VANGUARD TRUSTEES EQUITY FUND, 485BPOS, 1999-04-23

VANGUARD TRUSTEES EQUITY FUND
485BPOS, 1999-04-23

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

POST EFFECTIVE AMENDMENT NO. 26

AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940

AMENDMENT NO. 26

VANGUARD TRUSTEES' EQUITY FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)

P.O. BOX 2600,
VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482

IT IS PROPOSED THAT THE AMENDMENT BECOME EFFECTIVE:

on April 30, 1999, 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, 1998 ON MARCH 29, 1999.

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<PAGE> 2

VANGUARD TRUSTEES' EQUITY FUND

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
- ----------- ----------------------
<S> <C> <C>
Item 1. Front and Back Cover Pages............. Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments,
Risks, and Performance................. Fund Profile
Item 3. Risk/Return Summary: Fee Table......... Fee Table
Item 4. Investment Objectives, Principal
Investment Strategies, and Related
Risks.................................. A Word About Risk; Who Should Invest;
Primary Investment Strategies
Item 5. Management's Discussion of Fund
Performance............................ The Fund and Vanguard; Investment
Adviser
Item 6. Management, Organization, and Capital
Structure.............................. Herein incorporated by reference from
Registrant's Annual Report to
Shareholders dated December 31, 1998
filed with the Securities and Exchange
Commission's EDGAR system on March 1,
1999.
Item 7. Shareholder Information................ Share Price; Dividends, Capital Gains,
and Taxes; Investing with Vanguard
Item 8. Distribution Arrangements.............. Not Applicable
Item 9. Financial Highlights Information....... Financial Highlights
</TABLE>

<TABLE>
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
- ----------- -------------------------
<S> <C> <C>
Item 10. Cover Page and Table of Contents....... Cover Page; Table of Contents
Item 11. Fund History........................... Description of the Trust
Item 12. Description of the Fund and its
Investments and Risks.................. Investment Policies; Description of the
Trust; and Fundamental Investment
Limitations
Item 13. Management of the Funds................ Management of the Trust
Item 14. Control Persons and Principal Holders
of Securities.......................... Management of the Trust
Item 15. Investment Advisory and Other
Services............................... Investment Advisory Services
Item 16. Brokerage Allocation and other
Practices.............................. Portfolio Transactions
Item 17. Capital Stock and Other Securities..... Description of the Trust
Item 18. Purchase, Redemption, and Pricing of
Shares................................. Purchase of Shares; Redemption of
Shares; and Share Price
Item 19. Taxation of the Fund................... Description of the Trust
Item 20. Underwriters........................... Not Applicable
Item 21. Calculation of Performance Data........ Yield and Total Return
Item 22. Financial Statements................... Financial Statements
</TABLE>
<PAGE> 3
VANGUARD INTERNATIONAL VALUE FUND

Prospectus
April 30, 1999
An International Stock Mutual Fund

CONTENTS

1 FUND PROFILE
3 ADDITIONAL INFORMATION
3 A WORD ABOUT RISK
3 WHO SHOULD INVEST
4 PRIMARY INVESTMENT STRATEGIES
7 THE FUND AND VANGUARD
8 INVESTMENT ADVISER
8 YEAR 2000 CHALLENGE
9 DIVIDENDS, CAPITAL GAINS, AND TAXES
10 SHARE PRICE
11 FINANCIAL HIGHLIGHTS
12 INVESTING WITH VANGUARD
12 SERVICES AND ACCOUNT FEATURES
13 TYPES OF ACCOUNTS
13 BUYING SHARES
15 REDEEMING SHARES
18 TRANSFERRING REGISTRATION
18 FUND AND ACCOUNT UPDATES
GLOSSARY (inside back cover)

WHY READING THIS PROSPECTUS IS IMPORTANT

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<PAGE> 4
FUND PROFILE

The following profile summarizes key features of Vanguard International Value
Fund.

INVESTMENT OBJECTIVE
The Fund is an international stock fund that seeks to provide long-term capital
growth and some income.

INVESTMENT STRATEGIES
The Fund invests primarily in large and medium-size companies located outside
the United States whose common stocks are considered by the Fund's adviser to be
undervalued. Such stocks, called "value" stocks, often are out of favor in
periods when investors are drawn to companies with strong prospects for growth.
The prices of value stocks therefore may be below-average in comparison to such
fundamental factors as earnings, revenue, and
book-value. Such stocks often provide an above-average dividend yield.

PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:

- - Currency risk, which is the chance that returns will be hurt by a rise
in the value of the U.S. dollar versus foreign currencies.

- - Country risk, which is the chance that a country's economy will be hurt
by political troubles, financial problems, or natural disasters.

- - Investment style risk, which is the chance that returns from value
stocks will trail returns from other asset classes or the overall stock
market.

- - Manager risk, which is the chance that poor security selection will
cause the Fund to underperform other funds with similar investment
objectives.

PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based securities
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.

ANNUAL TOTAL RETURNS

[ANNUAL TOTAL RETURNS BAR GRAPH]

<TABLE>

During the period shown in the bar chart, the highest return for a calendar
quarter was 20.62% (quarter ended December 31, 1998) and the lowest return for a
quarter was - 18.00% (quarter ended September 30, 1990).

1
<PAGE> 5

AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard International Value Fund 19.46% 7.71% 7.70%
MSCI EAFE Index* 20.33 9.50 5.85
-----------------------------------------------------------------------------------
*Morgan Stanley Capital International Europe, Australasia, Far East Index.
-----------------------------------------------------------------------------------
</TABLE>

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 the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.

PLAIN TALK ABOUT
FUND EXPENSES

All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard International Value Fund's expense ratio in fiscal year 1998
was 0.52%, or $5.20 per $1,000 of average net assets. The average international
stock mutual fund had expenses in 1998 of 1.66%, or $16.60 per $1,000 of
average net assets, according to Lipper Inc., which reports on the mutual fund
industry.

FEES AND EXPENSES

The following table describes the fees and expenses you would pay if
you buy and hold shares of the Fund. The expenses shown under Annual Fund
Operating Expenses are based upon those incurred in the fiscal year ended
December 31, 1998.

<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.43%
12b-1 Distribution Fees: None
Other Expenses: 0.09%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.52%
</TABLE>

The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of each period.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
$53 $167 $291 $653
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</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.

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<PAGE> 6
ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS
Distributed annually in December

INVESTMENT ADVISER
Phillips & Drew (formerly known as UBS International Investment London
Limited), London, England, since March 31, 1996

INCEPTION DATE
May 16, 1983

NET ASSETS AS OF DECEMBER 31, 1998
$806 million

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

TICKER SYMBOL
VTRIX

A WORD ABOUT RISK

This prospectus describes the risks you would face as an investor in Vanguard
International Value 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. As you consider an investment in Vanguard International Value
Fund, you should also take into account your personal tolerance for the daily
fluctuations of the stock market.

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

WHO SHOULD INVEST

The Fund may be a suitable investment for you if:

- - You are seeking investment opportunities outside the United States.

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

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

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

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

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 Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.

THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND IF
YOU ARE A MARKET-TIMER.

3
<PAGE> 7
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 stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically pay above-average dividend yields. Growth funds generally
focus on companies believed to have above-average potential for growth in
revenue and earnings. Reflecting the market's high expectations for superior
growth, the prices of such stocks are typically above-average in relation to
such measures as revenue, earnings, book value, and dividends. Growth and value
stocks have, in the past, produced similar long-term returns, though each
category 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 hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).

The Fund has adopted the following policies, among others, to discourage
short-term trading:

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

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

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

PRIMARY INVESTMENT STRATEGIES

This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective, long-term growth in capital and income. It also
explains how the adviser implements these strategies. In addition, this section
discusses several important risks -- market risk, currency risk, country risk,
investment style risk, and manager risk -- faced by investors in the Fund. The
Fund's Board of Trustees oversees the management of the Fund, and may change the
investment strategies in the interest of shareholders.

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

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.
Generally, Vanguard defines large-capitalization (large-cap) funds as those
holding stocks of companies whose outstanding shares have a market value
exceeding $10 billion. Mid-cap funds hold stocks of companies with a market
value between $1 billion and $10 billion. Small-cap funds typically hold stocks
of companies with a market value of less than $1 billion.

4
<PAGE> 8

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

IN ADDITION, INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE AS
RISKY, IF NOT MORE RISKY, THAN U.S. STOCK INVESTMENTS. 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 their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from a foreign investment.

To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns for foreign stock markets
over various periods as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (MSCI EAFE) Index, a widely used barometer of
international market activity. (Total returns consist of dividend income plus
change in market price.) 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, that the gap between best and worst tends to
narrow over the long term.

<TABLE>
<CAPTION>
INTERNATIONAL STOCK MARKET RETURNS (1969 - 1998)
- --------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 14.7 13.6 14.9 14.7
- --------------------------------------------------------------
</TABLE>

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1998. 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 14.9%, compared to 11.0% 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 on international stocks; you
should not regard them as an indication of future returns from either foreign
markets as a whole or this Fund in particular.

Keep in mind, too, that because Vanguard International Value Fund's holdings
are not identical to the MSCI EAFE Index or any other market index, the
performance of the Fund will not mirror the returns of any particular index.

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

5
<PAGE> 9
The transition to a common European currency -- the "euro" -- which began on
January 1, 1999, is one form of country risk that the Fund faces. Although the
euro conversion should have no immediate impact on the Fund's share price, it
may cause uncertainty in European financial markets. If there are difficulties
with the euro conversion, the Fund's European holdings could be adversely
affected.

[FLAG GRAPHIC] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE
POSSIBILITY THAT RETURNS FROM VALUE STOCKS WILL TRAIL RETURNS
FROM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET. AS A
GROUP, VALUE STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER
-- OR WORSE -- THAN COMMON STOCKS IN GENERAL. THESE PERIODS
HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.

SECURITY SELECTION

Phillips & Drew, adviser to the Fund, believes that research is the key to
selecting securities for an international stock fund. Much of this research
takes the form of on-site visits. In 1998, for instance, Phillips & Drew
investment analysts visited approximately 1,450 companies.

To be considered for Vanguard International Value Fund, a company should --
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 have a management that is motivated to make positive changes and
work for its shareholders.

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

The Fund is run by Phillips & Drew according to traditional methods of active
investment management. This means that securities are selected according to
Phillips & Drew's judgments about companies and their financial prospects,
within the context of the stock market and the economy in general. A security
will be sold when it is no longer as attractive as an alternative investment.

The Fund is generally managed without regard to tax ramifications.

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

PLAIN TALK ABOUT
TURNOVER RATE

Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect 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 turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for all international stock funds is
approximately 80%, according to Morningstar, Inc.

TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 49%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)

OTHER INVESTMENT POLICIES AND RISKS
Besides investing in stocks of foreign companies, the Fund may make certain
other kinds of investments to achieve its objective.

The Fund may enter into forward foreign currency contracts, which help
protect its holdings against unfavorable short-term changes in exchange rates. A
forward foreign currency contract is an agreement to buy or sell
a country's currency at a specific price on a specific date, 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 downswings.

6
<PAGE> 10
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.

Phillips & Drew will use these contracts to eliminate some of the uncertainty of
foreign exchange rates -- but will not speculate on changes in the market.

The Fund may also 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 fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The value of all futures and options contracts in which
the Fund acquires an interest cannot exceed 20% of its total assets.

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

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

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

The Fund may, from time to time, take temporary defensive measures -- such as
holding cash reserves without limit -- that are inconsistent with the Fund's
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, the Fund may not
achieve its investment objective.

THE FUND AND VANGUARD

The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 distinct investment portfolios holding assets worth
more than $470 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 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.

PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE

The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most 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 own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.

7
<PAGE> 11
PLAIN TALK ABOUT
THE FUND'S ADVISER

Phillips & Drew (formerly UBS International Investment London Limited), is an
investment advisory firm founded in 1987. As of December 31, 1998, Phillips &
Drew managed more than $6 billion in assets. The manager responsible for
overseeing the implementation of Phillips & Drew's strategy for Vanguard
International Value Fund is:

WILSON PHILLIPS, CFA, Investment Manager; has worked in investment management
since 1980; has managed assets since 1981; with Phillips & Drew since 1987;
advised the Fund since 1996; B.Sc., Glasgow University.

INVESTMENT ADVISER

The Fund employs Phillips & Drew (formerly known as UBS International Investment
London Limited), Triton Court, 14 Finsbury Square, London EC2A 1PD, as its
investment adviser. Phillips & Drew manages the Fund subject to the control of
the Trustees and officers of the Fund.

Phillips & Drew's advisory fee is paid quarterly. This fee is based on
certain annual percentage rates applied to the Fund's average month-end assets
for each quarter.

In addition, Phillips & Drew's advisory fee is increased or decreased, based
on the cumulative investment performance of the Fund over a trailing 36-month
period as compared to the cumulative total return of the MSCI EAFE Index over
the same period. Note that this incentive/penalty fee structure will not be
fully operable until June 30, 1999. Until then, Phillips & Drew's fee will be
calculated using certain transition rules. The incentive/penalty fee schedule
and calculation process for the Fund are described in the Fund's Statement of
Additional Information dated April 30, 1999.

For the year ended December 31, 1998, the advisory fee paid to Phillips &
Drew represented an effective annual rate of 0.16% of the Fund's average net
assets before a decrease of 0.04% based on performance.

The Fund has authorized Phillips & Drew to choose brokers or dealers to
handle the purchase and sale of securities for the Fund, and to get the best
available price and most favorable execution from these brokers with respect to
all transactions.

In the interest of obtaining better execution of a transaction, Phillips &
Drew may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and favorable execution of a
transaction, then Phillips & Drew is authorized to choose a broker who, in
addition to executing the transaction, will provide research services to
Phillips & Drew or the Fund. Also, the Fund may direct Phillips & Drew to use a
particular broker for certain transactions in exchange for commission rebates or
research services provided to the Fund.

The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for Phillips & Drew or as an additional adviser. However, any such
change will be communicated to shareholders in writing.

YEAR 2000 CHALLENGE

The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.

The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.

In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.

8
<PAGE> 12
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.

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 a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one
year.

PLAIN TALK ABOUT
"BUYING A DIVIDEND"

Unless you are investing through 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 doing so can cost you money in taxes. 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 still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received -- even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.

DIVIDENDS, CAPITAL GAINS, AND TAXES

The Fund distributes to shareholders virtually all of its net income (interest
and dividends less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition,
the Fund may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year. You can receive
distributions of income or capital gains in cash, or you can have them
automatically invested in more shares of the Fund. 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 each year showing the tax status of all
your distributions. If you have chosen to receive dividend and/or capital gains
distributions in cash, and the postal or other delivery service is unable to
deliver checks to your address of record, we will change the distribution option
so that all dividends and other distributions are automatically invested in
additional shares. We will not pay interest on uncashed distribution checks. n
The dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes. n Any distributions of net long-term capital
gains by the Fund are taxable to you as long-term capital gains, no matter how
long you've owned shares in the Fund.

- - Although the Fund does not seek to realize any particular amount of
capital gains during a year, such gains are realized from time to time
as by-products of its ordinary investment activities. Consequently,
distributions may vary considerably from year to year.

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

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

- - Foreign governments may withhold taxes on dividends and interest paid,
while imposing taxes on other payments or gains, with respect to
foreign securities. If you meet certain holding period requirements, an
offsetting tax credit or deduction may be available. If you do not meet
these requirements, you may still be entitled to a deduction for
certain foreign taxes.

9
<PAGE> 13
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing through a tax-deferred account such
as an IRA or a qualified employee benefit plan. (Non-U.S. investors may be
subject to U.S. withholding and estate tax.) You should consult your tax adviser
about the tax consequences of an investment in the Fund.

IMPORTANT NOTE: By law, the Fund must withhold 31% of your taxable
distributions and any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct, or if the IRS
instructs the Fund to do so.

SHARE PRICE

The Fund'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 (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share is computed by adding up the total value of the Fund's
investments and other assets, subtracting any of its liabilities (debts), and
then dividing by the number of Fund shares outstanding:

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

Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day. Because
foreign securities markets may operate on days which are not business days in
the United States, the value of the Fund's holdings may change on days when
shareholders will not be able to purchase or redeem the Fund's shares.

A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees. The
Fund also may use fair value pricing if the value of a security held by the Fund
is materially affected by events occurring after the close of the primary
markets or exchanges on which such security is traded. In these situations,
prices used by the Fund to calculate its net asset value may differ from quoted
or published prices for the underlying securities.

The Fund'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 Fund's name, but the most common is INTLVAL.

10
<PAGE> 14
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Fund began fiscal 1998 with a net asset value (price) of $22.64 per share.
During the year, the Fund earned $.77 per share from investment income (interest
and dividends) and $3.64 per share from investments that had appreciated in
value or that were sold for higher prices than the Fund paid for them.

Shareholders received $1.96 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.

The earnings ($4.41 per share) minus the distributions ($1.96 per share)
resulted in a share price of $25.09 at the end of the year. This was an increase
of $2.45 per share (from $22.64 at the beginning of the year to $25.09 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 19.46% for the year.

As of December 31, 1998, the Fund had $806 million in net assets. For the
year, its expense ratio was 0.52% ($5.20 per $1,000 of net assets); and net
investment income amounted to 2.77% of its average net assets. It sold and
replaced securities valued at 39% of its net assets.

FINANCIAL HIGHLIGHTS

The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from the financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose report --
along with the Fund's financial statements -- is included in the Fund's most
recent annual report to shareholders. You may have the annual report sent to you
without charge by contacting Vanguard.

<TABLE>
<CAPTION>
VANGUARD INTERNATIONAL VALUE FUND
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $22.64 $27.54 $31.11 $31.48 $31.04
INVESTMENT OPERATIONS
Net Investment Income .77 .690 .82 .750 .55
Net Realized and Unrealized Gain (Loss)
on Investments 3.64 (1.945) 2.20 2.185 1.08
--------------------------------------------------------
Total from Investment Operations 4.41 (1.255) 3.02 2.935 1.63
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.06) (.690) (.82) (.790) (.56)
Distributions from Realized Capital Gains (.90) (2.955) (5.77) (2.515) (.63)
--------------------------------------------------------
Total Distributions (1.96) (3.645) (6.59) (3.305) (1.19)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $25.09 $22.64 $27.54 $31.11 $31.48
==============================================================================================================
TOTAL RETURN 19.46% -4.58% 10.22% 9.65% 5.25%
==============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $806 $777 $917 $988 $1,053
Ratio of Total Expenses to
Average Net Assets 0.52% 0.49% 0.50% 0.47% 0.34%
Ratio of Net Investment Income to
Average Net Assets 2.77% 2.36% 2.50% 2.29% 1.71%
Turnover Rate 39% 37% 82% 47% 40%
==============================================================================================================
</TABLE>

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

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

11
<PAGE> 15

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. Booklets providing detailed information are available on the
services marked with a [OPEN BOOKLET GRAPHIC]. Please call us to request copies.

SERVICES AND ACCOUNT FEATURES

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

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

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

VANGUARD AUTOMATIC EXCHANGE SERVICE(TM) [OPEN BOOKLET GRAPHIC]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.

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

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

VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [OPEN BOOKLET GRAPHIC]
Toll-free 24-hour access to Vanguard fund and account information -- as well as
some transactions -- by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.

ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER TERMINAL GRAPHIC]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:

- - Open a new account.*

- - Buy, sell, or exchange shares of most funds.

- - Change your name/address.

- - Add/change fund options (including dividend options, Vanguard Fund
Express, bank instructions, checkwriting, and Vanguard Automatic
Exchange Service).

*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.

INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335 Call Vanguard for information on our funds, fund services, and
retirement accounts, and to request literature.

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

SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.

12
<PAGE> 16
TYPES OF ACCOUNTS

Individuals and institutions can establish a variety of accounts with Vanguard.

FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.

FOR HOLDING PERSONAL TRUST ASSETS [OPEN BOOKLET GRAPHIC]
Invest assets held in an existing personal trust.

FOR INDIVIDUAL RETIREMENT ACCOUNTS [OPEN BOOKLET GRAPHIC]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).

FOR AN ORGANIZATION [OPEN BOOKLET GRAPHIC]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.

FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.

VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.

A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees or other policies. Consult your intermediary
to determine when your order will be priced.

BUYING SHARES

You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.

MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).

add to an existing account
$100 by mail or exchange; $1,000 by wire.

A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement account whose balance
falls below the minimum initial investment. The Fund will deduct a $10 annual
fee in June if your nonretirement account balance falls below $2,500. The fee is
waived if your total Vanguard account assets are $50,000 or more.

BY MAIL TO . . . [ENVELOPE GRAPHIC]
open a new account
Complete and sign the application form and enclose your check.

add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.

13
<PAGE> 17
BUYING SHARES (continued)

Make your check payable to: The Vanguard Group - 46
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division . . .

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815

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

BY TELEPHONE TO . . . [TELEPHONE GRAPHIC]
open a new account
Call Vanguard Tele-Account* 24 hours a day -- or Client Services during business
hours -- to exchange from another Vanguard fund account with the same
registration (name, address, taxpayer identification number, and account type).

add to an existing account
Call Vanguard Tele-Account* 24 hours a day -- or Client Services during business
hours -- to exchange from another Vanguard fund account with the same
registration (name, address, taxpayer identification number, 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.

Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739

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

IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.

BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE GRAPHIC]
Call Client Services to arrange your wire transaction. Wire transactions are not
available for retirement accounts, except for asset transfers and direct
rollovers.

Wire to:
FRB ABA 021001088
HSBC Bank USA

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
Vanguard International Value Fund - 46
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]

14
<PAGE> 18
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.

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

REDEEMING SHARES

This section describes how you can redeem -- that is, sell or exchange -- the
Fund's shares.

When Selling Shares:

- - Vanguard sends the redemption proceeds to you or a designated third
party.*

- - You can sell all or part of your Fund shares at any time.

*May require a signature guarantee; see footnote on page 17.

When Exchanging Shares:

- - The redemption proceeds are used to purchase shares of a different
Vanguard fund.

- - You must meet the receiving fund's minimum investment requirements.

- - Vanguard reserves the right to revise or terminate the exchange
privilege, limit the amount of an exchange, or reject an exchange at
any time, without notice.

In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.

NOTE: Once a redemption is processed and a confirmation number given, the
transaction CANNOT be canceled.

HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.

ONLINE REQUESTS [COMPUTER TERMINAL GRAPHIC]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).

NOTE: The Vanguard funds whose shares you cannot exchange online or by
telephone are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND,
VANGUARD INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, VANGUARD
TOTAL INTERNATIONAL STOCK INDEX FUND, AND VANGUARD GROWTH AND INCOME FUND. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will receive
a redemption check at your address of record.

TELEPHONE REQUESTS [TELEPHONE GRAPHIC]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day -- or Client Services during business
hours -- to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.

15
<PAGE> 19
REDEEMING SHARES (continued)

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

Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739

SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized. We reserve the
right to refuse a telephone redemption if the caller is unable to provide:

[CHECK MARK GRAPHIC] The ten-digit account number.

[CHECK MARK GRAPHIC] The name and address exactly as registered on the account.

[CHECK MARK GRAPHIC] The primary Social Security or employer identification
number as registered on the account.

[CHECK MARK GRAPHIC] The Personal Identification Number, if applicable.

Please note that Vanguard will not be responsible for any account
losses due to telephone fraud, so long as we have taken reasonable steps to
verify the caller's identity. If you wish to remove the telephone redemption
feature from your account, please notify us in writing.

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 this section.

MAIL REQUESTS [ENVELOPE GRAPHIC]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.

Vanguard Retirement Accounts: For information on how to request distributions
from:

- - Traditional IRAs and Roth IRAs -- call Client Services.

- - 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.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1120 455 Devon Park Drive
Valley Forge, PA 19482-1120 Wayne, PA 19087-1815

16
<PAGE> 20
For clients of Vanguard's Institutional Division ...

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815

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

If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in kind, i.e., in securities, rather than in cash. If
payment is made in kind, you may incur brokerage commissions if you elect to
sell the securities for cash.

OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of two ways: check, or exchange
to another Vanguard fund.

CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.

EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.

FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:

REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:

[CHECK MARK GRAPHIC] The Fund name and account number.

[CHECK MARK GRAPHIC] The amount of the transaction (in dollars or shares).

[CHECK MARK GRAPHIC] Signatures of all owners exactly as registered on the
account (for mail requests).

[CHECK MARK GRAPHIC] Signature guarantees (if required).*

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

[CHECK MARK GRAPHIC] Any outstanding certificates representing shares to be
redeemed.

*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most banks, credit unions,
and licensed brokers.

TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.

LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:

- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE
FUND during any 12-month period.

- - Your round trips through the Fund must be at least 30 days apart.

- - The Fund may refuse a share purchase at any time, for any reason.

- - Vanguard may revoke an investor's telephone exchange privilege at any
time, for any reason.

A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.

17
<PAGE> 21
REDEEMING SHARES (continued)

RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:

The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815

ALL TRADES FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.

TRANSFERRING REGISTRATION

You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division . . .

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815

FUND AND ACCOUNT UPDATES

STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.

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

To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund 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 Client Services Department at 1-800-662-2739.

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

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

18
<PAGE> 22
FUND FINANCIAL REPORTS
Mailed in February and August for this Fund.

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

AVERAGE COST REVIEW STATEMENT [OPEN BOOKLET GRAPHIC]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.##Buying Shares
(continued)##Redeeming Shares (continued)##Redeeming Shares (continued)#(This
page intentionally left blank.)Glossary of Investment TermsCapital Gains
Distribution Payment to mutual fund shareholders of gains realized on securities
that the fund has sold at a profit, minus any realized losses.

19
<PAGE> 23
(THIS PAGE INTENTIONALLY LEFT BLANK.)

20
<PAGE> 24
GLOSSARY OF INVESTMENT TERMS

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

CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include 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 political or financial troubles or natural
disasters will weaken a country's economy.

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

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

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

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

GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison to revenue,
earnings, book value, and dividends.

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 fund'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.

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

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 emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.

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
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 25
[SHIP]

THE VANGUARD GROUP(R)
Post Office Box 2600
Valley Forge, PA 19482-2600

FOR MORE INFORMATION
If you'd like more information about Vanguard International Value Fund, the
following documents are available free upon request:

ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during the most recent fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund.

The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
contact us as follows:

THE VANGUARD GROUP
INVESTOR INFORMATION DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600

TELEPHONE:
1-800-662-7447 (SHIP)

TEXT TELEPHONE:
1-800-952-3335

WORLD WIDE WEB:
www.vanguard.com

If you are a current Fund shareholder and would like information about your
account, account transactions, and/or account statements, please call:

CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)

TEXT TELEPHONE:
1-800-662-2738

INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.

Fund's Investment Company Act file number: 811-2968
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.

P046N - 04/30/1999

<PAGE> 26

VANGUARD INTERNATIONAL VALUE FUND

Participant Prospectus
April 30, 1999

An International Stock Mutual Fund

CONTENTS

1 FUND PROFILE

3 ADDITIONAL INFORMATION

3 A WORD ABOUT RISK

3 WHO SHOULD INVEST

4 PRIMARY INVESTMENT STRATEGIES

7 THE FUND AND VANGUARD

8 INVESTMENT ADVISER

8 YEAR 2000 CHALLENGE

9 DIVIDENDS, CAPITAL GAINS, AND TAXES

9 SHARE PRICE

10 FINANCIAL HIGHLIGHTS

11 INVESTING WITH VANGUARD

11 ACCESSING FUND INFORMATION BY COMPUTER

GLOSSARY (inside back cover)

WHY READING THIS PROSPECTUS IS IMPORTANT

IMPORTANT NOTE

This prospectus is intended 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.

16
<PAGE> 27
1

FUND PROFILE

The following profile summarizes key features of Vanguard International Value
Fund.

INVESTMENT OBJECTIVE

The Fund is an international stock fund that seeks to provide long-term capital
growth and some income.

INVESTMENT STRATEGIES

The Fund invests primarily in large and medium-size companies located outside
the United States whose common stocks are considered by the Fund's adviser to be
undervalued. Such stocks, called "value" stocks, often are out of favor in
periods when investors are drawn to companies with strong prospects for growth.
The prices of value stocks therefore may be below-average in comparison to such
fundamental factors as earnings, revenue, and book-value. Such stocks often
provide an above-average dividend yield.

PRIMARY RISKS

THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS.

The Fund is also subject to:

- - Currency risk, which is the chance that returns will be hurt by a rise in the
value of the U.S. dollar versus foreign currencies.

- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.

- - Investment style risk, which is the chance that returns from value stocks
will trail returns from other asset classes or the overall stock market.

- - Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other funds with similar investment objectives.

PERFORMANCE/RISK INFORMATION

The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based securities
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
<S> <C>
1989 25.97%
1990 -12.26%
1991 9.96%
1992 -8.72%
1993 30.49%
1994 5.25%
1995 9.65%
1996 10.22%
1997 -4.58%
1998 19.46%
- --------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard International Value Fund 19.46% 7.71% 7.70%
MSCI EAFE Index* 20.33 9.50 5.85
- --------------------------------------------------------------------------------
</TABLE>

* Morgan Stanley Capital International Europe, Australasia, Far East Index.

PLAIN TALK ABOUT
THE COSTS OF INVESTING

PLAIN TALK ABOUT
FUND EXPENSES

All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard International Value Fund's expense ratio in fiscal year 1998
was 0.52%, or $5.20 per $1,000 of average net assets. The average international
stock mutual fund had expenses in 1998 of 1.66%, or $16.60 per $1,000 of average
net assets, according to Lipper Inc., which reports on the mutual fund industry.

FEES AND EXPENSES

The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1998.

<TABLE>
<S> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 53 $167 $291 $653
- --------------------------------------------------------------------------------
</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE> 29
3

ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS

Distributed annually in December

INVESTMENT ADVISER

Phillips & Drew (formerly known as UBS International Investment London Limited),
London, England, since March 31, 1996

INCEPTION DATE

May 16, 1983

NET ASSETS AS OF DECEMBER 31, 1998

$806 million

NEWSPAPER ABBREVIATION

IntlVal

VANGUARD FUND NUMBER

046

CUSIP NUMBER

921939203

TICKER SYMBOL

VTRIX

- --------------------------------------------------------------------------------
A WORD ABOUT RISK

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

WHO SHOULD INVEST

The Fund may be a suitable investment for you if:

- - You are seeking investment opportunities outside the United States.

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

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

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

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

PLAIN TALK ABOUT
COSTS AND MARKET-TIMING

THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND IF
YOU ARE A MARKET-TIMER.
<PAGE> 30
4

PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS

The Fund has adopted the following policies, among others, to discourage
short-term trading:

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

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

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

PRIMARY INVESTMENT STRATEGIES

MARKET EXPOSURE

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

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

<PAGE> 31
5

PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING

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

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

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969 - 1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 14.7 13.6 14.9 14.7
- --------------------------------------------------------------------------------
</TABLE>

[FLAG] THE FUND 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 ANOTHER
COUNTRY'S 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 FUND IS SUBJECT TO COUNTRY RISK, WHICH IS THE POSSIBILITY THAT
POLITICAL EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL PROBLEMS (RISING
INFLATION, GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN EARTHQUAKE, A
FLOOD) WILL WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT
COUNTRY TO LOSE MONEY.
<PAGE> 32
6

The transition to a common European currency -- the "euro" -- which began on
January 1, 1999, is one form of country risk that the Fund faces. Although the
euro conversion should have no immediate impact on the Fund's share price, it
may cause uncertainty in European financial markets. If there are difficulties
with the euro conversion, the Fund's European holdings could be adversely
affected.

[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE POSSIBILITY
THAT RETURNS FROM VALUE STOCKS WILL TRAIL RETURNS FROM OTHER ASSET
CLASSES OR THE OVERALL STOCK MARKET. AS A GROUP, VALUE STOCKS TEND TO GO
THROUGH CYCLES OF DOING BETTER -- OR WORSE -- THAN COMMON STOCKS IN
GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.

SECURITY SELECTION

To be considered for Vanguard International Value Fund, a company should
- --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 have a management that is motivated to make positive changes and
work for its shareholders.

The Fund is generally managed without regard to tax ramifications.

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

PLAIN TALK ABOUT
TURNOVER RATE

TURNOVER RATE

Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 49%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)

OTHER INVESTMENT POLICIES AND RISKS

Besides investing in stocks of foreign companies, the Fund may make certain
other kinds of investments to achieve its objective.

The Fund may enter into forward foreign currency contracts, which help
protect its holdings against unfavorable short-term changes in exchange rates. A
forward foreign currency contract is an agreement to buy or sell a country's
currency at a specific price on a specific date, 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 downswings.
<PAGE> 33
7

PLAIN TALK ABOUT
DERIVATIVES

Phillips & Drew will use these contracts to eliminate some of the uncertainty of
foreign exchange rates -- but will not speculate on changes in the market.

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

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

- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced. The Fund may, from time to time, take temporary
defensive measures -- such as holding cash reserves without limit -- that are
inconsistent with the Fund's primary investment strategies, in response to
adverse market, economic, political, or other conditions. In taking such
measures, the Fund may not achieve its investment objective.

THE FUND AND VANGUARD

PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE

The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most 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 own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
<PAGE> 34
8

PLAIN TALK ABOUT
THE FUND'S ADVISER

INVESTMENT ADVISER

Phillips & Drew's advisory fee is paid quarterly. This fee is based on
certain annual percentage rates applied to the Fund's average month-end assets
for each quarter.

YEAR 2000 CHALLENGE

However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.

PLAIN TALK ABOUT
DISTRIBUTIONS

DIVIDENDS, CAPITAL GAINS, AND TAXES

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

SHARE PRICE

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

PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

Shareholders received $1.96 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
VANGUARD INTERNATIONAL VALUE FUND
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 22.64 $ 27.54 $ 31.11 $ 31.48 $ 31.04
- -------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .77 .690 .82 .750 .55
Net Realized and Unrealized Gain (Loss)
on Investments 3.64 (1.945) 2.20 2.185 1.08
-----------------------------------------------
Total from Investment Operations 4.41 (1.255) 3.02 2.935 1.63
-----------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.06) (.690) (.82) (.790) (.56)
Distributions from Realized Capital Gains (.90) (2.955) (5.77) (2.515) (.63)
-----------------------------------------------
Total Distributions (1.96) (3.645) (6.59) (3.305) (1.19)
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 25.09 $ 22.64 $ 27.54 $ 31.11 $ 31.48
===========================================================================================

TOTAL RETURN 19.46% -4.58% 10.22% 9.65% 5.25%
===========================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 806 $ 777 $ 917 $ 988 $ 1,053
Ratio of Total Expenses to
Average Net Assets 0.52% 0.49% 0.50% 0.47% 0.34%
Ratio of Net Investment Income to
Average Net Assets 2.77% 2.36% 2.50% 2.29% 1.71%
Turnover Rate 39% 37% 82% 47% 40%
===========================================================================================
</TABLE>

"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE> 37
11

INVESTING WITH VANGUARD

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

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

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

INVESTMENT OPTIONS AND ALLOCATIONS

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

TRANSACTIONS

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

In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.

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 this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.

Before making an exchange to or from another fund available in your plan,
consider the following:

- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.

- - Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.

- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.

ACCESSING FUND INFORMATION BY COMPUTER

- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB www.vanguard.com

Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
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> 38
(THIS PAGE INTENTIONALLY LEFT BLANK.)

<PAGE> 39

GLOSSARY OF INVESTMENT TERMS

CAPITAL GAINS DISTRIBUTION

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

CASH RESERVES

Cash deposits, short-term bank deposits, and money market instruments which
include 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 political or financial troubles or natural
disasters will weaken a country's economy.

CURRENCY RISK

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

DIVIDEND INCOME

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

EXPENSE RATIO

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

FUND DIVERSIFICATION

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

GROWTH STOCK FUND

A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison to revenue,
earnings, book value, and dividends.

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 fund'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.

PRINCIPAL

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

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 emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.

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

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

<PAGE> 40

[SHIP]

Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900

FOR MORE INFORMATION

If you'd like more information about Vanguard International Value Fund, the
following documents are available free upon request:

ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS

Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during the most recent fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAI provides more detailed information about the Fund.

The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
contact us as follows:

THE VANGUARD GROUP
PARTICIPANT SERVICES CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900

TELEPHONE:
1-800-523-1188

TEXT TELEPHONE:
1-800-523-8004

WORLD WIDE WEB:
www.vanguard.com

INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)

You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.

Fund's Investment Company Act file number: 811-2968

I046N - 04/30/1999

<PAGE> 41

PART B

VANGUARD TRUSTEES' EQUITY FUND

(THE "TRUST")

STATEMENT OF ADDITIONAL INFORMATION

APRIL 30, 1999

This Statement is not a prospectus but should be read in conjunction with
the Trust's Prospectus dated April 30, 1999. To obtain the Prospectus or an
additional 1998 Annual Report to Shareholders, which contains the Fund's
financial statements as hereby incorporated by reference, please call the
Investor Information Department:

1-800-662-7447

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of the Trust.................................... B-1
Investment Policies......................................... B-3
Share Price................................................. B-8
Purchase of Shares.......................................... B-9
Redemption of Shares........................................ B-10
Yield and Total Return...................................... B-10
Fundamental Investment Limitations.......................... B-11
Management of the Trust..................................... B-12
Investment Advisory Services................................ B-16
Portfolio Transactions...................................... B-18
Performance Measures........................................ B-18
Financial Statements........................................ B-21
</TABLE>

DESCRIPTION OF THE TRUST

ORGANIZATION

The Trust was organized as a Maryland corporation in 1979, reorganized as a
Pennsylvania business trust in 1984, then reorganized as a Delaware business
trust in August, 1998. Prior to its reorganization as a Delaware business trust,
the Trust was known as Vanguard/Trustees' Equity Fund. The Trust is registered
with the United States Securities and Exchange Commission (the Commission) under
the Investment Company Act of 1940 (the "1940 Act") as an open-end, diversified
management investment company. It currently offers the following fund and class
of shares: INTERNATIONAL VALUE FUND (the "Fund").

The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that the Trust may
issue for a single fund or class of shares.

SERVICE PROVIDERS

CUSTODIAN. Chase Manhattan Bank, N.A., 4 Chase MetroTech Center, Brooklyn,
New York 11245 serves as the Trust's custodian. The custodian is responsible for
maintaining the Fund's assets and keeping all necessary accounts and records.

INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania, 19103, serves as the Trust's independent
accountants. The accountants audit financial statements for the Trust and
provide other related services.

B-1
<PAGE> 42

TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.

CHARACTERISTICS OF THE TRUST'S SHARES

RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Trust's shares, other
than the possible future termination of the Trust or any of its funds. The Trust
or any of its funds may be terminated by reorganization into another mutual fund
or by liquidation and distribution of the assets of the affected fund. Unless
terminated by reorganization or liquidation, the Trust and its funds will
continue indefinitely.

SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Trust will
not be personally liable for payment of the Trust's debts except by reason of
his or her own conduct or acts. In addition, a shareholder could incur a
financial loss on account of a Trust obligation only if the Trust itself had no
remaining assets with which to meet such obligation. We believe that the
possibility of such a situation arising is extremely remote.

DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
of shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.

VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of the Trust's net assets, and to change any
fundamental policy of the Trust. Shareholders of the Trust receive one vote for
each dollar of net asset value owned on the record date, and a fractional vote
for each fractional dollar of net asset value owned on the record date. However,
only the shares of the fund affected by a particular matter are entitled to vote
on that matter. Voting rights are non-cumulative and cannot be modified without
a majority vote.

LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the net assets of the applicable fund of
the Trust.

PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares
of the Trust.

CONVERSION RIGHTS. There are no conversion rights associated with shares
of the Trust.

REDEMPTION PROVISIONS. The Trust's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.

SINKING FUND PROVISIONS. The Trust has no sinking fund provisions.

CALLS OR ASSESSMENT. The Trust's shares, when issued, are fully paid and
non-assessable.

TAX STATUS OF THE TRUST

The Trust qualifies as a "regulated investment company" under Subchapter M
of the Internal Revenue Code. This special tax status means that a fund will not
be liable for federal tax on income and capital gains distributed to
shareholders. In order to preserve its tax status, the Trust must comply with

B-2
<PAGE> 43

certain requirements. If it fails to meet these requirements in any taxable
year, it will be subject to tax on its taxable income at corporate rates, and
all distributions from earnings and profits, including any distributions of net
tax-exempt income and net long-term capital gains, will be taxable to
shareholders as ordinary income. In addition, the Trust could be required to
recognize unrealized gains, pay substantial taxes and interest, and make
substantial distributions before regaining its tax status as a regulated
investment company.

INVESTMENT POLICIES

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

FOREIGN INVESTMENTS. Under normal circumstances, at least 65% of Vanguard
International Value Fund's assets will be invested in foreign stocks in at least
three different countries. Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies.

CURRENCY RISK. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since Vanguard International Value Fund
may temporarily hold uninvested reserves in bank deposits in foreign currencies,
the Fund will be affected favorably or unfavorably by changes in currency rates
and in exchange control regulations, and may incur costs in connection with
conversions between various currencies. The investment policies of Vanguard
International Value Fund permit it to enter into forward foreign currency
exchange contracts in order to hedge the Fund'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.

FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option and similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are generally
not subject to the special currency rules if they are or would be treated as
sold for their fair market value at year-end under the marking-to-market rules
applicable to other futures contracts unless an election is made to have such
currency rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. The Treasury Department issued regulations under which
certain transactions subject to the special currency rules that are part of a
"section 988 hedging transaction" (as defined in the Internal Revenue Code of
1986, as amended, and the Treasury regulations) will be integrated and treated
as a single transaction or otherwise treated consistently for purposes of the
Code. Any gain or loss attributable to the foreign currency component of a
transaction engaged in by a Fund which is not subject to the special currency
rules (such as foreign equity investments other than certain preferred stocks)
will be treated as capital gain or loss and will not be segregated from the gain
or loss on the underlying transaction. It is anticipated that some of the
non-U.S. dollar-denominated investments and foreign currency contracts Vanguard
International Value Fund may make or enter into will be subject to the special
currency rules described above.

B-3
<PAGE> 44

COUNTRY RISK. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. In particular, emerging
markets, which are countries that are becoming industrialized (also called
developing economies), can be substantially more volatile than both U.S. and
more developed foreign markets. 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 the Fund 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 Fund's
foreign securities will be somewhat greater than the expenses for the custodian
arrangements for handling the U.S. Fund's securities of equal value.

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

FOREIGN TAX CREDIT. Foreign governments may withhold taxes on dividends
and interest paid with respect to foreign securities. Foreign governments may
also impose taxes on other payments or gains with respect to foreign securities.
If, at the close of its fiscal year, more than 50% of a fund's total assets are
invested in securities of foreign issuers, the fund may elect to pass through
foreign taxes paid, and thereby allow shareholders to take a tax credit or
deduction on their tax returns. If shareholders meet certain holding period
requirements with respect to fund shares, an offsetting tax credit may be
available. If shareholders do not meet the holding period requirements, they may
still be entitled to a deduction for certain foreign taxes. In either case, a
shareholder's tax statement will show more taxable income or capital gains than
were actually distributed by the fund, but will also show the amount of the
available offsetting credit or deduction.

A shareholder that is a nonresident alien for U.S. tax purposes may be
subject to adverse U.S. tax consequences. For example, dividends and short-term
capital gains paid by the fund will generally be subject to U.S. federal
withholding tax at a rate of 30% (or lower treaty rate if applicable). Foreign
investors are urged to consult their tax advisers regarding the U.S. tax
treatment of ownership of shares in the Fund.

FUTURES CONTRACTS. The Fund 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 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.
B-4
<PAGE> 45

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 Fund
expect to earn interest income on their margin deposits.

Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the market value of the underlying securities. The Fund will not use futures and
options for speculative purposes. The Fund 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. The Fund 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 Fund 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 Fund 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 Fund income to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While the Fund 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.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Fund 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 Fund's total assets. In addition, a Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund'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 Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Fund 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 Fund 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 Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures contracts which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
B-5
<PAGE> 46

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 Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Fund is subject to the risks of loss frequently
associated with futures transactions. A Fund 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 Fund 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 fund 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 fund of margin deposits in the event of bankruptcy of a broker
with whom the fund has an open position in a futures contract or related option.
Additionally, investments in futures contracts and options involve the risk that
the investment advisers will incorrectly predict stock market and interest rate
trends.

Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.

FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. The Fund 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 Fund may affect the holding period of such securities and, consequently, the
nature of the gain or loss on such securities upon disposition. A fund 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 fund.

In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or foreign currencies or other income derived with respect to the
Fund's business of investing in securities. It is anticipated that any net gain
realized from the closing out of futures contracts will be considered qualifying
income for purposes of the 90% requirement.

The Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the distributions.

REPURCHASE AGREEMENTS. The Fund 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
B-6
<PAGE> 47

excess cash balances. A repurchase agreement is an agreement under which the
Fund acquires a fixed-income security (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 Fund and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Fund (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 the
Fund'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 Fund.

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
fund 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 fund not within the control
of the fund and therefore the realization by a fund on such collateral may be
automatically stayed. Finally, it is possible that a fund 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.

ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on the Fund's books.

The Fund may invest in restricted, privately placed securities that, under
SEC rules, may be sold only to qualified institutional buyers. Because these
securities can be resold only to qualified institutional buyers, they may be
considered illiquid securities -- meaning that they could be difficult for the
Fund to convert to cash if needed.

If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the 1933 Act. While the Fund's
investment adviser determines the liquidity of restricted securities on a daily
basis, the Board oversees and retains ultimate responsibility for the adviser's
decisions. Several factors the Board considers in monitoring these decisions
include the valuation of a security, the availability of qualified institutional
buyers, and the availability of information about the security's issuer.

LENDING OF SECURITIES. The Fund may lend its investment securities on a
short-term or long-term basis to qualified institutional investors (typically
brokers, dealers, banks or other financial institutions) 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 fund 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 Fund. The terms, the structure
and the aggregate amount of such loans must be consistent with the 1940 Act, and
the Rules and Regulations or interpretations of the Commission thereunder. These
provisions limit the amount of securities a fund may lend to 33 1/3% of the
Fund's total assets, and require that: (a) the borrower pledge and maintain with
the Fund 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

B-7
<PAGE> 48

loaned rises (i.e., the borrower "marks to the market" on a daily basis), (c)
the loan be made subject to termination by the Fund at any time, and (d) the
Fund receive reasonable interest on the loan (which may include the Fund'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 fund 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 Trust's Board of Trustees.

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

VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Fund to participate in Vanguard's interfund lending
program. This program allows the Vanguard funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions, including the requirement that no fund may borrow or
lend money through the program unless it receives a more favorable interest rate
than is available from a typical bank for a comparable transaction. In addition,
a fund may participate in the program only if and to the extent that such
participation is consistent with the fund's investment objective and other
investment policies. The Board of Trustees of the Vanguard funds are responsible
for ensuring that the interfund lending program operates in compliance with all
conditions of the Commission's exemptive order.

TEMPORARY INVESTMENTS. The Fund may take temporary defensive measures that
are inconsistent with the Fund's normal fundamental or non-fundamental
investment policies and strategies in response to adverse market, economic,
political or other conditions. Such measures could include investments in (a)
highly liquid short-term fixed income securities issued by or on behalf of
municipal or corporate issuers, obligations of the U.S. Government and its
agencies, commercial paper, and bank certificates of deposit; (b) shares of
other investment companies which have investment objectives consistent with
those of the Fund; (c) repurchase agreements involving any such securities; and
(d) other money market instruments. There is no limit on the extent to which the
Fund may take temporary defensive measures. In taking such measures, the Fund
may fail to achieve its investment objective.

SHARE PRICE

The Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, 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 (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.

B-8
<PAGE> 49

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, or the most
recently determined closing price calculated according to local market
convention, available at the time a Fund is valued. Prices are obtained from the
broadest and most representative market on which the securities trade. If events
which materially affect the value of each Fund'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 the Fund'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 the Fund can be found daily in the mutual fund listings
of most major newspapers under the heading of Vanguard Funds.

PURCHASE OF SHARES

The purchase price of shares 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 (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 Fund's investment securities to
materially affect the Fund'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.

The Fund reserves the right in its sole discretion: (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, 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 Fund's shares.

TRADING SHARES THROUGH CHARLES SCHWAB

The Trust 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 the Trust's behalf subject to those terms and
conditions. Under this arrangement, the Trust 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 the Trust's instructions.
Customer orders that are properly transmitted to the Trust 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 the
Fund'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

B-9
<PAGE> 50

following business day and your share price will be based on the Fund's net
asset value calculated at the close of trading that day.

REDEMPTION OF SHARES

The Trust 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 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 Trust 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.

No charge is made by a Fund 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 Trust.

SIGNATURE GUARANTEES. To protect your account, the Trust and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Trust 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 Trust in certain instances.

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

YIELD AND TOTAL RETURN

The average annual total return of the Fund for the following periods ended
December 31, 1998 is set forth below:

<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
12/31/1998 12/31/1998 12/31/1998
------------ ------------- --------------
<S> <C> <C> <C>
Vanguard International Value Fund..... +19.46% +7.71% +7.70%
</TABLE>

AVERAGE ANNUAL TOTAL RETURN

Average annual total return is the average annual compounded rate of return
for the periods of one year, five years, ten years or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compounded rates of return of a hypothetical investment over
such periods according to the following formula (average annual total return is
then expressed as a percentage):

T = (ERV/P)(1/n) - 1

Where:

<TABLE>
<S> <C> <C>
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
</TABLE>

B-10
<PAGE> 51

CUMULATIVE TOTAL RETURN

Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):

C = (ERV/P) - 1

Where:

<TABLE>
<S> <C> <C>
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
</TABLE>

SEC YIELDS

Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:

YIELD = 2[((a - b)/cd+1)(6)- 1]

Where:

<TABLE>
<S> <C> <C>
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
</TABLE>

FUNDAMENTAL INVESTMENT LIMITATIONS

The Fund is subject to the following fundamental investment limitations,
which cannot be changed in any material way without the approval of the holders
of a majority of the Fund's shares. For these purposes, a "majority" of the
Fund's shares means shares representing the lesser of: (i) 67% or more of the
votes cast to approve a change, so long as shares representing more than 50% of
the Fund's net asset value are present or represented by proxy; or (ii) more
than 50% of the Fund's net asset value.

BORROWING. The Fund may not borrow money, except for temporary or
emergency purposes in an amount not exceeding 15% of the Fund's net assets. The
Fund may borrow money through banks, reverse repurchase agreements, or
Vanguard's interfund lending program only, and must comply with all applicable
regulatory conditions. The Fund may not make any additional investments whenever
its outstanding borrowings exceed 5% of net assets.

COMMODITIES. The Fund may not invest in commodities, except that it may
invest in stock futures contracts, stock options and options on stock futures
contracts. No more than 5% of the Fund's total assets may be used as initial
margin deposit for futures contracts, and no more than 20% of the Fund's total
assets may be invested in futures contracts or options at any time.

DIVERSIFICATION. With respect to 75% of its total assets, the Fund may
not: (i) purchase more than 10% of the outstanding voting securities of any one
issuer; or (ii) purchase securities of any issuer if,

B-11
<PAGE> 52

as a result, more than 5% of the Fund's total assets would be invested in that
issuer's securities. This limitation does not apply to obligations of the United
States Government, its agencies, or instrumentalities.

ILLIQUID SECURITIES. The Fund may not acquire any security if, as a
result, more than 15% of its net assets would be invested in securities that are
illiquid.

INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry.

INVESTING FOR CONTROL. The Fund may not invest in a company for purposes
of controlling its management.

INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.

LOANS. The Fund may not lend money to any person except: by purchasing
fixed income securities that are publicly distributed; by 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 the Fund's total assets; by
lending its portfolio securities; or through Vanguard's interfund lending
program.

MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.

OIL, GAS, MINERALS. The Fund may not invest in interests in oil, gas or
other mineral exploration or development programs.

PLEDGING ASSETS. The Fund may not pledge, mortgage or hypothecate more
than 15% of its net assets.

PUT OR CALL OPTIONS. The Fund may not purchase or write put or call
options, except as permitted by the Fund's investment policies relating to
commodities.

REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate.

SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.

UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.

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

None of these limitations prevents the Fund from participating in The
Vanguard Group ("Vanguard"). Because the Trust is a member of the Group, the
Fund may own securities issued by Vanguard, make loans to Vanguard, and
contribute to Vanguard's costs or other financial requirement. See "Management
of the Trust" for more information.

MANAGEMENT OF THE TRUST

TRUSTEES AND OFFICERS

The Officers of the Trust manage its day-to-day operations and are
responsible to the Trust's Board of Trustees. The Trustees set broad policies
for the Trust and choose its Officers. The following is a list of the Trustees
and Officers of the Trust and a statement of their present positions and
principal occupa-

B-12
<PAGE> 53

tions during the past five years. As a group, the Trust's Trustees and Officers
own less than 1% of the outstanding shares of the Trust. Each Trustee also
serves as a Director of The Vanguard Group, Inc., and as a Trustee of each of
the 36 investment companies administered by Vanguard (35 in the case of Mr.
Malkiel and 28 in the case of Mr. MacLaury). The mailing address of the Trustees
and Officers of the Trust 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 Trustee of each of
the investment companies in The Vanguard Group; Director of The Mead Corp.
(Paper Products), General Accident Insurance, and Chris-Craft Industries, Inc.
(Broadcasting & Plastics Manufacturer).

JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.

JOANN HEFFERNAN HEISEN, (DOB: 1/25/50) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson and Johnson (Pharmaceuticals/Consumer Products), Director of Johnson
& Johnson*MERCK Consumer Pharmaceuticals Co., Women First HealthCare, Inc.
(Research and Education Institution), Recording for the Blind and Dyslexic, The
Medical Center at Princeton, and Women's Research and Education Institute.

BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.

BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Southern New
England Telecommunications Co.

ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries
(Machinery/Coal/Appliances); Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals), and The Standard Products Co. (Rubber Products
Company).

JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries (Machinery/Coal/Appliances), and Newfield Exploration Co.
(Energy); formerly, Director and Senior Partner of McKinsey & Co., and President
of New York University.

JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp..

J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Chairman and Chief Executive Officer of Rohm & Haas Co. (Chemicals); Director of
Cummins Engine Co. (Diesel Engine Company), and The Mead Corp. (Paper Products);
and Trustee of Vanderbilt University.

RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.

THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.

B-13
<PAGE> 54

ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc. Controller of each of the investment
companies in The Vanguard Group.
- --------------------------------------------------------------------------------

*Officers of the Trust are "interested persons" as defined in the 1940 Act.

THE VANGUARD GROUP

Vanguard Trustees' Equity Fund is a member of The Vanguard Group of
Investment Companies which consists of more than 35 investment companies (the
"Trusts"). Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Trust and the other Trusts 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 Trusts.

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

Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the 1940 Act. 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 similar to, and in many cases more restrictive than, those
recommended by a blue ribbon panel of mutual fund industry executives.

Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the Funds.
The amounts which each of the Trusts has invested are adjusted from time to time
in order to maintain the proportionate relationship between each Trust's
relative net assets and its contribution to Vanguard's capital. At December 31,
1998, the Trust had contributed capital of $147,000 to Vanguard, representing
0.02% of the Fund's net assets and 0.2% of Vanguard's capitalization. The
Amended and Restated Funds' Service Agreement provides as follows: (a) each
Vanguard Trust may be called upon to invest up to .40% of its current assets in
Vanguard, and (b) there is no other limitation on the dollar amount that each
Vanguard Trust may contribute to Vanguard's capitalization.

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

DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the Trust. 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 Vanguard Group. The
Trustees and Officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each Trust, and
whether to organize new investment companies.

One half of the distribution expenses of a marketing and promotional nature
is allocated among the Trusts based upon their relative net assets. The
remaining one half of these expenses is allocated among the Trusts based upon
each Trust's sales for the preceding 24 months relative to the total sales of
the Trusts as a Group, provided, however, that no Trust'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
Vanguard Group, and that no Trust shall incur annual distribution expenses in
excess of 20/100 of 1% of its average month-end net assets. During the fiscal
years ended December 31,

B-14
<PAGE> 55

1996, 1997, and 1998, the Fund incurred approximately $2,567,000, $2,492,000,
and $2,719,000, of The Vanguard Group's management (including transfer agency),
distribution and marketing expenses.

INVESTMENT ADVISORY SERVICE. Vanguard provides investment advisory
services to several Vanguard Trusts. 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 Trusts utilizing
these services.

TRUSTEE COMPENSATION

The same individuals serve as Trustees of all Vanguard Trusts (with two
exceptions, which are noted in the table appearing on page B-16), and each Trust
pays a proportionate share of the Trustees' compensation. The Trusts employ
their officers on a shared basis, as well. However, officers are compensated by
The Vanguard Group, Inc., not the Trusts.

INDEPENDENT TRUSTEES. The Trusts compensate their independent
Trustees -- that is, the ones who are not also officers of the Trust -- in three
ways:

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

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

- Upon retirement, the independent 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 each Trustee's death.

"INTERESTED" TRUSTEES. The Trust's interested 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. We list the amounts paid as compensation and accrued as
retirement benefits by the Trust for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard Trusts upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard Trusts. All information shown is for the fiscal
year ended December 31, 1998.

VANGUARD TRUSTEES' EQUITY FUND
COMPENSATION TABLE

<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD TRUSTS
NAMES OF TRUSTEES FROM TRUST PART OF TRUST EXPENSES UPON RETIREMENT PAID TO TRUSTEES(1)
- ----------------- ------------ ---------------------- --------------- ------------------------
<S> <C> <C> <C> <C>
John C. Bogle................ None None None None
John J. Brennan.............. None None None None
Barbara Barnes
Hauptfuhrer(2)............. $207 $28 $15,000 $75,000
JoAnn Heffernan Heisen....... $103 $12 $15,000 $37,500
Robert E. Cawthorn(2)........ $ 86 $19 $ 6,000 $31,250
Bruce K. MacLaury............ $217 $20 $12,000 $70,000
Burton G. Malkiel............ $208 $20 $15,000 $75,000
Alfred M. Rankin, Jr. ....... $207 $15 $15,000 $75,000
John C. Sawhill.............. $207 $19 $15,000 $75,000
James O. Welch, Jr. ......... $207 $21 $15,000 $75,000
J. Lawrence Wilson........... $207 $16 $15,000 $75,000
</TABLE>

(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Trustee of 36 Vanguard Trusts (35 in the
case of Mr. Malkiel; 28 in the case of Mr. MacLaury).

(2) Mr. Cawthorn and Mrs. Hauptfuhrer have retired from the Trust's Board,
effective May 31, 1998, and December 31, 1998, respectively.
B-15
<PAGE> 56

INVESTMENT ADVISORY SERVICES

VANGUARD INTERNATIONAL VALUE FUND'S INVESTMENT ADVISER

The investment adviser to Vanguard International Value Fund is Phillips &
Drew (formerly known as UBS International Investment London Limited), Triton
Court, 14 Finsbury Square, London, England EC2A 1PD. Phillips & Drew 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 the Fund,
manages the investment and reinvestment of the assets of the Fund. In this
regard, it is the responsibility of Phillips & Drew to make investment decisions
for Vanguard International Value Fund and to place the Fund's purchase and sale
orders for investment securities.

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

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

The basic fee paid to Phillips & Drew ("Basic Fee"), shall be increased or
decreased by applying an incentive/penalty adjustment to the Basic Fee
reflecting the investment performance of the Fund 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
Phillips & Drew based upon the incentive/penalty adjustment:

<TABLE>
<CAPTION>
DIFFERENTIAL VERSUS MSCI-EAFE INDEX ADJUSTMENT*
- ----------------------------------- -----------
<S> <C>
+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
</TABLE>

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

Through the quarter ending June 30, 1999, the incentive/penalty fee for
Phillips & Drew 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 Fund 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-16
<PAGE> 57

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

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

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

During the period beginning April 1, 1996 through December 31, 1996 and the
fiscal years ended December 31, 1997 and 1998, Vanguard International Value Fund
paid Phillips & Drew advisory fees totaling $1,086,000 (.11 of the Fund's
average net assets), $1,371,000 (.15% of the Fund's average net assets) and
$1,321,000 (.16% of the Fund's average net assets), before a decrease of
$353,000 based on performance, respectively.

PRIOR INVESTMENT ADVISER FOR VANGUARD INTERNATIONAL VALUE FUND

From its inception until April 1, 1996, Vanguard International Value Fund
employed Batterymarch Financial Management as its investment adviser. During the
period beginning January 1, 1996 through April 1, 1996, Vanguard International
Value Fund paid Batterymarch Financial Management advisory fees totaling
$378,000 (.04 of 1% of average net assets) before a decrease of $94,000 (.01%)
based on performance, respectively.

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
trustees 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 trustees 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 Phillips & Drew the maximum performance
adjustment is made at a difference

B-17
<PAGE> 58

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 Phillips & Drew is renewable, 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. The agreement may be terminated at any time, without penalty,
by vote of the Board of Trustees of the Trust on 60 days' written notice to the
investment adviser, or by the investment adviser on 90 days' written notice to
the Trust. 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 be communicated to shareholders in writing.

CONTROL OF THE ADVISERS

Phillips & Drew Limited owner of Phillips & Drew International Investment
Ltd. (P&DII) (Formerly UBS International Investment London Limited) is the
"controlling person" (as that term is defined in the rules and regulations of
the Securities and Exchange Commission) of P&DII, UBS AG is the beneficial owner
of 100% of the outstanding equity securities of Phillips & Drew Holding Ltd*.,
which in turn is the 100% beneficial owner of Phillips & Drew Limited, the 100%
shareholder of P&DII.

*UBS AG holds 100% voting 'A' shares in Phillips & Drew Holding Ltd. Non Voting
'B' shares are held by UBS Assets (UK) Limited itself a wholly owned subsidiary
of UBS AG.

PORTFOLIO TRANSACTIONS

The investment advisory agreement authorizes the investment adviser to
select the brokers or dealers that will execute the purchases and sales of
investment securities for the Fund, and directs the investment adviser to use
its best efforts to obtain the best available price and most favorable execution
with respect to all transactions for the Fund.

Some securities considered for investment by the Fund may also be
appropriate for other clients served by the investment adviser. If purchase or
sale of securities consistent with the investment policies of the Fund 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 Fund 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 adviser, and
the results of such allocations, are subject to periodic review by the Fund's
Board of Trustees.

During the years ended December 31, 1996, 1997 and 1998 the Fund paid
$13,290,992, $2,431,609 and $1,467,221 respectively, in brokerage commissions.

PERFORMANCE MEASURES

Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member trusts of The Vanguard Group of Investment Companies.
B-18
<PAGE> 59

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 -- includes stocks
selected by Standard & Poor's Index Committee to include leading companies in
leading industries and to reflect 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.

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 a market weighted index that
contains individually priced U.S. Treasury securities 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 $100 million outstanding. This index
includes over 1,500 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 $100 million
principal outstanding and maturity greater than 10 years.

B-19
<PAGE> 60

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.

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 $5 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 $800 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 $1.1 trillion.

LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of
small company growth funds as defined by Lipper 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
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 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 Inc.

B-20
<PAGE> 61

FINANCIAL STATEMENTS

The Trust's financial statements as of and for the year ended December 31,
1998 appearing in the Trust's 1998 Annual Reports to Shareholders, and the
reports thereon of PricewaterhouseCoopers LLP, independent accountants, also
appearing therein, are incorporated by reference into this Statement of
Additional Information. For a more complete discussion of the performance,
please see the Trust's Annual Report to Shareholders, which may be obtained
without charge.

B-21
<PAGE> 62

PART C

VANGUARD TRUSTEES' EQUITY FUND

OTHER INFORMATION

ITEM 23. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
(a) Declaration of Trust*
(b) By-Laws*
(c) Reference is made to Articles III and V of the Registrant's
Declaration of Trust
(d) Investment Advisory Contracts*
(e) Not Applicable
(f) Reference is made to the section entitled "Management of the
Trust" in the Registrant's Statement of Additional
Information
(g) Custodian Agreement*
(h) Amended and Restated Funds' Service Agreement*
(i) Legal Opinion*
(j) Consent of Independent Accountants+
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Financial Data Schedule+
</TABLE>

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

* Filed previously

+ Filed herewith

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

Registrant is not controlled by or under common control with any person.

ITEM 25. INDEMNIFICATION

The Registrant's organizational documents contain provisions indemnifying
Trustees and Officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and Officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or Officer. However, this provision does not cover any liability to
which a Trustee or Officer 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 or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and Officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or Officer's
office with the Registrant.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Phillips & Drew is an investment adviser registered under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"). The list required by this
Item 26 of officers and partners of Phillips & Drew, together with any
information as to any business profession, vocation or employment of a
substantial nature engaged in by such officers and partners during the past two
years, is incorporated

C-1
<PAGE> 63

herein by reference from Schedules B and D of Form ADV filed by Phillips & Drew
pursuant to the Advisers Act (SEC File No. 801-8957).

ITEM 27. PRINCIPAL UNDERWRITERS

(a) Not Applicable
(b) Not Applicable
(c) Not Applicable

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., Valley Forge, Pennsylvania 19482; and the Registrant's
Custodian, Morgan Stanley Trust Company, One Pierrepont Plaza, Brooklyn, New
York 11201.

ITEM 29. MANAGEMENT SERVICES

Other than as set forth under the description of The Vanguard Group in Part
B of this Registration Statement, Registrant is not a party to any
management-related service contract.

ITEM 30. UNDERTAKINGS

Not Applicable

C-2
<PAGE> 64

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HEREBY CERTIFIES THAT IT MEETS
ALL THE REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT
TO RULE 485(b) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS
POST-EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN OF VALLEY
FORGE AND THE COMMONWEALTH OF PENNSYLVANIA, ON THE 23RD DAY OF APRIL, 1999.

VANGUARD TRUSTEES' EQUITY FUND

BY: (signature)

------------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

BY: (signature) John C. Bogle*, Senior Chairman April 23, 1999
------------------------------------------------- of the Board and Trustee
(HEIDI STAM)

BY: (signature) John J. Brennan*, Chairman, April 23, 1999
------------------------------------------------- Chief Executive Officer and
(HEIDI STAM) Trustee

BY: (signature) JoAnn Heffernan Heisen*, April 23, 1999
------------------------------------------------- Trustee
(HEIDI STAM)

BY: (signature) Bruce K. MacLaury*, Trustee April 23, 1999
-------------------------------------------------
(HEIDI STAM)

BY: (signature) Burton G. Malkiel*, Trustee April 23, 1999
-------------------------------------------------
(HEIDI STAM)

BY: (signature) Alfred M. Rankin, Jr.*, Trustee April 23, 1999
-------------------------------------------------
(HEIDI STAM)

BY: (signature) John C. Sawhill*, Trustee April 23, 1999
-------------------------------------------------
(HEIDI STAM)

BY: (signature) James O. Welch, Jr.*, Trustee April 23, 1999
-------------------------------------------------
(HEIDI STAM)

BY: (signature) J. Lawrence Wilson*, Trustee April 23, 1999
-------------------------------------------------
(HEIDI STAM)

BY: (signature) Thomas J. Higgins, Treasurer April 23, 1999
------------------------------------------------- and Principal Financial Officer
(HEIDI STAM) and Accounting Officer
</TABLE>

- ---------------
* By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE> 65

INDEX TO EXHIBITS

<TABLE>
<S> <C>
Consent of Independent Accountants.......................... EX-99.BJ

Financial Data Schedule..................................... EX-99.BN
</TABLE>

<PAGE> 1

EX-99.BJ

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 26 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 2, 1999, relating to the financial
statements and financial highlights appearing in the December 31, 1998 Annual
Report to Shareholders of Vanguard International Value Fund, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the
Prospectuses and under the headings "Financial Statements" and "Service
Providers -- Independent Accountants" in the Statement of Additional
Information.

PricewaterhouseCoopers LLP
Philadelphia, PA

April 22, 1999

<PAGE> 1
[ARTICLE] 6
[CIK] 0000313850
[NAME] VANGUARD TRUSTEES' EQUITY FUND
[SERIES]
[NUMBER] 02
[NAME] VANGUARD INTERNATIONAL VALUE FUND
[MULTIPLIER] 1000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 823653
[INVESTMENTS-AT-VALUE] 838831
[RECEIVABLES] 5916
[ASSETS-OTHER] 147
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 844894
[PAYABLE-FOR-SECURITIES] 252
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 38339
[TOTAL-LIABILITIES] 38591
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 810566
[SHARES-COMMON-STOCK] 32138
[SHARES-COMMON-PRIOR] 34304
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 10485
[ACCUMULATED-NET-GAINS] (6647)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 13229
[NET-ASSETS] 806303
[DIVIDEND-INCOME] 25076
[INTEREST-INCOME] 1203
[OTHER-INCOME] 962
[EXPENSES-NET] 4271
[NET-INVESTMENT-INCOME] 22970
[REALIZED-GAINS-CURRENT] 6900
[APPREC-INCREASE-CURRENT] 112495
[NET-CHANGE-FROM-OPS] 142365
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 32297
[DISTRIBUTIONS-OF-GAINS] 28807
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 9809
[NUMBER-OF-SHARES-REDEEMED] 14192
[SHARES-REINVESTED] 2217
[NET-CHANGE-IN-ASSETS] 29541
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 13857
[OVERDISTRIB-NII-PRIOR] 115
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 968
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4271
[AVERAGE-NET-ASSETS] 829005
[PER-SHARE-NAV-BEGIN] 22.64
[PER-SHARE-NII] 0.77
[PER-SHARE-GAIN-APPREC] 3.64
[PER-SHARE-DIVIDEND] 1.06
[PER-SHARE-DISTRIBUTIONS] 0.90
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 25.09
[EXPENSE-RATIO] 0.52
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>