VANGUARD TAX MANAGED FUND INC, 485APOS, 1998-12-03

VANGUARD TAX MANAGED FUND INC
485APOS, 1998-12-03

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<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT (NO. 33-53683) UNDER THE

SECURITIES ACT OF 1933

PRE-EFFECTIVE AMENDMENT NO.

POST-EFFECTIVE AMENDMENT NO. 7

AND

REGISTRATION STATEMENT (NO. 811-07175) UNDER THE INVESTMENT COMPANY

ACT OF 1940

AMENDMENT NO. 10

VANGUARD TAX-MANAGED FUNDS

(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 this filing become effective: On February * , 1999
pursuant to paragraph (a) of Rule 485.

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 * .

<PAGE> 2

VANGUARD TAX-MANAGED FUNDS

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
<S> <C>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
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............................... Herein incorporated by reference to
Registrant's Annual Report to Shareholders
dated December 31, 1998 filed with the
Securities & Exchange Commission's
EDGAR system on * .
Item 6. Management, Organization, and Capital
Structure................................ The Trust and Vanguard; Investment Adviser
Item 7. Shareholder Information................... Share Price; Dividends, Capital Gains, and Taxes;
Investing with Vanguard
Item 8. Distribution Arrangements................. Inside Front Cover Page
Item 9. Financial Highlights Information.......... Financial Highlights
</TABLE>

<TABLE>
<CAPTION>
<S> <C>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
Item 10. Cover Pages 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 Share Price of the Trust
Item 13. Management of the Fund.................... 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........ Not Applicable; Description of the Trust
Item 18. Purchase, Redemption and Pricing
of Shares................................ Purchase of Shares; Redemption of Shares;
and Fundamental Investment Limitations
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 TAX-MANAGED FUNDS
INVESTOR SHARES PROSPECTUS
February * , 1999

VANGUARD TAX-MANAGED
BALANCED FUND

VANGUARD TAX-MANAGED
GROWTH AND INCOME FUND

VANGUARD TAX-MANAGED
CAPITAL APPRECIATION FUND

VANGUARD TAX-MANAGED
SMALL-CAP FUND

This prospectus contains financial data for the Trust through the semi-annual
period ended June 30, 1998.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. SHARES OF
VANGUARD TAX-MANAGED SMALL-CAP FUND AND INSTITUTIONAL SHARES OF THE VANGUARD
TAX-MANAGED GROWTH AND INCOME AND TAX-MANAGED CAPITAL APPRECIATION FUNDS MAY NOT
BE SOLD, NOR MAY OFFERS TO BUY BE ACCEPTED, PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION SHALL NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN A STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF THE
STATES.
<PAGE> 4
VANGUARD TAX-MANAGED FUNDS
Investor Shares Prospectus
February *, 1999
A Group of Tax-Managed Mutual Funds

CONTENTS

1 FUND PROFILES
1 Vanguard Tax-Managed Balanced Fund
3 Vanguard Tax-Managed Growth and Income Fund
5 Vanguard Tax-Managed Capital Appreciation Fund
7 Vanguard Tax-Managed Small-Cap Fund
9 AN INTRODUCTION TO TAX-EFFICIENT INVESTING
9 A WORD ABOUT RISK
10 PRIMARY INVESTMENT STRATEGIES
14 THE FUNDS AND VANGUARD
14 INVESTMENT ADVISER
15 YEAR 2000 CHALLENGE
15 DIVIDENDS, CAPITAL GAINS, AND TAXES
16 SHARE PRICE
17 FINANCIAL HIGHLIGHTS
19 INVESTING WITH VANGUARD
20 SERVICES AND ACCOUNT FEATURES
21 TYPES OF ACCOUNTS
21 BUYING SHARES
23 REDEEMING SHARES
25 TRANSFERRING REGISTRATION
26 FUND AND ACCOUNT UPDATES

WHY READING THIS PROSPECTUS IS IMPORTANT

This prospectus explains the objective, risks, and strategies of each Vanguard
Tax-Managed Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk" explanations along the way. Reading the
prospectus will help you to decide which Funds, if any, are the right investment
for you. We suggest that you keep it for future reference.

IMPORTANT NOTE

Vanguard Tax-Managed Growth and Income Fund, Tax-Managed Capital Appreciation
Fund, and Tax-Managed Small-Cap Fund offer two separate classes of shares:
Investor and Institutional; Vanguard Tax-Managed Balanced Fund offers Investor
Shares only. This prospectus offers the Funds' Investor Shares, which have an
investment minimum of $10,000. The Funds' Institutional Shares, which have an
investment minimum of $10 million, are offered through a separate prospectus.
You can obtain a copy of the Institutional Shares prospectus by calling
Vanguard's Institutional Investor Services Department at 1-800-523-1036. Note
that the Funds' separate share classes have different expenses; as a result,
their investment performance will vary.

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> 5
This prospectus provides information about Investor Shares of the four Vanguard
Tax-Managed Funds. Each of these funds is managed to minimize the impact of
taxes on investors' returns and uses an index-oriented approach to equity
investing. However, the funds differ considerably in their investment objectives
and strategies. Below you'll find profiles that summarize the key features of
each fund. Additional information concerning the funds, including an
Introduction to Tax-Efficient Investing, appears following the profiles.

FUND PROFILE -- TAX-MANAGED BALANCED FUND

INVESTMENT OBJECTIVE

Tax-Managed Balanced Fund seeks to provide a tax-efficient total return,
consisting of federally tax-exempt current income, a modest amount of taxable
current income, and long-term capital growth.

INVESTMENT STRATEGIES

Tax-Managed Balanced Fund invests in a combination of municipal securities and
stocks. Approximately 50-55% of the Fund's assets will be invested in municipal
securities--bonds, notes, and other fixed income instruments issued by state and
local governments, that pay out federally tax-exempt income. The Fund emphasizes
high quality municipal securities; at least 75% of the Fund's bond holdings will
be rated in one of the top three credit rating categories as determined by an
independent bond rating agency. The dollar-weighted average maturity of the
Fund's municipal securities holdings will range from 7-12 years.

Stocks chosen from the Russell 1000 Index--an independent index of the
stocks of large- and medium-size U.S. companies--will comprise the remaining
45-50% of the Fund's assets. Rather than purchasing all stocks within the
Russell 1000 Index, the Fund uses statistical methods to "sample" the Index. In
the aggregate, stocks selected by the Fund are expected to closely track the
investment performance of the Russell 1000 Index, while providing a lower
dividend yield than the Index.

PRIMARY RISKS

TAX-MANAGED BALANCED 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:

- - Interest rate risk, which is the chance that bond prices overall,
including the prices of bonds held by the Fund, will decline due to rising
interest rates.

- - Credit risk, which is the chance that a bond issuer--a state, local
government or regional governmental authority--will fail to repay
interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be low for the Fund.

- - Investment style risk, which is the chance that returns from balanced
funds will trail returns from funds with a different investment focus.

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 since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception 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 FOR INVESTOR SHARES
<PAGE> 6
During the period shown in the bar chart, the highest return for a calendar
quarter was -% (quarter ending _____________ ) and the lowest return for a
quarter was - -% (quarter ending _____________ ).

AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
<S> <C> <C>
Tax-Managed Balanced Fund-Investor Shares - % - %
Tax-Managed Balanced Composite Index** - % - %
</TABLE>

* September 6, 1994
** Weighted 50% Russell 1000 Index and 50% Lehman 7-Year Municipal Bond Index.

FEES AND EXPENSES

The following table describes the fees and expenses you would pay if you buy and
hold Investor Shares of Tax-Managed Balanced Fund. The expenses shown under
Annual Fund Operating Expenses are based on estimated amounts for the current
fiscal year ended December 31, 1998.

SHAREHOLDER FEES (fees paid directly from your investment)

<TABLE>
<S> <C>
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees (includes redemptions by exchange to another fund): 2% or 1%*
Exchange Fees: None
</TABLE>

* A 2% redemption fee applies to shares held for less than 1 year; a 1%
redemption fee applies to shares held longer than 1 year but less than 5 years.
The fees are withheld from redemption proceeds and paid to the Fund. These fees
help to cover the transaction costs borne by the Fund when it must sell
securities to meet redemptions. In addition, these fees are intended to protect
the Fund's long-term investors from short-term traders, who erode the Fund's
tax-efficiency.

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)

<TABLE>
<S> <C>
Management Expenses: -%
12b-1 Distribution Fees: None
Other Expenses: -%
TOTAL OPERATING EXPENSES: -%
</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 invested
$10,000 in the Fund's Investor Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all of your shares at the end of the given period. Although your
actual costs might be higher or lower, based on these assumptions your costs
would be:

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

You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the
one-and three- year periods):

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

THESE EXAMPLES 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> 7
ADDITIONAL INFORMATION --
TAX-MANAGED BALANCED FUND

DIVIDENDS AND CAPITAL GAINS
Paid annually in December

INVESTMENT ADVISER
Vanguard Core Management and Fixed Income Groups, Valley Forge, Pennsylvania,
since inception

INCEPTION DATE
September 6, 1994

NET ASSETS AS OF 12/31/1998
$* billion

SUITABLE FOR IRAS
No

MINIMUM INITIAL INVESTMENT
$10,000

NEWSPAPER ABBREVIATION
TxMBal

VANGUARD FUND NUMBER
103

CUSIP NUMBER
921943304

TICKER SYMBOL
VTMFX

FUND PROFILE -- TAX-MANAGED GROWTH AND INCOME FUND

INVESTMENT OBJECTIVE

Tax-Managed Growth and Income Fund is a stock fund that seeks to provide a
tax-efficient total return, consisting of moderate current income and long-term
capital growth.

INVESTMENT STRATEGIES

Tax-Managed Growth and Income Fund purchases stocks included in the Standard &
Poor's 500 Composite Stock Price Index--an independent index that is dominated
by stocks of the largest U.S. companies. The Fund will hold substantially all of
the S&P 500 stocks, in approximately the same proportions as they are
represented in the Index.

PRIMARY RISKS

TAX-MANAGED GROWTH AND INCOME 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 investment style risk, which
is the chance that returns from large-capitalization stocks--which are the types
of stocks that the Fund emphasizes--will trail returns from other asset classes
or the overall stock market.
<PAGE> 8
PERFORMANCE/RISK INFORMATION

The bar chart and table below provide an indication of the risk of investing in
Tax-Managed Growth and Income Fund. The bar chart shows the Fund's performance
in each calendar year since inception. The table shows how the Fund's average
annual returns for one calendar year and since inception 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 FOR INVESTOR SHARES

During the period shown in the bar chart, the highest return for a calendar
quarter was -% (quarter ending _____________ ) and the lowest return for a
quarter was - -% (quarter ending _____________ ).

AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
<S> <C> <C>
Tax-Managed Growth and Income Fund-Investor Shares - % - %
S&P 500 Index - % - %
</TABLE>

* September 6, 1994

FEES AND EXPENSES

The following table describes the fees and expenses you would pay if you buy and
hold Investor Shares of Tax-Managed Growth and Income Fund. The expenses shown
under Annual Fund Operating Expenses are based on estimated amounts for the
current fiscal year ended December 31, 1998.

SHAREHOLDER FEES (fees paid directly from your investment)

*A 2% redemption fee applies to shares held for less than 1 year; a 1%
redemption fee applies to shares held longer than 1 year but less than 5 years.
The fees are withheld from redemption proceeds and paid to the Fund. These fees
help to cover the transaction costs borne by the Fund when it must sell
securities to meet redemptions. In addition, these fees are intended to protect
the Fund's long-term investors from short-term traders, who erode the Fund's
tax-efficiency.

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)

<TABLE>
<S> <C>
Management Expenses: - %
12b-1 Distribution Fees: None
Other Expenses: - %
TOTAL OPERATING EXPENSES: - %
</TABLE>

You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the one-
and three-year periods):

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

ADDITIONAL INFORMATION --
TAX-MANAGED GROWTH AND INCOME FUND

DIVIDENDS AND CAPITAL GAINS
Paid annually in December

INVESTMENT ADVISER
Vanguard Core Management Group, Valley Forge, Pennsylvania, since inception

INCEPTION DATE
September 6, 1994

NET ASSETS AS OF 12/31/1998
$* billion

SUITABLE FOR IRAS
No

MINIMUM INITIAL INVESTMENT
$10,000

NEWSPAPER ABBREVIATION
TxMGI

VANGUARD FUND NUMBER
101

CUSIP NUMBER
921943106

TICKER SYMBOL
VTGIX

FUND PROFILE -- TAX-MANAGED CAPITAL APPRECIATION FUND

INVESTMENT OBJECTIVE

Tax-Managed Capital Appreciation Fund is a stock fund that seeks to provide a
tax-efficient total return, consisting of long-term capital growth and nominal
current income.
<PAGE> 10
INVESTMENT STRATEGIES

Tax-Managed Capital Appreciation Fund purchases stocks included in the Russell
1000 Index--an independent index of the stocks of large- and medium-size U.S.
companies. Rather than purchasing all stocks within the Russell 1000 Index, the
Fund uses statistical methods to "sample" the Index. In the aggregate, stocks
selected by the Fund are expected to closely track the investment performance of
the Russell 1000 Index, while providing a lower dividend yield than that of the
Index.

PRIMARY RISKS

TAX-MANAGED CAPITAL APPRECIATION 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 investment style
risk, which is the chance that returns from large- and medium-capitalization
stocks--which are the types of stocks that the Fund emphasizes--will trail
returns from other asset classes or the overall stock market.

PERFORMANCE/RISK INFORMATION

The bar chart and table below provide an indication of the risk of investing in
Tax-Managed Capital Appreciation Fund. The bar chart shows the Fund's
performance in each calendar year since inception. The table shows how the
Fund's average annual returns for one calendar year and since inception 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 FOR INVESTOR SHARES

AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
<S> <C> <C>
Tax-Managed Capital Appreciation Fund-Investor Shares - % - %
Russell 1000 Index - % - %
</TABLE>

*September 6, 1994

FEES AND EXPENSES

The following table describes the fees and expenses you would pay if you buy and
hold Tax-Managed Capital Appreciation Fund-Investor Shares. The expenses shown
under Annual Fund Operating Expenses are based on estimated amounts for the
current fiscal year ended December 31, 1998.

SHAREHOLDER FEES (fees paid directly from your investment)

<PAGE> 11
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)

<TABLE>
<S> <C>
Management Expenses: -%
12b-1 Distribution Fees: None
Other Expenses: -%
TOTAL OPERATING EXPENSES: -%
</TABLE>

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

You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the one-
and three-year periods):

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

ADDITIONAL INFORMATION --
TAX-MANAGED CAPITAL APPRECIATION FUND

DIVIDENDS AND CAPITAL GAINS
Paid annually in December

INVESTMENT ADVISER
Vanguard Core Management Group, Valley Forge, Pennsylvania, since inception

INCEPTION DATE
September 6, 1994

NET ASSETS AS OF 12/31/1998
$* billion

SUITABLE FOR IRAS
No

MINIMUM INITIAL INVESTMENT
$10,000

NEWSPAPER ABBREVIATION
TxMCap

VANGUARD FUND NUMBER
102
<PAGE> 12
CUSIP NUMBER
921943205

TICKER SYMBOL
VMCAX

FUND PROFILE -- VANGUARD TAX-MANAGED SMALL-CAP FUND

INVESTMENT OBJECTIVE

Tax-Managed Small-Cap Fund is a stock fund that seeks to provide a tax-efficient
total return, consisting of long-term capital growth and nominal current income.

INVESTMENT STRATEGIES

Tax-Managed Small-Cap Fund purchases stocks included in the Standard & Poor's
SmallCap 600 Index--an independent index that is made up of stocks of smaller
U.S. companies. The Fund will hold substantially all of the S&P SmallCap 600
stocks, in approximately the same proportions as they are represented in the
Index.

PRIMARY RISKS

TAX-MANAGED SMALL-CAP 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 investment style risk, which is
the chance that returns from small- and medium-capitalization stocks--which are
the types of stocks that the Fund emphasizes--will trail returns from other
asset classes or the overall stock market. Small-capitalization stocks tend to
go through cycles of doing better--or worse--than the stock market in general.
These periods have, in the past, lasted for as long as several years.

PERFORMANCE/RISK INFORMATION
Tax-Managed Small-Cap Fund is new, so it has no performance information to
report yet.

FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold Tax-Managed Small-Cap Fund-Investor Shares. The expenses shown under Annual
Fund Operating Expenses are based on estimated amounts for the current fiscal
year. The Fund has no operating history; actual operating expenses could be
different.

SHAREHOLDER FEES (fees paid directly from your investment)

<TABLE>
<S> <C>
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases 1%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees (includes redemptions by exchange to another fund): 2% or 1%**
Exchange Fees: None
</TABLE>

* The 1% purchase fee is deducted from all purchases (including exchanges from
other Vanguard funds), but not from reinvested dividends and capital gains.

** The 2% redemption fee applies to shares held for less than 1 year; the 1%
redemption fee applies to shares held longer than 1 year but less than 5 years.
The fees are withheld from redemption proceeds and paid to the Fund. These fees
help to cover the transaction costs borne by the Fund when it must sell
securities to meet redemptions. In addition, these fees are intended to protect
the Fund's long-term investors from short-term traders, who erode the Fund's
tax-efficiency.

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)

<TABLE>
<S> <C>
Management Expenses: - %
12b-1 Distribution Fees: None
Other Expenses: - %
TOTAL OPERATING EXPENSES: - %
</TABLE>
<PAGE> 13
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's Investor Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all your shares at the end of the given period. Although your
actual costs might be higher or lower, based on these assumptions your costs
would be:

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

You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the one-
and three-year periods):

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

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

ADDITIONAL INFORMATION --
TAX-MANAGED SMALL-CAP FUND

DIVIDENDS AND CAPITAL GAINS
Paid annually in December

INVESTMENT ADVISER
Vanguard Core Management Group, Valley Forge, Pennsylvania, since inception

INCEPTION DATE
February *, 1999

MINIMUM INITIAL INVESTMENT
$10,000

SUITABLE FOR IRAS
No

NEWSPAPER ABBREVIATION
*

VANGUARD FUND NUMBER
*

CUSIP NUMBER
*

TICKER SYMBOL
*

AN INTRODUCTION TO TAX-EFFICIENT INVESTING
<PAGE> 14
Most mutual funds seek to maximize PRE-TAX total returns, without regard to the
personal tax consequences incurred by investors. Yet, taxable investors stand to
lose a significant portion of their investment returns to federal, state and
local taxes. Fund dividends and short-term capital gains are now taxed at
federal income tax rates as high as 39.6%, and for long-term capital gains, the
rates reach up to 20%. The Vanguard Tax-Managed Funds aim to minimize the impact
of taxes on investors' total returns by operating in a tax-efficient manner.
The Funds use these tax-management techniques:

LOW PORTFOLIO TURNOVER. The Funds minimize portfolio turnover by
employing an index-oriented approach to stock investing. Instead of trading
frequently, each Fund simply buys and holds the stocks comprising its target
index. Frequent trading--a hallmark of many actively-managed funds--causes funds
to realize capital gains, which must then be distributed to shareholders,
reducing their after tax returns.

A DISCIPLINED SELL-SELECTION METHOD. When selling specific securities,
the Funds will select a specific share lot-more often than not, the highest-cost
shares--in order to minimize realized capital gains. In addition, each Fund may
sell securities at a loss in order to offset realized capital gains that would
otherwise have to be distributed to shareholders.

BIAS AGAINST TAXABLE DIVIDEND INCOME. The Tax-Managed Balanced and
Tax-Managed Capital Appreciation Funds minimize taxable dividend income by
focusing on the lower-yielding stocks within their shared, target index (the
Russell 1000 Index). In addition, the bond portion of Tax-Managed Balanced Fund
is comprised of municipal securities, which generate tax-exempt dividends.

REDEMPTION FEES. Each Fund imposes redemption fees on short-term
investors, whose in-out activity can reduce a fund's tax efficiency by causing
it to realize capital gains. The fee is 2% for shares held for less than one
year, and 1% for shares held for more than one but less than five years. These
fees are paid to the Funds to help cover their transaction costs when selling
securities to meet redemptions.

A WORD ABOUT RISK

This prospectus describes the risks you would face as an investor in the
Vanguard Tax-Managed Funds. It is important to keep in mind one of the main
axioms of investing: The higher the potential reward, the higher the risk of
losing money. The reverse, also, is generally true: The lower the potential
reward, the lower the risk. As you consider an investment in one or more of the
Funds, you should also take into account your personal tolerance for the daily
fluctuations of the stock market.

Look for this "warning 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 one or more of the Funds.

PRIMARY INVESTMENT STRATEGIES

Each of the Funds follows a distinct set of investment strategies. This section
explains the strategies that the investment adviser uses in pursuit of each
Fund's objective. It also explains how the adviser implements these strategies.
In addition, this section discusses important risks faced by investors in the
Funds. The Funds' Board of Trustees oversees their management and may change the
investment strategies in the interest of shareholders.

MARKET EXPOSURE

The grid below shows, at a glance, the types of investments made by each Fund as
its primary investment strategy. In addition, the grid shows the percentage of
each Fund's assets that is normally committed to each listed type of investment.
Primary investment strategies are expected to play the most important role in
achieving a Fund's investment objective.
<PAGE> 15
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
TAX-MANAGED TAX-MANAGED GROWTH TAX-MANAGED CAPITAL TAX-MANAGED SMALL-
PRIMARY INVESTMENT STRATEGY BALANCED FUND AND INCOME FUND APPRECIATION FUND CAP
FUND
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks 45-50% 100% 100% 100%
Large and mid-size Large U.S. Large and mid-size Small U.S.
U.S. companies companies U.S. companies companies
- ----------------------------------------------------------------------------------------------------------------
Municipal securities 50-55% None None None
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

COMMON STOCKS. Each of the Funds invests in U.S. common stocks as a primary
investment strategy, although the size of the companies on which the Funds focus
varies.

#EACH 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.

To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Composite Stock Price Index, a
widely used barometer of 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.

U.S. STOCK MARKET RETURNS (1926 - 1997)

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

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
1997. You can see, for example, that while the average return on stocks for all
of the 5-year periods was 10.5%, returns for individual 5-year periods ranged
from a - 12.5% average (from 1928 through 1932) to 23.9% (from 1951 through
1954). These average returns reflect past performance on common stocks; you
should not regard them as an indication of future returns from either the stock
market as a whole or these Funds in particular.

Keep in mind that the S&P 500 Index--which is the index tracked by Tax-Managed
Growth and Income Fund -- holds mainly large-cap stocks. Historically, mid- and
small-cap stocks have been more volatile than -- and at times have performed
quite differently from -- large-cap stocks. This is due to several factors,
including less-certain growth and dividend prospects for smaller companies.
Tax-Managed Balanced and Tax-Managed Capital Appreciation Funds hold mid-cap
stocks in addition to large-cap stocks. On the other hand, Tax-Managed Small-Cap
Fund holds just small-cap stocks.

#THE FUNDS ARE SUBJECT, IN VARYING DEGREES, TO INVESTMENT STYLE RISK, WHICH IS
THE POSSIBILITY THAT RETURNS FROM A SPECIFIC TYPE OF STOCK (FOR INSTANCE, SMALL-
OR MID-CAP STOCKS) OR FUND WILL TRAIL RETURNS FROM OTHER ASSET CLASSES OR THE
OVERALL STOCK MARKET. EACH TYPE OF STOCK OR FUND TENDS 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.

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

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 median market value
exceeding $10 billion. Mid-cap funds hold stocks of companies with a median
market value between $1 billion and $10 billion. Small-cap funds typically hold
stocks of companies with a median market value of less than $1 billion.

- --------------------------------------------------------------------------------
<PAGE> 16
MUNICIPAL SECURITIES. Tax-Managed Balanced Fund invests 50-55% of its assets in
municipal securities. Municipal securities are bonds, notes, and other fixed
income instruments issued by state and local governments and regional
governmental authorities. Municipal securities pay out federally tax-exempt
income. The Fund emphasizes high quality municipal securities; at least 75% of
the Fund's bond holdings will be rated in one of the top three credit rating
categories as determined by an independent bond rating agency. Up to 25% of the
Fund's bond holdings may be invested in bonds that have been rated in the fourth
highest rating category and, within that 25%, up to 5% may be invested in lower
rated securities or securities that are unrated. The dollar-weighted average
maturity of the Fund's municipal securities holdings will range from 7-12 years.

#DUE TO ITS BOND INVESTMENTS, TAX-MANAGED BALANCED FUND IS SUBJECT TO INTEREST
RATE RISK--THE CHANCE THAT BOND PRICES WILL FALL WHEN INTEREST RATES RISE--AND
CREDIT RISK--THE CHANCE THAT A BOND ISSUER WILL FAIL TO PAY INTEREST AND
PRINCIPAL IN A TIMELY MANNER.

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

PLAIN TALK ABOUT
MUNICIPAL BONDS

Municipal bonds are securities issued by state and local governments and
regional governmental authorities as a way of raising money for public
construction projects (for example, highways, airports, or housing); for
operating expenses; or for loans to public institutions and facilities.

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

PLAIN TALK ABOUT
BONDS AND INTEREST RATES

As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand if interest rates were falling and 4% bonds were
being offered, you would be able to sell your 5% bond for more than you paid.

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

PLAIN TALK ABOUT
BOND MATURITIES

A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks of price fluctuations to get higher interest income; short-term bond
investors should be willing to accept lower yields in return for less
fluctuation in the value of their investment.

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

PLAIN TALK ABOUT
CREDIT QUALITY

A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. Bonds issued or backed by the U.S.
Government offer maximum credit protection; bonds issued or backed by
financially troubled states or local governments can carry considerably more
risk. Municipal securities are usually rated by independent bond rating
agencies. The lower the rating by one of these rating agencies (for example,
Moody's or Standard & Poor's), the greater the chance (in the rating agency's
opinion) that the bond issuer will default, or fail to meet its payment
obligations. All things being equal, the lower a bond's credit rating, the
higher its yield should be to compensate investors for assuming additional risk.
Bonds rated in one of the four highest rating categories are considered
"investment grade."

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

SECURITY SELECTION

Each of the Funds employs an index-oriented approach to stock investing;
Tax-Managed Balanced Fund selects municipal securities based upon traditional,
active management techniques. The grid below shows, at a glance, the stock index
tracked by each Fund and the indexing method employed.
<PAGE> 17
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
TAX-MANAGED BALANCED TAX-MANAGED GROWTH TAX-MANAGED CAPITAL TAX-MANAGED
FUND AND INCOME FUND APPRECIATION FUND SMALL-CAP
FUND
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Russell 1000 Index S&P 500 Composite Russell 1000 Index S&P SmallCap 600
Sampling Method Stock Index Sampling Method Index
Replication Method Replication Method
- ------------------------------------------------------------------------------------
</TABLE>

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

PLAIN TALK ABOUT
INDEXING METHODS

In seeking to track a particular index, funds generally use one of two methods
to select the stocks in which they invest. Some index funds hold each stock in
their target indexes in about the same proportions as represented in the indexes
themselves. This is called a REPLICATION METHOD. For example, if 5% of the S&P
500 Index were made up of the stock of a specific company, a fund tracking that
index (such as Tax-Managed Growth and Income Fund) would invest 5% of its assets
in that company. Other index funds may use a different security selection
process, a SAMPLING METHOD. Using a sophisticated computer program, these funds
select stocks that will mirror their target indexes in terms of industry
weightings, market capitalization, and other characteristics. For instance, if
10% of the Russell 1000 Index were made up of financial services stocks,
Tax-Managed Capital Appreciation Fund would invest about 10% of its assets in
the financial services stocks of the Index with overall similar characteristics.
Funds tend to use a sampling method when the target index includes too many
stocks to track cost-effectively.

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

OTHER INVESTMENT POLICIES AND RISKS

Each of the Funds may invest, to a limited extent, in futures contracts, options
(including puts and calls), warrants, convertible securities, and swap
agreements, which are all types of derivatives. Losses (or gains) involving
futures contracts 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. Similar risks exist for warrants
(securities that permit their owners to purchase a specific number of shares of
stock at a predetermined price), convertible securities (securities that may be
exchanged for a different asset), and swap agreements (contracts between two
parties in which each agrees to make payments to the other based on the return
of a specified index or asset). For this reason, the Funds will not use futures,
options, warrants, convertible securities, or swap agreements for speculative
purposes or as leveraged investments that magnify the gains or losses of an
investment.

Each of the Funds may invest in futures contracts and options so long as the
total value of these investments does not exceed 5% of the Fund's assets.

The reasons for which a 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 its benchmark index.

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

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

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.

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

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

TURNOVER RATES
<PAGE> 18
Although the Funds generally seek to invest for the long term, each retains the
right to sell securities regardless of how long the securities have been held.
However, their index-oriented approach to stock investing and focus on avoiding
capital gains should hold the Funds' turnover rates for stocks fairly low, at
20% or less. (A turnover rate of 100% would occur, for example, if a Fund sold
and replaced securities valued at 100% of its net assets within a one-year
period.) Tax-Managed Balanced Fund's turnover rate for municipal securities is
expected to remain below 40%.

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

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. (These costs are in addition to those described in the
fee table which appears earlier in this prospectus.) 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 domestic stock funds is approximately 80%.

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

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 prices 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 Tax-Managed Funds have adopted the following policies, among
others, designed to discourage short-term trading:

- - The Funds reserve the right to reject any purchase request into any of the
Funds -- including exchanges from other Vanguard funds -- that it regards
as disruptive to the efficient management of the Funds. 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 a
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).

- - The Funds impose a 2% redemption fee on shares that are redeemed by any
method within one year of purchase. There is a 1% redemption fee on shares
that are redeemed by any method more than one year but less than 5 years
of purchase.

- - The Funds reserve the right to stop offering shares at any time.

The Vanguard funds do not permit market-timing. Do not invest in these Funds if
you are a market-timer.

PLAIN TALK ABOUT
THE FUNDS' REDEMPTION FEE

The Tax-Managed Funds charge a redemption fee on shares that are redeemed,
including redeeming by exchange to another Vanguard fund, before they have been
held for five years. The fee is 2% for shares redeemed within one year of
purchase and 1% for shares redeemed after 1 year but within 5 years of purchase.
The Funds are intended for long-term investors, and this redemption fee ensures
that the costs associated with short-term trading are borne by the investors
making the transactions -- and not by those shareholders in the Funds for the
long term.

At Vanguard, all fees are paid directly to the fund itself (unlike a sales
charge or load, which -- for many fund companies -- ends up in the pocket of the
sponsor, adviser, or sales representative).

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 impact on a fund's performance.
<PAGE> 19
PLAIN TALK ABOUT
FUND EXPENSES

All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. The Vanguard Tax-Managed Funds' expense ratios for Investor Shares in
fiscal year 1998 were as follows: Tax-Managed Balanced Fund -- X%, or $X per
$1,000 of average net assets; Tax-Managed Growth and Income Fund -- X%, or $X
per $1,000 of average net assets; and Tax-Managed Capital Appreciation Fund --
X%, or $X per $1,000 of average net assets. The expense ratio for Tax-Managed
Small-Cap Fund, which is new, is expected to be X%, or $X per $1,000 of average
net assets, for fiscal year 1999. The average equity mutual fund had expenses in
1997 of X%, or $X per $1,000 of average net assets, according to Lipper
Analytical Services, which reports on the mutual fund industry.

THE FUNDS AND VANGUARD

Vanguard Tax-Managed Funds are members of The Vanguard Group, a family of more
than 35 investment companies with more than 100 distinct investment portfolios
and total net assets of more than $390 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.

INVESTMENT ADVISER

Each of the Tax-Managed Funds obtains advisory services on an at-cost basis from
The Vanguard Group, Valley Forge, Pennsylvania 19482. For the fiscal year ended
December 31, 1998, Tax-Managed Balanced Fund, Tax-Managed Growth and Income Fund
and Tax-Managed Capital Appreciation Fund paid advisory expenses of ________,
________, and ____________, which represented effective annual rates of ____,
____, and _____. Tax-Managed Small-Cap Fund began operations on February *,
1999, and advisory expenses for its first fiscal year are estimated at an
effective annual rate of ______.

The Funds have authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions. Also, the Funds may direct the advisers to use a particular broker
for certain transactions in exchange for commission rebates or research services
provided to the Funds. However, the Group will not pay higher commissions
specifically for the purpose of obtaining research services.

PLAIN TALK ABOUT
THE FUNDS' ADVISERS

The individual primarily responsible for overseeing investments for Tax-Managed
Growth and Income Fund, Tax-Managed Capital Appreciation Fund, Tax-Managed Small
Capitalization Fund, and the stock portion of the Tax-Managed Balanced Fund is:

GEORGE U. SAUTER, Managing Director of Vanguard; has worked in investment
management since 1985; with Vanguard since 1987; A.B., Dartmouth College;
M.B.A., University of Chicago.
<PAGE> 20
The municipal securities portion of Tax-Managed Balanced Fund is overseen by:

CHRISTOPHER M. RYON, Principal of Vanguard; has worked in investment
management and with Vanguard since 1985; B.S., Villanova University; M.B.A.,
Drexel University.

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 Funds' operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.

However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on a Fund's business,
operations, or financial condition. Additionally, a 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.

DIVIDENDS, CAPITAL GAINS, AND TAXES

Each December, the Tax-Managed Funds distribute to their shareholders virtually
all of their income from interest and dividends, as well as any capital gains
realized from the sale of its holdings. In addition, the Funds 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 a 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.

- - The dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes.

- - Any distributions of net long-term capital gains by a Fund are taxable to
you as long-term capital gains, no matter how long you've owned shares in
the Fund.

- - Although the Funds do 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 their ordinary investment activities. Consequently,
distributions may vary considerably from year to year.

- - 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.
<PAGE> 21
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. The 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.

SHARE PRICE

Each 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.

A NOTE ON PRICING: A 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 Board of Trustees.

Each 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 Funds' names, but the most common are TxMBal,
TxMGI, TxMCap, and ______ for Balanced, Growth and Income, Capital Appreciation,
and Small-Cap Fund, respectively.

PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

This explanation uses the Tax-Managed Balanced Fund as an example. The Fund
began fiscal 1998 with a net asset value (price) of $14.67 per share. During the
semi-annual period, the Fund earned $ - per share from investment income
(interest and dividends) and $ - per share from investments that had appreciated
in value or that were sold for higher prices than the Fund paid for them.

Of those total earnings of $ - per share, $ - per share was returned to
shareholders in the form of dividend and capital gains distributions.
<PAGE> 22
The earnings ($ - per share) minus the distributions ($ - per share) resulted
in a share price of $ - at the end of the year. This was an increase of $ - per
share (from $14.67 at the beginning of the year to $ - 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 - % for the year.

As of December 31, 1998, the Fund had $ - billion in net assets; an expense
ratio of - % ($ - per $1,000 of net assets); and net investment income amounting
to - % of its average net assets. It sold and replaced securities valued at - %
of its total net assets.

FINANCIAL HIGHLIGHTS

The following financial highlights tables are intended to help you understand
each Fund's financial performance since its inception (except for Tax-Managed
Small-Cap Fund, which did not start until February *, 1999), and reflect
financial results for a single Fund share in each case. The total returns in
each table represent the BEFORE-TAX rate that an investor would have earned each
period on an investment in the Fund (assuming reinvestment of all dividends and
distributions, and complete redemption at the end of the period). Except for the
data relating the six-months ended June 30, 1998, this information has been
audited by PricewaterhouseCoopers LLP, independent accountants, whose report --
along with each Fund's financial statements -- is included in the Funds' most
recent annual report to shareholders. You may have the annual or semi-annual
report sent to you without charge by contacting Vanguard.

TAX-MANAGED BALANCED FUND

<TABLE>
<CAPTION>
SIX MONTHS JULY 25***
ENDED JUNE 30, YEAR ENDED DECEMBER 31, TO DECEMBER 1,
-------------- ----------------------- --------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD........................... $14.67 $12.92 $11.85 $ 9.79 $10.00
----- ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income......... .37 .36 .31 .09
Net Realized and Unrealized Gain
(Loss) on Investments 1.75 1.07 2.07 (.21)
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 2.12 1.43 2.38 (.12)

DISTRIBUTIONS
Dividends from Net Investment
Income (.37) (.36) (.32) (.09)
Distributions from Realized Capital
Gains -- -- -- --
------ ------ ------ ------
Total distributions (.37) (.36) (.32) (.09)
NET ASSET VALUE, END OF PERIOD $14.67 $12.92 $11.85 $ 9.79
============================================================================================================================

TOTAL RETURN** 16.55% 12.21% 24.52% (1.40)%
============================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) ..................... $120 $63 $39 $17
Ratio of Total Expenses to Average Net Assets ............ 0.17% 0.20% 0.20% 0.0%
Ratio of Net Investment Income to Average Net Assets ..... 2.77% 3.04% 3.06% 2.88%*
Turnover Rate 7% 5% 5% 0%
</TABLE>

*Annualized

**Total returns do not reflect the 2% redemption fee on shares held less than
one year or the 1% redemption fee on shares held more than one year but less
than five years.

***Subscription period was July 25, 1994 through September 5, 1994, during which
time all assets were held in money market instruments. Performance measurement
began September 6, 1994.

TAX-MANAGED GROWTH AND INCOME FUND
<PAGE> 23
<TABLE>
<CAPTION>
SIX MONTHS JULY 25***
ENDED JUNE 30, YEAR ENDED DECEMBER 31, TO DECEMBER 1,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD........................... $20.88 $15.89 $13.16 $9.77 $10.00
------ ------ ------ ------ ------

INVESTMENT OPERATIONS
Net Investment Income............. .29 .27 .25 .09
Net Realized and Unrealized Gain
(Loss) on Investments...... 4.98 2.74 3.39 (.23)
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS.... 5.27 3.01 3.64 (.14)
DISTRIBUTIONS
Dividends from Net Investment
Income..................... (.28) (.28) (.25) (.09)
Distributions from Realized
Capital Gains.............. - - - -
------ ------ ------ ------
TOTAL DISTRIBUTIONS................. (.28) (.28) (.25) (.09)
NET ASSET VALUE, END OF PERIOD...... $20.88 $15.89 $13.16 $ 9.77
========================================================================================================================
TOTAL RETURN** 33.31% 23.03% 37.53% (1.70)%
========================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 579 $ 235 $ 98 $ 31
Ratio of Total Expenses to Average Net Assets 0.17% 0.20% 0.20% 0.20%*
Ratio of Net Investment Income to Average Net Assets 1.62% 2.04% 2.37% 2.82%*
Turnover Rate 2% 7% 6% 0%
</TABLE>

*Annualized

**Total returns do not reflect the 2% redemption fee on shares held less than
one year or the 1% redemption fee on shares held more than one year but less
than five years.

***Subscription period was July 25, 1994 through September 5, 1994, during which
time all assets were held in money market instruments. Performance measurement
began September 6, 1994.

TAX-MANAGED CAPITAL APPRECIATION FUND

<TABLE>
<CAPTION>
SIX MONTHS JULY 25***
ENDED JUNE 30, YEAR ENDED DECEMBER 31, TO DECEMBER 1,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD........................... $20.18 $15.95 $13.28 $ 9.95 $10.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income............. .11 .12 .08 .04
Net Realized and Unrealized Gain
(Loss) on Investments.......... 4.24 2.66 3.34 (.05)
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS.... 4.35 2.78 3.42 (.01)
DISTRIBUTIONS
Dividends from Net Investment
Income..................... (.12) (.11) (.09) (.04)
Distributions from Realized
Capital Gains.............. - - - -
------ ------ ------ ------
TOTAL DISTRIBUTIONS................. (.12) (.11) (.09) (.04)
NET ASSET VALUE, END OF PERIOD...... $20.18 $15.95 $13.28 $ 9.95
========================================================================================================================
TOTAL RETURN** 27.29% 20.92% 34.38% (0.50)%
========================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)...................... $893 $517 $254 $70
Ratio of Total Expenses to Average Net Assets............. 0.17% 0.20% 0.20% 0.20%*
Ratio of Net Investment Income to Average Net Assets...... 0.70% 0.91% 0.97% 1.26%*
Turnover Rate................................... 4% 12% 7% 1%
</TABLE>

<PAGE> 24
*Annualized

**Total returns do not reflect the 2% redemption fee on shares held less than
one year or the 1% redemption fee on shares held more than one year but less
than five years.

***Subscription period was July 25, 1994 through September 5, 1994, during which
time all assets were held in money market instruments. Performance measurement
began September 6, 1994.

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," "500,"
and "Standard & Poor's SmallCap 600" are trademarks of The McGraw-Hill
Companies, Inc. Frank Russell Company is the owner of the trademarks and
copyrights relating to the Russell Indexes.
<PAGE> 25
- --------------------------------------------------------------------------------
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 [book]. Please call us to request copies.
- --------------------------------------------------------------------------------

SERVICES AND ACCOUNT FEATURES

Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, 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) [BOOK]
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) [BOOK]

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

- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOK]

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) [BOOK]

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 [book]

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(R) www.vanguard.com

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(R), bank instructions, checkwriting, and
Vanguard Automatic Exchange Service(TM)).

*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.

- --------------------------------------------------------------------------------
<PAGE> 26
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.

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 [BOOK]

Invest assets held in an existing personal trust.

- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOK]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
or its appointed agent 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
$10,000 (regular account)

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 account whose balance falls below the
minimum initial investment. The Fund will deduct a $10 annual fee in June if
your account balance falls below $10,000. The fee is waived if your total
Vanguard account assets are $50,000 or more.

A NOTE ON PURCHASE FEES

Tax-Managed Small-Cap Fund deducts a 1% fee from all purchases (including
exchanges from other Vanguard funds), but not from reinvested dividends or
capital gains.

- --------------------------------------------------------------------------------
BY MAIL TO . . .
<PAGE> 27
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.

Make your check payable to: The Vanguard Group-103 (Balanced), -101 (Growth and
Income), -102 (Capital Appreciation), and ??? (Small-Cap) 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 . . .
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
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
Marine Midland Bank, New York

For credit to:
<PAGE> 28
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
Vanguard Tax-Managed Funds-[Fund number] [Account number, or temporary number
for a new account] [Registered account owner] [Registered address]

- --------------------------------------------------------------------------------
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.

Keep in mind that if you buy or sell Fund shares through a registered
broker/dealer or investment adviser, the broker/dealer or adviser may charge you
a service fee.

- --------------------------------------------------------------------------------
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 Funds'
shares.

WHEN SELLING SHARES:

- Vanguard sends the redemptions proceeds to you or a designated third
party. (Proceeds sent to third parties or different addresses require a
signature guarantee; see footnote on page ___.)

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

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.

- --------------------------------------------------------------------------------
A NOTE ON REDEMPTION FEES

Each Fund imposes a 2% redemption fee on shares that are redeemed by any method
within one year of purchase. Each Fund imposes a 1% redemption fee on shares
that are redeemed by any method more than one year but less than 5 years from
purchase.

- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION

You can request a redemption (that is, either a sale or exchange of shares) in
any one of three ways: Online, By Telephone, or By Mail.

ONLINE REQUESTS
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 Fund, Vanguard REIT Index
<PAGE> 29
Fund, Vanguard Total International Stock Index Fund, and Vanguard Growth and
Income Fund. If you sell shares of these funds online, you will receive a
redemption check at your address of record.

TELEPHONE REQUESTS

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.

SPECIAL INFORMATION: We will automatically establish the telephone
redemption option for your account, unless your 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:

- The ten-digit account number.

- The name and address exactly as registered on the account.

- The primary Social Security or employer identification number as
registered on the account.

- 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.

MAIL REQUESTS

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, or
taxpayer identification number), you must provide Vanguard with written
instructions that include the guaranteed signatures of all current account
owners.

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 you redemption to purchase shares of another Vanguard fund.

FOR OUR MUTUAL PROTECTION

For your best interest 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:

- The Fund name and account number.

- The amount of the transaction (in dollars or shares).

- Signatures of all owners exactly as registered on the account (for mail
requests).

- Signature guarantees (if required). *

- Any supporting legal documentation that may be required.

- Any outstanding certificates representing shares to be redeemed.
<PAGE> 30
*For instance, a signature guarantee must be provided for all registered
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
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 management of the
Fund."

RETURN YOUR SHARE CERTIFICATES. Any portion of your account represented by
share certificates cannot be redeemed until you return the certificates to
Vanguard.

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.

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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 . . .
<PAGE> 31
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 clear, concise 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, a listing of the Fund's holdings, and other
financial statements.

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 Investor Information Department at 1-800-662-7447.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT

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

Mailed quarterly 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.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS

Mailed in February and August for these Funds.
- --------------------------------------------------------------------------------
TAX STATEMENTS

Generally mailed in January; report previous year's dividend distributions and
proceeds from the sale of shares.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT

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.
<PAGE> 32
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.

DIVIDEND INCOME

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

DOLLAR-COST AVERAGING

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

EXPENSE RATIO

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

FIXED-INCOME SECURITIES

Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.

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 or industry.

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.

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.

PRICE/EARNINGS (P/E) RATIO

The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.

PRINCIPAL

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

SECURITIES

Stocks, bonds, and other investment vehicles.

TOTAL RETURN

A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.

VALUE STOCK FUND
A mutual fund that 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 to 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> 33

<TABLE>
<S> <C> <C>
The Vanguard Group
WORLD WIDE WEB: Post Office Box 2600
www.vanguard.com Valley Forge, PA 19482-2600

FOR MORE INFORMATION E-mail:
If you'd like more information [email protected]
about Vanguard Tax-Managed
Funds, the following documents If you are a current Fund
are available free upon request: shareholder and would like
information about your account,
ANNUAL/SEMIANNUAL REPORT TO account transactions, and/or
SHAREHOLDERS account statements, please call:
Additional information about
the Funds' investments is CLIENT SERVICES DEPARTMENT
available in the Funds' annual
and semiannual reports to TELEPHONE:
shareholders. In these reports, 1-800-662-2739 (CREW)
you will find a discussion of the
market conditions and TEXT TELEPHONE:
investment strategies that 1-800-662-2738
significantly affected the Funds'
performance during the most INFORMATION PROVIDED BY THE
recent fiscal year. SECURITIES AND EXCHANGE
COMMISSION (SEC)
STATEMENT OF ADDITIONAL You can review and copy
INFORMATION (SAI) information about the Fund
The SAI provides more detailed (including the SAI) at the SEC's
information about the Funds. Public Reference Room in
Washington, DC. To find out
The current annual and more about this public service,
semiannual reports and the SAI call the SEC at 1-800-SEC-0330.
are incorporated by reference Reports and other information
into (and are thus legally a part about the Fund are also
of) this prospectus. available on the SEC's website
(www.sec.gov), or you can
To receive a free copy of the receive copies of this
latest annual or semiannual information, for a fee, by
report or the SAI, or to request writing the Public Reference
additional information about the Section, Securities and
Funds or other Vanguard funds, Exchange commission,
please contact us as follows: Washington, DC 20549-6009.

THE VANGUARD GROUP Investment Company Act File
INVESTOR INFORMATION DEPARTMENT No. 811-07175
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600 P087N-02/00/1999

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

TEXT TELEPHONE:
1-800-952-3335
</TABLE>

<PAGE> 34

VANGUARD TAX-MANAGED FUNDS
INSTITUTIONAL SHARES PROSPECTUS
February * , 1999

VANGUARD TAX-MANAGED
GROWTH AND INCOME FUND

VANGUARD TAX-MANAGED
CAPITAL APPRECIATION FUND

VANGUARD TAX-MANAGED
SMALL-CAP FUND

This prospectus contains financial data for the Trust through the semi-annual
period ended June 30, 1998.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE.
INSTITUTIONAL SHARES OF VANGUARD TAX-MANAGED FUNDS MAY NOT BE SOLD, NOR MAY
OFFERS TO BUY BE ACCEPTED, PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS COMMUNICATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN A STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF THE STATES.

<PAGE> 35

VANGUARD TAX-MANAGED FUNDS
Institutional Shares Prospectus
February *, 1999
A Group of Tax-Managed Mutual Funds

CONTENTS

1 FUND PROFILES
1 Vanguard Tax-Managed Growth and Income Fund
3 Vanguard Tax-Managed Capital Appreciation Fund
5 Vanguard Tax-Managed Small-Cap Fund
7 AN INTRODUCTION TO TAX-EFFICIENT INVESTING
7 A WORD ABOUT RISK
8 PRIMARY INVESTMENT STRATEGIES
12 THE FUNDS AND VANGUARD
12 INVESTMENT ADVISER
13 YEAR 2000 CHALLENGE
13 DIVIDENDS, CAPITAL GAINS, AND TAXES
14 SHARE PRICE
15 FINANCIAL HIGHLIGHTS
17 INVESTING WITH VANGUARD
Glossary (inside back cover)

WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of each Vanguard
Tax-Managed Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk" explanations along the way. Reading the
prospectus will help you to decide which Funds, if any, are the right investment
for you. We suggest that you keep it for future reference.

IMPORTANT NOTE
Vanguard Tax-Managed Growth and Income Fund, Tax-Managed Capital Appreciation
Fund, and Tax-Managed Small-Cap Fund offer two separate classes of shares:
Investor and Institutional; Vanguard Tax-Managed Balanced Fund offers Investor
Shares only. This prospectus offers the Funds' Institutional Shares, which have
an investment minimum of $10 million. The Funds' Investor Shares, which have an
investment minimum of $10,000, are offered through a separate prospectus. You
can obtain a copy of the Investor Shares prospectus by calling Vanguard's
Investor Information Department at 1-800-662-7447. Note that the Funds' separate
share classes have different expenses; as a result, their investment performance
will vary.

<PAGE> 36
This prospectus provides information about Institutional Shares of three
Vanguard Tax-Managed Funds. Each of these funds is managed to minimize the
impact of taxes on investors' returns and uses an index-oriented approach to
equity investing. However, the funds differ considerably in their investment
objectives and strategies. Below you'll find profiles that summarize the key
features of each fund. Additional information concerning the funds, including an
Introduction to Tax-Efficient Investing, appears following the profiles.

<PAGE> 37
FUND PROFILE -- TAX-MANAGED GROWTH AND INCOME FUND

INVESTMENT OBJECTIVE

Tax-Managed Growth and Income Fund is a stock fund that seeks to provide a
tax-efficient total return, consisting of moderate current income and long-term
capital growth.

INVESTMENT STRATEGIES

PRIMARY RISKS

TAX-MANAGED GROWTH AND INCOME 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 investment style risk, which
is the chance that returns from large-capitalization stocks--which are the
types of stocks that the Fund emphasizes--will trail returns from other asset
classes or the overall stock market.
<PAGE> 38

PERFORMANCE/RISK INFORMATION

Note: This prospectus offers the Fund's Institutional Shares not the Investor
Shares. Performance for the Investor Shares is shown here because the Fund's
Institutional Shares are new. However, the two share classes are invested in the
same portfolio of securities and will have the same annual returns except to the
extent that their operating expenses differ.

ANNUAL TOTAL RETURNS FOR INVESTOR SHARES

AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
<S> <C> <C>
Tax-Managed Growth and Income Fund-Investor Shares - % - %
S&P 500 Index - % - %
</TABLE>

*September 6, 1994

FEES AND EXPENSES

The following table describes the fees and expenses you would pay if you buy and
hold Institutional Shares of Tax-Managed Growth and Income Fund. The expenses
shown under Annual Fund Operating Expenses are based on estimated amounts for
the current fiscal year.

<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 (includes redemptions by exchange to another fund): 2% or 1%*
Exchange Fees: None
</TABLE>

*A 2% redemption fee applies to shares held for less than 1 year; a 1%
redemption fee applies to shares held longer than 1 year but less than 5 years.
The fees are withheld from redemption proceeds and paid to the Fund. These fees
help to cover the transaction costs borne by the Fund when it must sell
securities to meet redemptions. In addition, these fees are intended to protect
the Fund's long-term investors from short-term traders, who erode the Fund's
tax-efficiency.

<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: - %
12b-1 Distribution Fees: None
Other Expenses: - %
</TABLE>
<PAGE> 39
<TABLE>
<S> <C>
TOTAL OPERATING EXPENSES: -%
</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 invested
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all of your shares at the end of the given period. Although your
actual costs might be higher or lower, based on these assumptions your costs
would be:

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

You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the one-
and three-year periods):

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

ADDITIONAL INFORMATION --
TAX-MANAGED GROWTH AND INCOME FUND

DIVIDENDS AND CAPITAL GAINS
Paid annually in December

INVESTMENT ADVISER
Vanguard Core Management Group, Valley Forge, Pennsylvania, since inception

INCEPTION DATE
February *, 1999

MINIMUM INITIAL INVESTMENT
$10 million

NEWSPAPER ABBREVIATION
*

VANGUARD FUND NUMBER
*

CUSIP NUMBER
*

TICKER SYMBOL
*

FUND PROFILE -- TAX-MANAGED CAPITAL APPRECIATION FUND
<PAGE> 40
INVESTMENT OBJECTIVE

Tax-Managed Capital Appreciation Fund is a stock fund that seeks to provide a
tax-efficient total return, consisting of long-term capital growth and nominal
current income.

INVESTMENT STRATEGIES

PRIMARY RISKS

PERFORMANCE/RISK INFORMATION

ANNUAL TOTAL RETURNS FOR INVESTOR SHARES

AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
<S> <C> <C>
Tax-Managed Capital Appreciation Fund-Investor Shares - % - %
Russell 1000 Index - % - %
</TABLE>

*September 6, 1994

FEES AND EXPENSES

The following table describes the fees and expenses you would pay if you buy and
hold Tax-Managed Capital Appreciation Fund-Institutional Shares. The expenses
shown under Annual Fund Operating Expenses are based on estimated amounts for
the current fiscal year.
<PAGE> 41
<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 (includes redemptions by exchange to another fund): 2% or 1%*
Exchange Fees: None
</TABLE>

<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: - %
12b-1 Distribution Fees: None
Other Expenses: - %
TOTAL OPERATING EXPENSES: - %
</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 invested
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all of your shares at the end of the given period. Although your
actual costs might be higher or lower, based on these assumptions your costs
would be:

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

You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the one-
and three-year periods):

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

ADDITIONAL INFORMATION --
TAX-MANAGED CAPITAL APPRECIATION FUND

DIVIDENDS AND CAPITAL GAINS
Paid annually in December

INVESTMENT ADVISER
Vanguard Core Management Group, Valley Forge, Pennsylvania, since inception

INCEPTION DATE
February *, 1999

MINIMUM INITIAL INVESTMENT
$10 million
<PAGE> 42
NEWSPAPER ABBREVIATION
*

VANGUARD FUND NUMBER
*

CUSIP NUMBER
*

TICKER SYMBOL
*

FUND PROFILE -- VANGUARD TAX-MANAGED SMALL-CAP FUND

INVESTMENT OBJECTIVE

Tax-Managed Small-Cap Fund is a stock fund that seeks to provide a tax-efficient
total return, consisting of long-term capital growth and nominal current income.

INVESTMENT STRATEGIES

PRIMARY RISKS

TAX-MANAGED SMALL-CAP 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 investment style risk, which is
the chance that returns from small- and medium- capitalization stocks --which
are the types of stocks that the Fund emphasizes--will trail returns from other
asset classes or the overall stock market. Small-capitalization stocks tend to
go through cycles of doing better--or worse--than the stock market in general.
These periods have, in the past, lasted for as long as several years.

PERFORMANCE/RISK INFORMATION

Tax-Managed Small-Cap Fund is new, so it has no performance information to
report yet.

FEES AND EXPENSES

The following table describes the fees and expenses you would pay if you buy and
hold Tax-Managed Small-Cap Fund-Institutional Shares. The expenses shown under
Annual Fund Operating Expenses are based on estimated amounts for the current
fiscal year. The Fund has no operating history; actual operating expenses could
be different.

<TABLE>
<S> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases 1%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees (includes redemptions by exchange to another fund): 2% or 1%**
Exchange Fees: None
</TABLE>

*The 1% purchase fee is deducted from all purchases (including exchanges from
other Vanguard funds), but not from reinvested dividends and capital gains.

** The 2% redemption fee applies to shares held for less than 1 year; the 1%
redemption fee applies to shares held longer than 1 year but less than 5 years.
The fees are withheld from redemption proceeds and paid to the Fund. These fees
help cover the transaction costs borne by the Fund when it must sell securities
to meet redemptions. In addition, these fees are intended to protect the Fund's
long-term investors from short-term traders, who erode the Fund's tax-
efficiency.

<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: - %
</TABLE>
<PAGE> 43
<TABLE>
<S> <C>
12b-1 Distribution Fees: None
Other Expenses: - %
TOTAL OPERATING EXPENSES: - %
</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's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all your shares at the end of the given period. Although your
actual costs might be higher or lower, based on these assumptions your costs
would be:

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

You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the one-
and three- year periods):

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

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

ADDITIONAL INFORMATION --
TAX-MANAGED SMALL-CAP FUND

DIVIDENDS AND CAPITAL GAINS
Paid annually in December

INVESTMENT ADVISER
Vanguard Core Management Group, Valley Forge, Pennsylvania, since inception

INCEPTION DATE
February *, 1999

MINIMUM INITIAL INVESTMENT
$10 million

NEWSPAPER ABBREVIATION
*

VANGUARD FUND NUMBER
*

CUSIP NUMBER
*

TICKER SYMBOL
*

AN INTRODUCTION TO TAX-EFFICIENT INVESTING
<PAGE> 44
Most mutual funds seek to maximize PRE-TAX total returns, without regard to the
personal tax consequences incurred by investors. Yet, taxable investors stand to
lose a significant portion of their investment returns to federal, state and
local taxes. Fund dividends and short-term capital gains are now taxed at
federal income tax rates as high as 39.6%, and for long-term capital gains, the
rates reach up to 20%. The Vanguard Tax-Managed Funds aim to minimize the impact
of taxes on investors' total returns by operating in a tax-efficient manner. The
Funds use these tax-management techniques:

LOW PORTFOLIO TURNOVER. The Funds minimize portfolio turnover by employing
an index-oriented approach to stock investing. Instead of trading frequently,
each Fund simply buys and holds the stocks comprising its target index. Frequent
trading--a hallmark of many actively-managed funds--causes funds to realize
capital gains, which must then be distributed to shareholders, reducing their
after-tax returns.

A DISCIPLINED SELL-SELECTION METHOD. When selling specific securities, the
Funds will select a specific share lot - more often than not, the highest-cost
shares - in order to minimize realized capital gains. In addition, each Fund
may sell securities at a loss in order to offset realized capital gains that
would otherwise have to be distributed to shareholders.

BIAS AGAINST TAXABLE DIVIDEND INCOME. The Tax-Managed Capital Appreciation
Fund minimizes taxable dividend income by focusing on the lower-yielding stocks
within its target index (the Russell 1000 Index).

A WORD ABOUT RISK

Look for this "warning 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 one or more of the Funds.

PRIMARY INVESTMENT STRATEGIES

MARKET EXPOSURE

COMMON STOCKS. Each of the Funds invests in U.S. common stocks as a primary
investment strategy, although the size of the companies on which the Funds
focus varies.

#EACH 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.

U.S. STOCK MARKET RETURNS (1926 - 1997)

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

Keep in mind that the S&P 500 Index--which is the index tracked by Tax-Managed
Growth and Income Fund -- holds mainly large-cap stocks. Historically, mid- and
small-cap stocks have been more volatile than -- and at times have performed
quite differently from -- large-cap stocks. This is due to several factors,
including less-certain growth and dividend prospects for smaller companies.
Tax-Managed Capital Appreciation Fund holds mid-cap stocks in addition to
large-cap stocks. On the other hand, Tax-Managed Small-Cap Fund holds just
small-cap stocks.

PLAIN TALK ABOUT

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

Each of the Funds employs an index-oriented approach to stock investing.
The grid below shows, at a glance, the stock index tracked by each Fund and
the indexing method employed.
<PAGE> 47
<TABLE>
<CAPTION>
TAX-MANAGED TAX-MANAGED TAX-MANAGED
GROWTH AND CAPITAL SMALL-CAP
INCOME FUND APPRECIATION FUND FUND
- ----------- ----------------- -------------
<S> <C> <C>
S&P 500 Russell 1000 S&P SmallCap
Composite Index 600 Index
Stock Index Sampling Replication
Replication Method Method
Method
</TABLE>

PLAIN TALK ABOUT

INDEXING METHODS

OTHER INVESTMENT POLICIES AND RISKS

Each of the Funds may invest, to a limited extent, in futures contracts, options
(including puts and calls), warrants, convertible securities, and swap
agreements, which are all types of derivatives. Losses (or gains) involving
futures contracts 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. Similar risks exist for warrants
(securities that permit their owners to purchase a specific number of shares of
stock at a predetermined price), convertible securities (securities that may be
exchanged for a different asset), and swap agreements (contracts between two
parties in which each agrees to make payments to the other based on the return
of a specified index or asset). For this reason, the Funds will not use futures,
options, warrants, convertible securities, or swap agreements for speculative
purposes or as leveraged investments that magnify the gains or losses of an
investment.

Each of the Funds may invest in futures contracts and options so long as the
total value of these investments does not exceed 5% of the Fund's assets.

The reasons for which a 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.

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), 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.

TURNOVER RATES
<PAGE> 48
Although the Funds generally seek to invest for the long term, each retains the
right to sell securities regardless of how long the securities have been held.
However, their index-oriented approach to stock investing and focus on avoiding
capital gains should hold the Funds' turnover rates for stocks fairly low, at
20% or less. (A turnover rate of 100% would occur, for example, if a Fund sold
and replaced securities valued at 100% of its net assets within a one-year
period.)

PLAIN TALK ABOUT

TURNOVER RATE

COSTS AND MARKET-TIMING

- - The Funds reserve the right to reject any purchase request into any of
the Funds -- including exchanges from other Vanguard funds -- that it
regards as disruptive to the efficient management of the Funds. 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 a Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD
section).

- - The Funds impose a 2% redemption fee on shares that are redeemed by any
method within one year of purchase. There is a 1% redemption fee on
shares that are redeemed by any method more than one year but less than
5 years of purchase.

- - The Funds reserve the right to stop offering shares at any time.

The Vanguard funds do not permit market-timing. Do not invest in these Funds if
you are a market-timer.

PLAIN TALK ABOUT

THE FUNDS' REDEMPTION FEE

The Tax-Managed Funds charge a redemption fee on shares that are redeemed,
including redeeming by exchange to another Vanguard fund, before they have been
held for five years. The fee is 2% for shares redeemed within 1 year of purchase
and 1% for shares redeemed after 1 year but within 5 years of purchase. The
Funds are intended for long-term investors, and this redemption fee ensures that
the costs associated with short-term trading are borne by the investors making
the transactions -- and not by those shareholders in the Funds for the long
term. At Vanguard, all fees are paid directly to the fund itself (unlike a sales
charge or load, which -- for many fund companies -- ends up in the pocket of the
sponsor, adviser, or sales representative).

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.
<PAGE> 49
PLAIN TALK ABOUT

FUND EXPENSES

All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. The Vanguard Tax-Managed Funds' expense ratios for Investor Shares in
fiscal year 1998 were as follows: Tax-Managed Growth and Income Fund -- X%, or
$X per $1,000 of average net assets; and Tax-Managed Capital Appreciation Fund
- -- X%, or $X per $1,000 of average net assets. The expense ratio for Tax-Managed
Small-Cap Fund, which is new, is expected to be X%, or $X per $1,000 of average
net assets, for fiscal year 1999. The average equity mutual fund had expenses in
1997 of X%, or $X per $1,000 of average net assets, according to Lipper
Analytical Services, which reports on the mutual fund industry.

THE FUNDS AND VANGUARD

PLAIN TALK ABOUT

VANGUARD'S UNIQUE CORPORATE STRUCTURE

INVESTMENT ADVISER

Each of the Tax-Managed Funds obtains advisory services on an at-cost basis from
The Vanguard Group, Valley Forge, Pennsylvania 19482. For the fiscal year ended
December 31, 1998, Tax-Managed Growth and Income Fund and Tax-Managed Capital
Appreciation Fund paid advisory expenses of ________, and ____________, which
represented effective annual rates of ____, and _____. Tax-Managed Small-Cap
Fund began operations on February *, 1999, and advisory expenses for its first
fiscal year are estimated at an effective annual rate of ______.

PLAIN TALK ABOUT

THE FUNDS' ADVISERS

The individual primarily responsible for overseeing investments for Tax-Managed
Growth and Income Fund, Tax-Managed Capital Appreciation Fund, and Tax-Managed
Small Capitalization Fund is:

DIVIDENDS, CAPITAL GAINS, AND TAXES

You can receive distributions of income or capital gains in cash, or you can
have them automatically invested in more shares of a 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.

- - The dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes.

- - Any distributions of net long-term capital gains by a Fund are taxable to you
as long-term capital gains, no matter how long you've owned shares in the
Fund.

- - 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.
<PAGE> 51
- - 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.

PLAIN TALK ABOUT

DISTRIBUTIONS

PLAIN TALK ABOUT

"BUYING A DIVIDEND"

SHARE PRICE

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

PLAIN TALK ABOUT

HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

This explanation uses the Tax-Managed Capital Appreciation Fund as an example.
The Fund began fiscal 1998 with a net asset value (price) of $20.18 per share.
During the semi-annual period, the Fund earned $ - per share from investment
income (interest and dividends) and $ - per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.

Of those total earnings of $ - per share, $ - per share was returned to
shareholders in the form of dividend and capital gains distributions.
<PAGE> 52
The earnings ($ - per share) minus the distributions ($ - per share) resulted in
a share price of $ - at the end of the year. This was an increase of $ - per
share (from $X at the beginning of the year to $ - 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 - % for the year.

FINANCIAL HIGHLIGHTS

TAX-MANAGED GROWTH AND INCOME FUND-INVESTOR SHARES
<PAGE> 53
<TABLE>
<CAPTION>
SIX MONTHS JULY 25*** TO
ENDED JUNE 30, YEAR ENDED DECEMBER, 31 DECEMBER 1,
-------------- ------------------------------ -------------
1998 1997 1996 1995 1994
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD ........................... $20.88 $15.89 $13.16 $9.77 $10.00
--------- ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income ............. .29 .27 .25 .09
Net Realized and Unrealized Gain
(Loss) on Investments........... 4.98 2.74 3.39 (.23)
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS
DISTRIBUTIONS........................ 5.27 3.01 3.64 (.14)
Dividends from Net Investment
Income......................... (.28) (.28) (.25) (.09)
Distributions from Realized Capital
Gains.......................... -- -- -- --
------ ------ ------ ------
TOTAL DISTRIBUTIONS.................. (.28) (.28) (.25) (.09)

NET ASSET VALUE, END OF PERIOD....... $20.88 $15.89 $13.16 $ 9.77
========= ====== ====== ====== ======
TOTAL RETURN**....................... 33.31% 23.03% 37.53% (1.70)%
========= ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).. $ 579 $ 235 $ 98 $ 31
Ratio of Total Expenses to Average Net Assets 0.17% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to Average Net Assets 1.62% 2.04% 2.37% 2.82%
Turnover Rate 2% 7% 6% 0%
</TABLE>

*Annualized

**Total returns do not reflect the 2% redemption fee on shares held less than
one year or the 1% redemption fee on shares held more than one year but less
than five years.

***Subscription period was July 25, 1994 through September 5, 1994, during which
time all assets were held in money market instruments. Performance measurement
began September 6, 1994.

TAX-MANAGED CAPITAL APPRECIATION FUND-INVESTOR SHARES

<TABLE>
<CAPTION>
SIX MONTHS JULY 25*** TO
ENDED JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 1,
-------------- ------------------------------ ---------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD ........................... $20.18 $15.95 $13.28 $9.95 $10.00
INVESTMENT OPERATIONS
Net Investment Income ............. .11 .12 .08 .04
Net Realized and Unrealized Gain
(Loss) on Investments 4.24 2.66 3.34 (.05)
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS
DISTRIBUTIONS 4.35 2.78 3.42 (.01)
Dividends from Net Investment
Income (.12) (.11) (.09) (.04)
Distributions from Realized Capital
Gains -- -- -- --
------ ------ ------ ------
TOTAL DISTRIBUTION (.12) (.11) (.09) (.04)

NET ASSET VALUE, END OF PERIOD $20.18 $15.95 $13.28 $ 9.95
========= ====== ====== ====== ======
TOTAL RETURN** 27.29% 20.92% 34.38% (0.50)%
========= ====== ====== ====== ======
</TABLE>
<PAGE> 54
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (Millions) $893 $517 $254 $70
Ratio of Total Expenses to Average Net Assets 0.17% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to Average Net Assets 0.70% 0.91% 0.97% 1.26%*
Turnover Rate 4% 12% 7% 1%
</TABLE>

*Annualized

**Total returns do not reflect the 2% redemption fee on shares held less than
one year or the 1% redemption fee on shares held more than one year but less
than five years.

***Subscription period was July 25, 1994 through September 5, 1994, during which
time all assets were held in money market instruments. Performance measurement
began September 6, 1994.

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," "S&P 500(R)," "Standard & Poor's 500," "500,"
and "Standard & Poor's SmallCap 600" are trademarks of The McGraw-Hill
Companies, Inc. Frank Russell Company is the owner of the trademarks and
copyrights relating to the Russell Indexes.

<PAGE> 55
INVESTING WITH VANGUARD (INSTITUTIONAL SHARES VERSION)

Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information?
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 [book]. Please call us to request copies.

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

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

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

VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 [book]
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(R) www.vanguard.com
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, bank instructions,
checkwriting, and Vanguard Automatic Exchange Service(TM)).
*Only current Vanguard shareholders can open a new account online, by
exchanging shares from other existing Vanguard accounts.

SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-800-523-1036
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.

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 [BOOK]
Invest assets held in an existing personal trust.

FOR AN ORGANIZATION [BOOK]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
<PAGE> 56
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. You may convert Investor Shares
of the Funds into Institutional Shares of the Funds provided that you meet the
minimum initial investment requirements for Institutional Shares.

MINIMUM INVESTMENT TO . . .
open a new account
$10 million

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

A NOTE ON PURCHASE FEES
Tax-Managed Small-Cap Fund deducts a 1% fee from all purchases (including
exchanges from other Vanguard funds), but not from reinvested dividends or
capital gains.

BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT Call your assigned
Service Associate to arrange your wire transaction.

Wire to:
FRB ABA 021001088
Marine Midland Bank, New York

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
Vanguard Tax-Managed Funds-[Fund number]
[Account number, or temporary number for a new account]
[Registered account owner]
[Registered address]

BY MAIL TO . . .
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.

Make your check payable to: The Vanguard Group-101 (for Growth and Income Fund),
- -102 (for Capital Appreciation Fund), or -??? (for Small-Cap Fund).

All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
<PAGE> 57
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355

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

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

Vanguard Tele-Account Your assigned Service Associate
1-800-662-6273

*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.

You can redeem (that is, sell or exchange) shares purchased by check 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 Funds'
shares.

WHEN SELLING SHARES:
- Vanguard sends the redemption proceeds to you or a designated third
party. (Proceeds sent to third parties or different addresses require a
signature guarantee; see footnote on page ___.)
- You can sell all or part of your Fund shares at any time.

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.
<PAGE> 58
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.

A NOTE ON REDEMPTION FEES
Each Fund imposes a 2% redemption fee on shares that are redeemed by any method
within one year of purchase. Each Fund imposes a 1% redemption fee on shares
that are redeemed by any method more than one year but less than five years of
purchase.

HOW TO REQUEST A REDEMPTION
You can request a redemption--that is, either a sale or exchange of shares--in
any one of three ways: Online, By Telephone, or By Mail.

ONLINE REQUESTS
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 Fund, Vanguard REIT Index Fund, Vanguard
Total International Stock Index Fund, and Vanguard Growth and Income Fund. If
you sell shares of these funds online, you will receive a redemption check at
your address of record.

TELEPHONE REQUESTS
Call Vanguard Tele-Account 24 hours a day--or your assigned Service Associate
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.

We reserve the right to refuse a telephone redemption if the caller is
unable to provide:
- The ten-digit account number.
- The name and address exactly as registered on the account.
- The primary Social Security or employer identification number as
registered on the account.
- 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.

MAIL REQUESTS
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
account owners.

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.
<PAGE> 59
EXCHANGE REDEMPTIONS. As described above, an exchange involves using the
proceeds of you redemption to purchase shares of another Vanguard fund.

FOR OUR MUTUAL PROTECTION

For your best interest 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:

- The Fund name and account number.
- The amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account (for mail
requests).
- Signature guarantees (if required). *
- Any supporting legal documentation that may be required.

*For instance, a signature guarantee must be provided for all registered
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. o 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
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 management of the
Fund."

A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in the this section.

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 a shareholder redeems more than $250,000 worth of Fund shares within any
90-day period, the Fund reserves
<PAGE> 60
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, the
shareholder may incur brokerage commissions if the shareholder elects to sell
the securities for cash.

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 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 clear, concise 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, a listing of the Fund's holdings, and other
financial statements.
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 Institutional Division at 1-800-523-1036 or your assigned Service Associate.

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

PORTFOLIO SUMMARY
Mailed quarterly 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.

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 and proceeds from the sale of shares.

AVERAGE COST REVIEW STATEMENT
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.

- --------------------------------------------------------------------------------
MANDATORY CONVERSION TO INVESTOR SHARES Each Fund reserves the right to convert
an investor's Institutional Shares into Investor Shares of the same Fund if the
investor's account balance falls below $10 million. Any such conversion will be
preceded by written notice to the investor.
- --------------------------------------------------------------------------------

<PAGE> 61
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

COMMON STOCK

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

DIVIDEND INCOME

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

DOLLAR-COST AVERAGING

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

EXPENSE RATIO

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

FIXED-INCOME SECURITIES

Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.

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 or industry.

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.

PRICE/EARNINGS (P/E) RATIO

The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.

PRINCIPAL

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

SECURITIES

Stocks, bonds, and other investment vehicles.

TOTAL RETURN

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> 62

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

FOR MORE INFORMATION
If you'd like more information about Vanguard Tax-Managed Funds, the following
documents are available free upon request:

ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Additional information about the Funds' investments is available in the Funds'
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 Funds' 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 thus are legally part a 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 Funds or other Vanguard funds,
please contact us as follows:

IF YOU ARE AN INDIVIDUAL INVESTOR:
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

IF YOU ARE A CLIENT OF VANGUARD'S INSTITUTIONAL DIVISION:
THE VANGUARD GROUP
INSTITUTIONAL INVESTOR INFORMATION
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900

TELEPHONE:
1-800-523-1036

WORLD WIDE WEB:
WWW.VANGUARD.COM

E-MAIL:
[email protected]

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, DC. 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.

Investment Company Act File No. 811-07175

I087N-02/00/1999

<PAGE> 63
PART B

VANGUARD TAX-MANAGED FUNDS
(THE "TRUST")

STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY * , 1999

This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectuses (dated February * , 1999). To obtain a
Prospectus, please call the Investor Information Department:

1-800-662-7447 (SHIP)

TABLE OF CONTENTS

PAGE
Description of the Trust.......................................... B-1
Investment Policies............................................... B-
Purchase of Shares................................................ B-6
Redemption of Shares.............................................. B-6
Share Price.......................................................
Fundamental Investment Limitations................................ B-8
Management of the Trust........................................... B-11
The Vanguard Group................................................ B-12
Portfolio Transactions............................................ B-14
Performance Measures.............................................. B-15
Yield and Total Return............................................ B-18
Financial Statements.............................................. B-18
Appendix A--Description of Municipal Bonds and their Ratings...... B-19

DESCRIPTION OF THE TRUST

ORGANIZATION

The Trust was organized as a Maryland corporation in 1994, and was
reorganized as a Delaware business trust in June, 1998. Prior to its
reorganization as a Delaware business trust, the Trust was known as Vanguard
Tax-Managed Fund, Inc. The Trust is registered with the United States
Securities and Exchange Commission under the Investment Company Act of 1940
(the "1940 Act") as an open-end diversified management investment company. It
currently offers the following funds:

Vanguard Tax-Managed Balanced Fund
Vanguard Tax-Managed Growth and Income Fund
Vanguard Tax-Managed Capital Appreciation Fund
Vanguard Tax-Managed Small-Cap Fund

Each of the funds offers two classes of shares, an investor share class and an
institutional share class, with the exception of Vanguard Tax-Managed Balanced
Fund which has only an investor share class. (individually, the "Fund";
collectively, the "Funds")

The Trust has the ability to offer additional series 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. The 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 Trust's assets and keeping all necessary
accounts and records.

Independent Public Accountant. PricewaterhouseCoopers LLP, 30 South 17th
Street, Philadelphia, Pennsylvania 19103, serves as the Trust's independent
public accountant. The accountant audits the Trust's financial statements and
provides other related services.

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 funds. 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
series; 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 of
shareholders.

Liquidation Rights. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the net assets of applicable funds
of the Trust.

Preemptive Rights. There are no preemptive rights associated with the
Trust.

Conversion Rights. Shareholders of the Trust may convert their shares
into another class of shares of the same funds upon the satisfaction of any
then applicable eligibility requirements.

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 are fully paid and
non-assessable.

TAX STATUS OF THE TRUST

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

REPURCHASE AGREEMENTS

Each Fund of the Trust may invest in repurchase agreements with commercial
banks, brokers or dealers either for defensive purposes due to market conditions
or to generate income from its excess cash balances. A repurchase agreement is
an agreement under which a Fund acquires a money market instrument (generally a
security issued by the U.S. Government or an agency thereof, a banker's
acceptance or a certificate of deposit) from a commercial bank, broker or
dealer, subject to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may be considered a
loan collateralized by securities. The resale price reflects an agreed upon
interest rate effective for the period the instrument is held by the 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
Trust's Board of Trustees will monitor a 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.

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The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
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 the Fund on such collateral may be
automatically stayed. Finally, it is possible that the 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 each Fund's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.

LENDING OF SECURITIES. Each Fund of the Trust may lend its investment
securities 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 and the structure and the
aggregate amount of such loans must be consistent with the Investment Company
Act of 1940, and the Rules and Regulations or interpretations of the Securities
and Exchange Commission (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 or securities issued or
guaranteed by the United States Government having at all times not less than
100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the 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
each Fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which 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 SEC has issued an exemptive order
permitting the Funds 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 Boards of Trustees of the Vanguard funds are
responsible for ensuring that the interfund lending program operates in
compliance with all conditions of the SEC's exemptive order.

ILLIQUID SECURITIES

Each 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.

Each 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. 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.

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FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, WARRANTS, CONVERTIBLE
SECURITIES AND SWAP AGREEMENTS

Each Fund of the Trust may enter into futures contracts, options, and
options on futures contracts for several reasons: to simulate full investment in
the underlying securities while retaining a cash balance for Fund management
purposes, to facilitate trading, or to reduce transaction costs. 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.

Most futures 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," or "selling" a contract previously purchased) in an identical contract
to terminate the position. Brokerage commissions are incurred when a futures
contract is bought or sold.

Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. 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.

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 Trust
expects to earn interest income on its initial margin deposit.

Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. Under CFTC regulations, the Funds may
use futures transactions for bona fide hedging purposes only, except that a
Fund may establish non-hedging futures positions if the aggregate initial
margin and premiums for such positions do not exceed five percent of the value
of the Fund's assets.

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

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS

A Fund of the Trust 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

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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 its total assets.

RISK FACTORS IN FUTURES TRANSACTIONS

Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, a Fund would continue to be required to
make daily cash payments to maintain its required margin. In such situations, if
the 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
futures contracts it holds. The inability to close options and futures positions
also could have an adverse impact on the ability to effectively hedge.

A Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved. 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 initial margin
requirement for the contract. However, because the futures strategies of a
Fund are engaged in only for hedging purposes and will not be leveraged, 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 financial instrument 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 each Fund of margin deposits in the event of bankruptcy of a
broker with whom a Fund has an open position in a futures contract or related
option.

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

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OTHER TYPES OF DERIVATIVES

In addition to futures and options, a Fund may invest in other types
of derivatives, including warrants, swap agreements and partnerships or grantor
trust derivative products. Derivatives are instruments whose value is linked to
or derived from an underlying security. Derivatives may be traded separately on
exchanges or in the over-the-counter market, or they may be imbedded in
securities. The most common imbedded derivative is the call option attached to,
or imbedded in, a callable bond. The owner of a traditional callable bond holds
a combination of a long position in a non-callable bond and a short position in
a call option on that bond.

Derivative instruments may be used individually or in combination to hedge
against unfavorable changes in interest rates, or to take advantage of
anticipated changes in interest rates. Derivatives may be structured with no or
a high degree of leverage. When derivatives are used as hedges, the risk
incurred is that the derivative instrument's value may change differently than
the value of the security being hedged. This "basis risk" is generally lower
than the risk associated with an unhedged position in the security being hedged.
Some derivatives may entail liquidity risk, i.e., the risk that the instrument
cannot be sold at a reasonable price in highly volatile markets. Leveraged
derivatives used for speculation are very volatile, and therefore, very risky.
However, the Funds will only utilize derivatives for hedging or arbitrage
purposes, and not for speculative purposes. Over-the-counter derivatives involve
a counterparty risk, i.e., the risk that the individual or institution on the
other side of the agreement will not or cannot meet their obligations under the
derivative agreement.

FEDERAL TAX TREATMENT OF FUTURES CONTRACTS AND OTHER FEDERAL TAX MATTERS

Except for transactions a Fund has identified as hedging transactions,
the Fund is required for federal income tax purposes to recognize as income
for each taxable year its net unrealized gains and losses on certain futures
contracts as of the end of the year as well as those actually realized during
the year. In most cases, any gain or loss recognized with respect to a futures
contract is considered to be 60% long-term capital gain or loss and 40%
short-term capital gain or loss, without regard to the holding period of the
contract. Furthermore, sales of futures contracts which are intended to hedge
against a change in the value of securities held by 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 a 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 of
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.

A 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 transactions.

Non-Investment Grade Purchases

The Balanced Fund will invest 50-55% of its assets in
intermediate-term municipal securities which provide interest exempt from
federal income taxes.

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At least 75% of the municipal securities held by the Tax-Managed Balanced
Fund must be rated in one of the top three ratings categories (Aaa, Aa, and
A for Moody's, or AAA, AA, and A for Standard & Poor's). No more than 25% of the
Fund will be invested in bonds rated Baa (by Moody's) or BBB (by Standard &
Poor's.) Of that 25%, 5% may be lower-rated or unrated. Bonds rated below Baa
(by Moody's) or BBB (by Standard & Poor's), may include bonds rated as low as C
(by Moody's) or D (by Standard & Poor's.)

In the event that a particular municipal security held by the Fund is
downgraded below the minimum investment level permitted by the Fund's investment
policies, the Trustees and Officers of the Trust will carefully assess the
creditworthiness of the obligation to determine whether it continues to meet the
policies and objectives of the Fund.

MUNICIPAL LEASE OBLIGATIONS

Each Fund of the Trust may invest in municipal lease obligations. These
securities are sometimes considered illiquid because of the inefficiency and
thinness of the market in which they are traded. Under the supervision of the
Trust's Board of Trustees, the Fixed Income Group may determine to treat certain
municipal lease obligations as liquid, and therefore not subject to the Trust's
15% limit on illiquid securities. The factors that the Fixed Income Group may
consider in making these liquidity determinations include: (1) the frequency of
trades and quotations for the security; (2) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (3) the
willingness of dealers to underwrite and make a market in the security; (4) the
nature of the marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer; and
(5) factors unique to a particular security, including general creditworthiness
of the issuer, the importance to the issuer of the property covered by the lease
and the likelihood that the marketability of the securities will be maintained
throughout the time the security is held by the Fund.

In the case of any unrated municipal lease obligations, a Fixed Income
Group analyst will assign a credit rating based upon criteria that include an
analysis of factors similar to those considered by nationally recognized
statistical rating organizations. In addition, the Fixed Income Group's
liquidity determinations will incorporate those factors mentioned above.

PURCHASE OF SHARES

The Trust 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 Trust, and (iii) to
reduce or waive the minimum investment for or any other restriction on initial
and subsequent investments for certain fiduciary accounts or under circumstances
where certain economies can be achieved in sales of the Trust's shares.

REDEMPTION OF SHARES

Each Fund of 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 Securities
and Exchange Commission (the "Commission"), (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for a Fund to dispose of securities owned by
it, or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.

The Trust has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Trust at
the beginning of such period. Such commitment is irrevocable without

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the prior approval of the Commission. Redemptions in excess of the above limits
may be paid in whole or in part, in readily marketable investment securities or
in cash, as the Trustees may deem advisable; however, payment will be made
wholly in cash unless the Trustees believe that economic or market conditions
exist which would make such a practice detrimental to the best interests of the
Trust. If redemptions are paid in investment securities, such securities will be
valued as set forth in the Prospectus under "The Share Price of Each Portfolio"
and a redeeming shareholder would normally incur brokerage expenses if he
converted these securities to cash.

A redemption fee of 2% of the value of a Fund's shares redeemed will be
deducted from the redemption proceeds if shares held for less than one year are
redeemed. A redemption fee of 1% of the value of shares redeemed will be
deducted from the redemption proceeds if shares held for at least one year but
less than five years are redeemed. These fees are paid directly to the Trust.
Any redemption may be more or less than the shareholder's cost depending on the
market value of the securities held by a Fund. In the event of an early
redemption due to a shareholder's death, all redemption fees will be waived. In
order to substantiate the death, a certified copy of the death certificate must
be provided.

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.

A signature guarantor must be a bank, broker, or any other guarantor that
Vanguard deems acceptable. NOTARIES PUBLIC ARE NOT ACCEPTABLE SIGNATURE
GUARANTORS.

The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Trust are also
being redeemed, on the letter or stock power.

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 that the
Exchange is open for trading.

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

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

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

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LIM 1

FUNDAMENTAL INVESTMENT LIMITATIONS

The Funds are 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 a Fund's shares. For these purposes, a "majority" of a Fund's shares
means shares representing the lesser of: (i) 67% or more of the Fund's net asset
value, 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 or commodity
contracts, except that it may invest in stock and bond futures contracts,
options, and options on futures contracts. No more than 3% of the Fund's assets
may be used as initial margin deposit for futures contracts, and no more than
5% of the Fund's assets may be invested in futures contracts 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, 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
approved by the Fund's shareholders, 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 or customarily purchased
by institutional investors, 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.

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

REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate and, in the case
of Tax-Managed Balanced Fund, bonds secured by 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.

None of these limitations prevents the Fund from participating in The Vanguard
Group ("Vanguard"). Because the Trust is a member of the Group, the Funds 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. Unless otherwise stated, each of the above limitations
applies at the time securities are purchased.

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MANAGEMENT OF THE TRUST

OFFICERS AND TRUSTEES

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 occupations during the past five years. As a group, the Trust's
Trustees and Officers own less than 1% of the outstanding shares of each Fund
of the Trust. Each Trustee also serves as a Director of the Vanguard Group,
Inc., and as a Trustee of each of the 35 investment companies administered by
Vanguard (34 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.

BARBARA BARNES HAUPTFUHRER, (DOB: 10/11/1928) Trustee
Director of The Great Atlantic and Pacific Tea Co. (Retail Stores), IKON Office
Solutions, Inc. (Office Products), Raytheon Co. (Defense/Electronics),
Knight-Ridder, Inc. (Publishing), Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; and Trustee Emerita of Wellesley College.

JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) 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 B.F.Goodrich 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.

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 Investment
Company Act of 1940.

B-10
<PAGE> 73
THE VANGUARD GROUP

Vanguard Tax-Managed Funds are a member of The Vanguard Group of Investment
Companies which consists of more than 30 investment companies (the "Trusts").
Through their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Trust and the other Trusts in The Vanguard 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
certain of the Vanguard Trusts including Vanguard Tax-Managed Fund.

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 Trusts 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 Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
Officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines 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 Trusts.
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. The Amended and
Restated Funds' Service Agreement provides for the following arrangement: (1)
each Vanguard Trust may invest a maximum of 0.40% of its assets in Vanguard and
(2) there is no restriction on the maximum cash investment that the Vanguard
Trusts may make in Vanguard. At December 31, 1998, the Trust had contributed
capital of $ * to Vanguard, representing * % of 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. During the
six months ended December 31, 1998, the Trust's allocated share of Vanguard's
actual net costs of operation relating to management and administrative services
(including transfer agency) totaled approximately $ * .

DISTRIBUTION.

Vanguard Marketing Corporation, a wholly-owned Subsidiary of The Vanguard
Group, Inc., provides all distribution and marketing activities for the Trusts
in the Group. 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 distri-

B-11
<PAGE> 74

bution 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 year ended December 31, 1998, the Trust paid
approximately $- of the The Vanguard Group's distribution and marketing
expenses.

INVESTMENT ADVISORY SERVICES. Vanguard's Core Management Group provides
investment advisory services to the Trust. These services are provided on an
at-cost basis by Vanguard's Core Management Group and Vanguard's Fixed Income
Group. The compensation and other expenses of this staff are paid by the funds
and Trusts utilizing these services. During the fiscal year ended December 31,
1998, the Trust paid approximately $ * of Vanguard's expenses relating to
investment advisory services.

TRUSTEE COMPENSATION

The individuals in the following table serve as Trustees of all Vanguard
Trusts, 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 Trusts, 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. For the Trust, 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.

B-12
<PAGE> 75

VANGUARD TAX-MANAGED FUNDS
COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM ALL
COMPENSATION ACCRUED AS PART OF ANNUAL BENEFITS VANGUARD TRUSTS
NAME OF TRUSTEES FROM TRUST 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..... $ - $ - $ - $ -
JoAnn Heffernan Heisen......... $ - $ - $ - $ -
Robert E. Cawthorn(2).......... $ - $ - $ - $ -
Bruce K. MacLaury.............. $ - $ - $ - $ -
Burton G. Malkiel.............. $ - $ - $ - $ -
Alfred M. Rankin, Jr........... $ - $ - $ - $ -
John C. Sawhill................ $ - $ - $ - $ -
James O. Welch, Jr............. $ - $ - $ - $ -
J. Lawrence Wilson............. $ - $ - $ - $ -
</TABLE>

(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 35 Vanguard Trusts (34 in
the case of Mr. Malkiel; 28 in the case of Mr. MacLaury).

(2) Mr. Cawthorn has retired from the Trust's Board, effective May 31, 1998.

PORTFOLIO TRANSACTIONS

In placing portfolio transactions, Vanguard uses its best judgment to
choose the broker most capable of providing the brokerage services necessary to
obtain best available price and most favorable execution. The full range and
quality of brokerage services available are considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration will be given to
those brokers which supply statistical information and provide other services in
addition to execution services to the Fund.

During the periods ended December 31, 1996, 1997, and 1998, the Fund paid
$203,672, $176,637, and $ * in brokerage commissions, respectively.

B-13

<PAGE> 76
PERFORMANCE MEASURES

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

Each of the investment company members of The Vanguard Group, including
each Fund of Vanguard Tax-Managed Funds, may, from time to time, use
one or more of the following unmanaged indices for comparative performance
purposes.

STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--contains the stocks
of 500 of the largest domestic companies.

STANDARD & POOR'S/BARRA VALUE INDEX--contains common stocks of the S&P 500
Index which have lower than average price-to-book ratios.

STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized
domestic stocks.

STANDARD & POOR'S SMALLCAP 600 INDEX-- - .

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 1000 INDEX--consists of approximately 1,000 large and medium
capitalization stocks.

RUSSELL 2000 INDEX--is composed of approximately 2,000 small capitalization
stocks.

RUSSELL 3000 INDEX--consists of approximately 3,000 large, medium and small
capitalization stocks.

MORGAN STANLEY CAPITAL INTERNATIONAL--SELECT EMERGING MARKETS INDEX--is an
unpublished index which includes common stocks of companies located in the
countries 12 emerging markets.

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, Australia, Asia 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.

B-14

<PAGE> 77
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.

SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND INDEX--is a market-weighted
index that contains approximately 4700 individually priced investment-grade
corporate bonds rated BBB or better, U.S. Treasury/agency issues and mortgage
passthrough securities.

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

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

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

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

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

STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average
yield of four high grade, non-callable preferred stock issues.

NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.

COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.

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

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

LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.

LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market-weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB- or better. The Index has a market
value of over $4 trillion.

LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The Index has a market value of over $1.6 trillion.

LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE
INDEX--is a market-weighted index that contains individually priced U.S.
Treasury, agency, and corporate securities

B-15

<PAGE> 78
rated BBB- or better with maturities between 5 and 10 years. The Index has a
market value of over $700 billion.

LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market-weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The Index
has a market value of over $900 billion.

LEHMAN BROTHERS MUNICIPAL BOND INDEX--is a total return performance
benchmark for the long-term, investment-grade tax-exempt bond market.

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

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

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

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

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

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

MARKETING AND ADVERTISING MATERIALS FOR THE VANGUARD TAX-MANAGED FUNDS MAY
FROM TIME TO TIME REFERENCE DATA FROM THE FOLLOWING STUDIES.

Joel M. Dickson and John B. Shoven, "Ranking Mutual Funds on an After Tax
Basis," Center for Economic Policy Research, Publication Number 344, April 1993.

B-16

<PAGE> 79

YIELD AND TOTAL RETURN

The yield(*) of each Fund of the Trust (except Tax-Managed Small-Cap Fund)
for the 30-day period ended December 31, 1998 was as follows:

<TABLE>
<CAPTION>
<S> <C>
Growth and Income Fund........... - %
Capital Appreciation Fund........ - %
Balanced Fund.................... - %
</TABLE>

(*)Yield is calculated daily.

The average annual total return of each Fund of the Trust (except
Tax-Managed Small-Cap Fund) for the one year period ended December 31, 1998 and
since its September 6, 1994 inception was as follows:

<TABLE>
<CAPTION>
ONE YEAR ENDED SINCE INCEPTION
DECEMBER 31, 1998 SEPTEMBER 6, 1994
----------------- -----------------
<S> <C> <C>
Growth and Income Fund........... + % * %
Capital Appreciation Fund........ + % * %
Balanced Fund.................... + % * %
</TABLE>

The Trust had a subscription period for these Funds from July 25, 1994, to
September 5, 1994, during which time all assets were held in money market
instruments. Performance measurement begins September 6, 1994.

FINANCIAL STATEMENTS

The Trust's financial statements as of and for the year ended December 31,
1997, appearing in the Vanguard Tax-Managed Fund 1997 Annual Report to
Shareholders, and the report thereon of PricewaterhouseCoopers LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information.

B-17

<PAGE> 80
APPENDIX A--DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS

Vanguard Tax-Managed Balanced Fund invests 50-55% of its assets in
municipal bonds and other municipal securities.

Municipal Bonds generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets and water
and sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loan to other public institutions and facilities.

The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. The Trust may also invest in tax-exempt industrial
development bonds, short-term municipal obligations, demand notes and tax-exempt
commercial papers.

Industrial revenue bonds in most cases are revenue bonds and generally do
not have the pledge of the credit of the issuer. The payment of the principal
and interest on such industrial revenue bonds is dependent solely on the ability
of the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. Short-term municipal obligations issued by states,
cities, municipalities or municipal agencies, include Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
Short-Term Discount Notes.

Note obligations with demand or put options may have a stated maturity in
excess of one year, but permit any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the note plus accrued interest upon a specific number
of days' notice to the bondholders. The interest rate on a demand note may be
based upon a known lending rate, such as a bank's prime rate, and be adjusted
when such rate changes, or the interest rate on a demand note may be a market
rate that is adjusted at specified intervals. The demand notes in which the Fund
will invest are payable on not more than 397 days' notice. Each note purchased
by the Fund will meet the quality criteria set out above for the Fund.

The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Corporation represent their opinions of the quality of the Municipal Bonds rated
by them. It should be emphasized that such ratings are general and are not
absolute standards of quality. Consequently, Municipal Bonds with the same
maturity, coupon and rating may have different yields, while Municipal Bonds of
the same maturity and coupon, but with different ratings may have the same
yield. It will be the responsibility of the investment management staff to
appraise independently the fundamental quality of the bonds held by the Trust.

The Funds may purchase municipal bonds subject to so-called "demand
features." In such cases the Funds may purchase a security that is nominally
long-term, but has many of the features of shorter-term securities. By virtue of
this demand feature, the security will be deemed to have a maturity date that is
earlier than its stated maturity rate.

B-18
<PAGE> 81

Municipal Bonds are sometimes purchased on a "when issued" basis meaning
the Trust has committed to purchasing certain specified securities at an agreed
upon price when they are issued. The period between commitment date and issuance
date can be a month or more. It is possible that the securities will never be
issued and the commitment canceled.

From time to time proposals have been introduced before Congress to
restrict or eliminate the Federal income tax exemption for interest on Municipal
Bonds. Similar proposals may be introduced in the future. If any such proposal
were enacted, it might restrict or eliminate the ability of the Trust to achieve
its investment objective. In that event, the Trust's Trustees and Officers would
reevaluate its investment objective and policies and consider recommending to
its shareholders changes in such objective and policies.

Similarly, from time to time proposals have been introduced before State
and local legislatures to restrict or eliminate the State and local income tax
exemption for interest on Municipal Bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or eliminate
the ability of each Fund to achieve its respective investment objective. In
that event, the Trust's Trustees and Officers would reevaluate its investment
objective and policies and consider recommending to its shareholders changes in
such objectives and policies.

Excerpts from Moody's Investors Service, Inc.'s Municipal Bond ratings:
Aaa--judged to be of the "best quality" and are referred to as "gilt edge";
interest payments are protected by a large or by an exceptionally stable margin
and principal is secure; Aa--judged to be of "high quality by all standards" but
as to which margins of protection or other elements make long-term risks appear
somewhat larger than Aaa-rated Municipal Bonds; together with Aaa group they
comprise what are generally known as "high grade bonds"; A--possess many
favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A-rated
Municipal Bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future; Baa--considered
as medium grade obligations; i.e., they are neither highly protected nor poorly
secured; interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time; Ba--protection of
principal and interest payments may be very moderate; judged to have speculative
elements; their future cannot be considered as well-assured; B--lack
characteristics of a desirable investment; assurance of interest and principal
payments over any long period of time may be small; Caa--poor standing; may be
in default or there may be present elements of danger with respect to principal
and interest; Ca--speculative in a high degree; often in default; C--lowest
rated class of bonds; issues so rated can be regarded as having extremely poor
prospects for ever attaining any real investment standing.

Description of Moody's ratings of state and municipal notes: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used will be as follows:
MIG-1--Best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both: MIG-2--High quality with margins of protection
ample although not so large as in the preceding group.

Description of Moody's highest commercial paper rating: Prime-1
("P-1")--judged to be of the best quality. Their short-term debt obligations
carry the smallest degree of investment risk.

Excerpts from Standard & Poor's Corporation's Municipal Bond ratings:
AAA--has the highest rating assigned by S&P; extremely strong capacity to pay
principal and interest; AA--has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree;
A--has a strong capacity to pay principal and interest, although somewhat more
susceptible to the adverse changes in circumstances and economic conditions;
BBB--regarded as having an adequate

B-20

<PAGE> 82
capacity to pay principal and interest; normally exhibit adequate protection
parameters but adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest than for
bonds in A category; BB--B--CCC--CC--predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of
obligations; BB is being paid; D--in default, and payment of principal and/or
interest is in arrears.

The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.

Excerpt from Standard & Poor's Corporation's rating of municipal note
issues: SP-1+--very strong capacity to pay principal and interest; SP-1--strong
capacity to pay principal and interest.

Description of S&P's highest commercial papers ratings: A-1+--This
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1--This designation indicates the degree of safety regarding
timely payments is very strong.

B-21
<PAGE> 83
PART C

VANGUARD TAX-MANAGED FUNDS

OTHER INFORMATION

ITEM 23. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
(a) Declaration of Trust*
(b) By-Laws*
(c) Not Applicable
(d) Investment Advisory Contracts*
(e) Not Applicable
(f) Reference is made to the section entitled "Manage-
ment 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+
(o) Rule 18F-3 Plan+
</TABLE>

* Filed Previously.

+ Filed Herewith.

** To be Filed By Amendment.

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

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

C-1
<PAGE> 84

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

Investment advisory services are provided to the Registrant on an at-cost
basis by The Vanguard Group, Inc., a jointly owned Subsidiary of the Registrant
and the other Trusts in the Group. See the information concerning The Vanguard
Group set forth in Parts A and B.

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 Chase Manhattan
Bank, the Registrant's Custodian.

ITEM 29. MANAGEMENT SERVICES

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

ITEM 30. UNDERTAKINGS

Not Applicable

C-2

<PAGE> 85
SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT HAS DULY CAUSED
THIS POST-EFFECTIVE AMENDMENT TO THE 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 3RD DAY OF DECEMBER 1998.

VANGUARD TAX-MANAGED FUNDS

By:
-------------------------------------
(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>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
By: Senior Chairman of the Board December 3, 1998
------------------------------------ and Trustee
(HEIDI STAM)
JOHN C. BOGLE*

By:
------------------------------------ Chairman, Chief Executive December 3, 1998
(HEIDI STAM) Officer and Trustee
JOHN J. BRENNAN*

By: Trustee December 3, 1998
------------------------------------
(HEIDI STAM)
BARBARA B. HAUPTFUHRER*

By: Trustee December 3, 1998
-------------------------------------
(HEIDI STAM)
JOANN HEFFERNAN HEISEN*

By: Trustee December 3, 1998
------------------------------------
(HEIDI STAM)
BURTON G. MALKIEL*

By: Trustee December 3, 1998
------------------------------------
(HEIDI STAM)
BRUCE K. MACLAURY, JR.*

By:
------------------------------------- Trustee December 3, 1998
(HEIDI STAM)
ALFRED M. RANKIN, JR.*

By: Trustee December 3, 1998
-------------------------------------
(HEIDI STAM)
JOHN C. SAWHILL*

By: Trustee December 3, 1998
-------------------------------------
(HEIDI STAM)
JAMES O. WELCH, JR.*

By: Trustee December 3, 1998
-------------------------------------
(HEIDI STAM)
J. LAWRENCE WILSON*

By: Treasurer and Principal December 3, 1998
------------------------------------- Financial Officer and
(HEIDI STAM) Accounting Officer
THOMAS J. HIGGINS*
</TABLE>

* By Power of Attorney. See File Number - , - . Incorporated by Reference.

<PAGE> 86

VANGUARD TAX-MANAGED FUNDS

INDEX TO EXHIBITS

Financial Data Schedule.................................. EX-99.BN
Multiple Class Plan...................................... EX-99.BO

<PAGE> 1
EX-99.BO

VANGUARD TAX-MANAGED FUNDS

MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
UNDER THE INVESTMENT COMPANY ACT OF 1940

This Multiple Class Plan ("Plan") has been adopted by a majority of the
Board of Trustees of Vanguard Tax-Managed Funds (the "Trust"), including a
majority of the Trustees who are not interested persons of the Trust, on behalf
of the Trust. This Plan pertains to three Funds of the Trust: Vanguard
Tax-Managed Growth and Income Fund, Vanguard Tax-Managed Capital Appreciation
Fund, and Vanguard Tax-Managed Small-Cap Fund (the "Multiple Class Funds").
Provisions of the Plan relating to Vanguard Tax-Managed Small-Cap Fund will take
effect upon the effectiveness of the Fund.

I. SHARE CLASSES

Each of the Multiple Class Funds will offer two classes of shares as
follows:

A. VANGUARD TAX-MANAGED GROWTH AND INCOME FUND

1. Vanguard Tax-Managed Growth and Income Fund-Investor
Shares (referred to herein as "Class A Shares"); and

2. Vanguard Tax-Managed Growth and Income
Fund-Institutional Shares (referred to herein as
"Class C Shares").

B. VANGUARD TAX-MANAGED CAPITAL APPRECIATION FUND

1. Vanguard Tax-Managed Capital Appreciation
Fund-Investor Shares (referred to herein as "Class A
Shares"); and

2. Vanguard Tax-Managed Capital Appreciation
Fund-Institutional Shares (referred to herein as
"Class C Shares").

C. VANGUARD TAX-MANAGED SMALL-CAP FUND

1. Vanguard Tax-Managed Small-Cap Fund-Investor Shares
(referred to herein as "Class A Shares"); and

2. Vanguard Tax-Managed Small-Cap Fund-Institutional
Shares (referred to herein as "Class C Shares").

<PAGE> 2
II. DISTRIBUTION ARRANGEMENTS

For each Multiple Class Fund, the distribution arrangements will differ
between Class A Shares and Class C Shares as follows:

A. CLASS A SHARES

Class A Shares will be available to all investors, but will be
marketed primarily to individual investors and smaller institutional investors.
At present, the minimum initial investment requirement for Class A Shares is
expected to be $3,000 for most accounts and $1,000 for Uniform Gifts/Transfers
to Minors Act accounts.

B. CLASS C SHARES

Class C Shares will be available only to investors who, due to
the substantial size of their investments, are expected to afford the Funds
certain economies of scale with respect to the servicing of their accounts. It
is expected that most investors eligible for Class C Shares will be
institutional entities, such as foundations, endowments, trusts, bank nominees
and corporations. At present, the minimum initial investment requirement for
Class C Shares is expected to be at least $10 million.

III. SERVICE ARRANGEMENTS

Service arrangements will differ between Class A Shares and Class C
Shares of each Multiple Class Fund as follows:

A. CLASS A SHARES

Class A Shares will be serviced primarily through The Vanguard
Group, Inc.'s ("Vanguard's") Individual Investor Services Group. Due to the
lower minimum initial investment requirement, it is expected that Class A Shares
will be held by more investors than Class C Shares. It is anticipated that the
aggregate amount of account-based services(1) that are provided to Class A
Shares will materially exceed the amount of such services for Class C Shares.

B. CLASS C SHARES

Class C Shares will be serviced primarily through Vanguard's
Institutional Investor Services Group. Due to the higher minimum initial
investment requirement, it is expected that Class C Shares will be held by fewer
investors than Class A Shares. It is anticipated that the aggregate amount of
account-based services that are provided to Class C Shares will be materially
less than the amount of such services provided to Class A Shares.

- --------
(1) "Account-based services" for purposes of the Plan are defined as
services provided by Vanguard on a per account basis to the Funds. Such services
include transaction processing, shareholder recordkeeping and the mailing of
shareholder reports, proxy materials and other items.
<PAGE> 3
IV. EXCHANGES AND CONVERSIONS

A. EXCHANGES

1. CLASS A SHARES

Class A Shares may be exchanged for Class C Shares of
the same Multiple Class Fund provided that all purchase eligibility
requirements for Class C Shares are satisfied by the holder of Class A
Shares. Class A Shares of each Multiple Class Fund may be exchanged for
shares of any of the other investment companies for which Vanguard
provides administrative services ("Vanguard Funds"); provided that (a)
exchanges are permitted by the Vanguard Fund; (b) the investor meets
all purchase eligibility requirements then imposed by the Vanguard
Fund; and (c) any such exchange is permitted by the Investment Company
Act of 1940, as amended ("1940 Act") and the rules, regulations and
interpretations thereunder.

2. CLASS C SHARES

Class C Shares of one Multiple Class Fund may be
exchanged for Class A Shares of the same Multiple Class Fund provided
that all purchase eligibility requirements for Class A shares are
satisfied by the holder of Class C Shares. Class C Shares of each
Multiple Class Fund may be exchanged into any Vanguard Fund; provided
that (a) exchanges are permitted by such Vanguard Fund; (b) the
investor meets all purchase eligibility requirements then imposed by
the Vanguard Fund; and (c) any such exchanges are permitted by the 1940
Act and the rules, regulations and interpretations thereunder.

B. CONVERSIONS OF CLASS C SHARES INTO CLASS A SHARES

The Trust may convert an investor's Class C Shares into Class
A Shares of the same Multiple Class Fund if such investor's account falls below
the then-applicable minimum initial investment amount for Class C Shares. Any
such conversion will be preceded by written notice to the investor and will be
effected on the basis of the relative net asset values of Class A Shares and
Class C Shares of the applicable Multiple Class Fund without the imposition of
any sales load, fee or other charge.

V. EXPENSE ALLOCATION BETWEEN CLASSES

A. BACKGROUND

The Trust is a member of The Vanguard Group of Investment
Companies (the "Group"). Through their jointly-owned subsidiary, Vanguard, the
Trust and the other Vanguard Funds obtain at cost virtually all of their
corporate management, administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost basis to the Trust and
certain other Vanguard Funds. Vanguard was established and operates pursuant to
a Funds' Service Agreement ("Agreement") between itself and the Vanguard Funds,
and pursuant to an exemptive order granted by the U.S. Securities and Exchange
Commission. Vanguard's direct and indirect
<PAGE> 4
expenses of providing corporate management, administrative and distribution
services to the Vanguard Funds are allocated among the Vanguard Funds in
accordance with methods specified in the Agreement.

B. CLASS-SPECIFIC EXPENSES

1. MARKETING AND DISTRIBUTION EXPENSES

Expenses associated with Vanguard's marketing and
distribution activities will be allocated to the Multiple Class Funds
on behalf of which the expenses were incurred by making such
allocations to the Multiple Class Funds' Class A Shares and Class C
Shares as if each such share class were a separate Vanguard Fund under
the Agreement.

2. EXPENSES FOR ACCOUNT-BASED SERVICES

Expenses associated with Vanguard's provision of
account-based services to the Multiple Class Funds will be allocated
between Class A Shares and Class C Shares of each Multiple Class Fund
on the basis of the amount incurred by each such share class as
follows:

(a) ACCOUNT MAINTENANCE EXPENSES

For each Multiple Class Fund, expenses
associated with the maintenance of investor accounts will be
proportionately allocated between Class A Shares and Class C
Shares based upon a monthly determination of (i) the
percentage of total shareholder accounts represented by each
class, and (ii) the percentage of total account transactions
performed by Vanguard for each class. In allocating account
maintenance expenses between the classes, (i) above will be
given a 75% weighting and (ii) above will be given a 25%
weighting.

(b) LITERATURE PRODUCTION AND MAILING EXPENSES

For each Multiple Class Fund, expenses
associated with shareholder reports, proxy materials and other
literature will be allocated between Class A Shares and Class
C Shares based upon the number of such items produced and
mailed for each class of shares.

3. OTHER CLASS SPECIFIC EXPENSES

Expenses for the primary benefit of a particular
share class will be allocated to that share class. Such expenses
include the following: each class's share of Vanguard's operating
expenses (not including expenses related to management of the Fund's
assets allocated under subparagraph (C) below); blue sky fees; and
legal fees attributable to a particular class.

C. FUND EXPENSES
<PAGE> 5
1. ASSET MANAGEMENT EXPENSES

For each Multiple Class Fund, expenses associated
with management of the Fund's assets (including all advisory, tax
preparation and custody fees) will be allocated between Class A Shares
and Class C Shares on the basis of their relative net assets.

2. OTHER FUND EXPENSES

For each Multiple Class Fund, any other expenses not
described above will be allocated between Class A Shares and Class C
Shares on the basis of their relative net assets.

VI. ALLOCATION OF INCOME, GAINS AND LOSSES

For each Multiple Class Fund, income, gains and losses will be
allocated between Class A Shares and Class C Shares on the basis of their
relative net assets. As a result of differences in allocated expenses, it is
expected that the net income of, and dividends payable to, each class of shares
will vary. For each Multiple Class Fund, dividends and distributions paid to
each class of shares will be calculated in the same manner, on the same day, and
at the same time.

VII. VOTING AND OTHER RIGHTS

For each Multiple Class Fund, Class A Shares and Class C Shares will
each have: (i) exclusive voting rights on any matter submitted to shareholders
that relates solely to its service or distribution arrangements; and (ii)
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ materially from the interests of the other class;
and (iii) in all other respects the same rights, obligations and privileges as
each other, except as described in this Plan.

VIII. AMENDMENTS

All material amendments to this Plan must be approved by a majority of
the Board of Trustees of the Trust, including a majority of the Trustees who are
not interested persons of the Trust.

<PAGE> 1
[ARTICLE] 6
[CIK] 0000923202
[NAME] VANGUARD TAX-MANAGED FUNDS
[SERIES]
[NUMBER] 001
[NAME] GROWTH AND INCOME FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] JUN-30-1998
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 726,764
[INVESTMENTS-AT-VALUE] 998,822
[RECEIVABLES] 4,407
[ASSETS-OTHER] 221
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1,003,450
[PAYABLE-FOR-SECURITIES] 8,161
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 833
[TOTAL-LIABILITIES] 8,994
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 725,967
[SHARES-COMMON-STOCK] 40,674
[SHARES-COMMON-PRIOR] 27,742
[ACCUMULATED-NII-CURRENT] 392
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (3,961)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 272,058
[NET-ASSETS] 994,456
[DIVIDEND-INCOME] 5,860
[INTEREST-INCOME] 110
[OTHER-INCOME] 0
[EXPENSES-NET] 669
[NET-INVESTMENT-INCOME] 5,301
[REALIZED-GAINS-CURRENT] (2,305)
[APPREC-INCREASE-CURRENT] 118,644
[NET-CHANGE-FROM-OPS] 121,640
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 4,843
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 13,632
[NUMBER-OF-SHARES-REDEEMED] 860
[SHARES-REINVESTED] 160
[NET-CHANGE-IN-ASSETS] 415,164
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (1,656)
[OVERDISTRIB-NII-PRIOR] 66
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 9
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 669
[AVERAGE-NET-ASSETS] 788,457
[PER-SHARE-NAV-BEGIN] 20.88
[PER-SHARE-NII] 0.14
[PER-SHARE-GAIN-APPREC] 3.56
[PER-SHARE-DIVIDEND] 0.13
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 24.45
[EXPENSE-RATIO] 0.17
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>

<PAGE> 1
[ARTICLE] 6
[CIK] 0000923202
[NAME] VANGUARD TAX-MANAGED FUNDS
[SERIES]
[NUMBER] 002
[NAME] CAPITAL APPRECIATION FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] JUN-30-1998
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 799,859
[INVESTMENTS-AT-VALUE] 1,258,885
[RECEIVABLES] 22,266
[ASSETS-OTHER] 231
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1,281,382
[PAYABLE-FOR-SECURITIES] 26,360
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 16,255
[TOTAL-LIABILITIES] 42,615
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 801,558
[SHARES-COMMON-STOCK] 52,307
[SHARES-COMMON-PRIOR] 44,231
[ACCUMULATED-NII-CURRENT] 3,144
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (24,961)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 459,026
[NET-ASSETS] 1,238,767
[DIVIDEND-INCOME] 4,134
[INTEREST-INCOME] 260
[OTHER-INCOME] 0
[EXPENSES-NET] 922
[NET-INVESTMENT-INCOME] 3,472
[REALIZED-GAINS-CURRENT] (7,487)
[APPREC-INCREASE-CURRENT] 170,684
[NET-CHANGE-FROM-OPS] 166,669
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 8,869
[NUMBER-OF-SHARES-REDEEMED] 793
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 346,260
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (17,474)
[OVERDISTRIB-NII-PRIOR] 328
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 9
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 922
[AVERAGE-NET-ASSETS] 1,083,313
[PER-SHARE-NAV-BEGIN] 20.18
[PER-SHARE-NII] 0.07
[PER-SHARE-GAIN-APPREC] 3.43
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 23.68
[EXPENSE-RATIO] 0.17
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>

<PAGE> 1
[ARTICLE] 6
[CIK] 0000923202
[NAME] VANGUARD TAX-MANAGED FUNDS
[SERIES]
[NUMBER] 003
[NAME] BALANCED FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] JUN-30-1998
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 138,020
[INVESTMENTS-AT-VALUE] 171,711
[RECEIVABLES] 3,577
[ASSETS-OTHER] 32
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 175,320
[PAYABLE-FOR-SECURITIES] 5,438
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 540
[TOTAL-LIABILITIES] 5,978
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 136,911
[SHARES-COMMON-STOCK] 10,640
[SHARES-COMMON-PRIOR] 8,163
[ACCUMULATED-NII-CURRENT] 270
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1,530)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 33,691
[NET-ASSETS] 169,342
[DIVIDEND-INCOME] 250
[INTEREST-INCOME] 1,783
[OTHER-INCOME] 0
[EXPENSES-NET] 123
[NET-INVESTMENT-INCOME] 1,910
[REALIZED-GAINS-CURRENT] (736)
[APPREC-INCREASE-CURRENT] 11,715
[NET-CHANGE-FROM-OPS] 12,889
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 1,588
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2,569
[NUMBER-OF-SHARES-REDEEMED] 181
[SHARES-REINVESTED] 89
[NET-CHANGE-IN-ASSETS] 49,577
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (794)
[OVERDISTRIB-NII-PRIOR] 52
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 13
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 123
[AVERAGE-NET-ASSETS] 145,396
[PER-SHARE-NAV-BEGIN] 14.67
[PER-SHARE-NII] 0.20
[PER-SHARE-GAIN-APPREC] 1.21
[PER-SHARE-DIVIDEND] 0.16
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 15.92
[EXPENSE-RATIO] 0.17
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>