DOB: 7/29/1954) Chairman, Chief Executive Officer &
Trustee*

Chairman, 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, (DOB: 9/28/1935) Trustee

Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing
Director of Global Health Care Partners/DLJ Merchant Banking Partners;
Director of Sun Company, Inc., and Westinghouse Electric Corporation.

BARBARA BARNES HAUPTFUHRER, (DOB: 10/11/1928) Trustee

Director of The Great Atlantic and Pacific Tea Company, IKON Office
Solutions, Inc., Raytheon Company, Knight-Ridder, Inc., Massachusetts Mutual
Life Insurance Co., and Ladies Professional Golf Association; and Trustee
Emerita of Wellesley College.

B-8
<PAGE>

BRUCE K. MACLAURY, (DOB: 5/7/1931) 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, (DOB: 8/28/1932) 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 Telecommunications
Company.

ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee

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

JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee

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

JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee

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

J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee

Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company, and the Mead Corporation; and Trustee of Vanderbilt
University.

RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*

Managing Director and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.

RICHARD F. HYLAND, (DOB: 3/22/1937) Treasurer*

Treasurer of The Vanguard Group, Inc. and of each of the investment companies
in The Vanguard Group.

KAREN E. WEST, (DOB: 9/13/1946) 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.

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, 1997, the
Fund had contributed capital of $66,000 to Vanguard, representing 0.4% 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.

B-9
<PAGE>

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, 1997, the Fund's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $2,689,000.

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,
1997, the Fund paid approximately $222,000 of the Group's distribution and
marketing expenses.

Investment Advisory Service. 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
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 Fund, a
portion of Vanguard/Morgan Growth Fund, Vanguard Explorer Fund, and Vanguard
Equity Income 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.

Director/Trustee Compensation

The individuals in the table on page 11 serve as Directors/Trustees of all
Vanguard Funds, and each Fund pays a proportionate share of the
Directors'/Trustees' compensation. The Funds employ their officers on a shared
basis, as well. However, officers are compensated by The Vanguard Group, Inc.,
not the Funds.

Independent Directors/Trustees The Funds compensate their independent
Directors/Trustees--that is, the ones who are not also officers of the Fund--in
three ways:

o The independent Directors/Trustees receive an annual fee for their service
to the Funds, which is subject to reduction based on absences from
scheduled Board meetings.

B-10
<PAGE>

o The independent Directors/Trustees are reimbursed for the travel and other
expenses that they incur in attending Board meetings.

o Upon retirement, the independent Directors/Trustees receive an aggregate
annual fee of $1,000 for each year served on the Board, up to fifteen
years of service. This annual fee is paid for ten years following
retirement, or until the Directors'/Trustees' death.

"Interested" Directors/Trustees The Funds' interested Directors/Trustees--
Messrs. Bogle and Brennan receive no compensation for their service in that
capacity. However, they are paid in their role as Officers of The Vanguard
Group, Inc.

Compensation Table The following table provides compensation details for each
of the Trustees. For the Fund, we list the amounts paid as compensation and
accrued as retirement benefits by the Fund for each Trustee. In addition, the
table shows the total amount of benefits that we expect each Director/Trustee to
receive from all Vanguard Funds upon retirement, and the total amount of
compensation paid to each Director/Trustee by all Vanguard Funds. All
information shown is for the fiscal year ended December 31, 1997.

<TABLE>
<CAPTION>
VANGUARD/TRUSTEES' EQUITY FUND
COMPENSATION TABLE

<S> <C> <C> <C> <C>
Aggregate Pension or Estimated Total Compensation
Compensation Retirement Annual Benefits From All Vanguard
Names of Trustees From Trust Benefits Accrued As Upon Retirement Funds Paid to
Part of Trust Trustees(2)
Expenses
- ---------------------------------- ------------------ --------------------- ---------------- ---------------------
John C. Bogle(1) None None None None
John J. Brennan(1) None None None None
Barbara Barnes Hauptfuhrer $305 $ 44 $15,000 $70,000
Robert E. Cawthorn $305 $ 37 $13,000 $70,000
Bruce K. MacLaury $327 $ 42 $12,000 $65,000
Burton G. Malkiel $308 $ 30 $15,000 $70,000
Alfred M. Rankin, Jr. $305 $ 23 $15,000 $70,000
John C. Sawhill $305 $ 27 $15,000 $70,000
James O. Welch, Jr. $305 $ 34 $15,000 $70,000
J. Lawrence Wilson $305 $ 24 $15,000 $70,000

(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 35 Vanguard Funds (34 in the case of Mr. Malkiel; 28 in the case of Mr. MacLaury).

</TABLE>

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 March 31, 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.

B-11
<PAGE>

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.

Net Assets Rate
First $50 million............................................. 0.475%
Next $450 million............................................. 0.150%
Next $500 million............................................. 0.120%
Over $1 billion............................................... 0.110%

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:

Differential Versus MSCI-EAFE Index Adjustment*
----------------------------------- --------------
+13.5% points or more ............................. -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

* 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, 1999, 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 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.

B-12

<PAGE>

During the period beginning April 1, 1996 through December 31, 1996 and the
fiscal year ended December 31, 1997, Vanguard International Value Portfolio paid
UBSII advisory fees totaling $1,086,000 (.11 of 1% of average net assets) and
$1,371,000 (.15% 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 year ended December 31, 1995, and during the period beginning January
1, 1996 through April 1, 1996, Vanguard International Value Portfolio paid
Batterymarch Financial Management advisory fees totaling $1,516,000 (.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 Advisor

On April 1, 1996, 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, 1995, 1996 and
1997, the U.S. Portfolio paid Geewax advisory fees totaling $383,000 (.31 of 1%
of average net assets) $511,000 (.35 of 1% of average net assets) before a
decrease of $192,000 (.13%) and $615,000 (.40 of 1% of average net assets)
before a decrease of $274,000 (.18%) 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.

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>

<S> <C>
Cumulative Three-Year Performance Performance Fee
Differential vs. The S&P 500 Adjustment*
--------------------------------- ----------------
+4.5% points or more .......................... 0.50 x Basic Fee
+2.25% points but less than +4.5% points........ -0.20 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.

B-13
<PAGE>

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

The agreement with Geewax, Terker continues until March 31, 1999 and the
agreement with UBS II continues until March 30, 1999. 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.

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.

B-14
<PAGE>

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 advisers 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, 1995, 1996 and 1997 the Fund paid
$2,173,469, $13,290,992, and $2,431,609 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.

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.

Standard & Poor's MidCap 400 Index--is composed of 400 medium sized domestic
stocks.

Standard & Poor's SmallCap 600/BARRA Value Index--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.

Standard & Poor's SmallCap 600/BARRA Growth Index--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.

Russell 1000 Value Index--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.

Wilshire 5000 Equity Index--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.

Wilshire 4500 Equity Index--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.

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.

B-15
<PAGE>

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.

Composite Index--65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting 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.

B-16

<PAGE>

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 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 on page 18 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
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.

B-17

<PAGE>

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 as of and for the year ended December 31,
1997, appearing in the Fund's 1997 Annual Reports to Shareholders, and the
reports thereon of Price Waterhouse LLP, independent accountants, also appearing
therein, are incorporated by reference in this Statement of Additional
Information.

B-18