VANGUARD TAX MANAGED FUND INC, 497, 2000-04-10

VANGUARD TAX MANAGED FUND INC
497, 2000-04-10

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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. 11

AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 14

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 APRIL 10, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.

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[SHIP GRAPHIC]

VANGUARD
TAX-MANAGED
FUNDS(R)

Prospectus
April 10, 2000

This prospectus contains
financial data for the Funds
through the fiscal year ended
December 31, 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

VANGUARD TAX-MANAGED
INTERNATIONAL FUND

[MEMBERS OF THE VANGUARD GROUP(R) LOGO]
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VANGUARD TAX-MANAGED FUNDS
Prospectus
April 10, 2000
A Group of Tax-Managed Mutual Funds

<TABLE>
<CAPTION>
<S> <C>
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CONTENTS
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1 AN INTRODUCTION TO TAX-MANAGED INVESTING 27 SHARE PRICE
2 FUND PROFILES 27 FINANCIAL HIGHLIGHTS
2 Vanguard Tax-Managed Balanced Fund 30 INVESTING WITH VANGUARD
5 Vanguard Tax-Managed Growth and Income Fund 30 Services and Account Features
8 Vanguard Tax-Managed Capital Appreciation Fund 31 Types of Accounts
11 Vanguard Tax-Managed Small-Cap Fund 31 Buying Shares
13 Vanguard Tax-Managed International Fund 34 Redeeming Shares
15 MORE ON THE FUNDS 37 Transferring Registration
23 THE FUNDS AND VANGUARD 38 Fund and Account Updates
24 INVESTMENT ADVISER GLOSSARY (inside back cover)
25 DIVIDENDS, CAPITAL GAINS, AND TAXES
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</TABLE>

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WHY READING THIS PROSPECTUS IS IMPORTANT

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

The Tax-Managed Growth and Income Fund, Tax-Managed Capital Appreciation Fund,
Tax-Managed Small-Cap Fund, and Tax-Managed International Fund each offer two
separate classes of shares: Investor and Institutional (The Tax-Managed Balanced
Fund offers Investor Shares only). This prospectus offers the Funds' Investor
Shares, which have an investment minimum of $10,000 and are intended for
individual investors. Please call Vanguard's Institutional Investor Group at
1-800-523-1036 to obtain a separate prospectus that offers the Funds'
Institutional Shares. These institutional options have an investment minimum of
$10 million and generally are not available to investors who require special
employee benefit plan services.

The Funds' separate share classes have different expenses; as a result, their
investment performances will vary.
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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>

AN INTRODUCTION TO TAX-MANAGED INVESTING

Most mutual funds seek to maximize pretax total returns, without regard to the
personal tax consequences for investors. Yet most 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:
o Low turnover. The Funds minimize turnover by employing an index-oriented
approach to stock investing. Instead of trading frequently, each Fund
simply buys and holds all--or a representative sample--of 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.
o 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.
o Bias against taxable dividend income. The Tax-Managed Balanced and Capital
Appreciation Funds minimize taxable dividend income by focusing on the
lower-yielding stocks in their target index (the Russell 1000 Index). In
addition, the bond portion of the Tax-Managed Balanced Fund is comprised of
municipal securities, which generate tax-exempt dividends.
o 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 at least 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.

<PAGE>

FUND PROFILE--
VANGUARD TAX-MANAGED BALANCED FUND

The following profile summarizes key features of Vanguard Tax-Managed Balanced
Fund.

INVESTMENT OBJECTIVE

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

INVESTMENT STRATEGIES

The Fund invests approximately 50%-55% of its assets in municipal securities and
the balance in common stocks. The fixed-income portion of the Fund emphasizes
higher-quality municipal securities with a dollar-weighted average maturity that
will range from 7-12 years. The Fund's stock holdings are chosen from the
Russell 1000 Index--an independent index of large- and mid-capitalization U.S.
companies. The Fund uses statistical methods to "sample" the Index, aiming to
closely track its investment performance while minimizing taxable dividend
distributions. For more information, see "Security Selection" under PRIMARY
INVESTMENT STRATEGIES.

PRIMARY RISKS

THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
o Investment style risk, which is the chance that returns from large- or
mid-capitalization stocks will trail returns from other asset classes or
the overall stock market. Each type of stock tends 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.
o 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.
o Call risk, which is the chance that during periods of falling interest
rates, a bond issuer will "call"--or repay--a relatively high-yielding bond
before the bond's maturity date. Forced to reinvest the unanticipated
proceeds at lower interest rates, the Fund would experience a decline in
income and lose the opportunity for additional price appreciation
associated with falling rates.Call risk is generally high for longer-term
bonds.
o Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally low for longer-term
bonds.
o Credit risk, which is the chance that a bond issuer--a state or local
government or regional governmental authority--will fail to pay 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.

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 total returns for one
and five calendar years and since inception compare with those of broad-based
securities market indexes and a composite stock/bond index weighted to match the
Fund's target allocation. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.

<PAGE>

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ANNUAL TOTAL RETURNS
--------------------------------------------------
[BAR CHAR]
1995 24.52%
1996 12.21%
1997 16.55%
1998 16.93%
1999 15.49%
------------------------------------------------

During the period shown in the bar chart, the highest return for a calendar
quarter was 12.32% (quarter ended December 31, 1998) and the lowest return for a
quarter was -5.03% (quarter ended September 30, 1998).

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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS SINCE INCEPTION*
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Vanguard Tax-Managed Balanced Fund 15.49% 17.07% 15.67%
Russell 1000 Index 20.91 28.05 25.71
Lehman Brothers 7 Year Municipal Bond Index -0.14 6.35 05.61
Tax-Managed Balanced Composite Index** 10.16 17.03 15.54
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*September 6, 1994.
**Weighted 50% Russell 1000 Index and 50% Lehman Brothers 7 Year
Municipal Bond Index.
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FEES AND EXPENSES

The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee*: 2% or 1%**

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.18%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20%

*Includes redemptions by exchange to another fund.

**A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by 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.

<PAGE>

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 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:

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1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS**
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$125 $180 $113 $255
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*Includes a 1% redemption fee (for shares held at least one year but less than
five years). If you hold shares for less than one year, a 2% redemption fee
applies.
**Does not include a redemption fee.

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 below, as it would to those shown above):

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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$20 $64 $113 $255
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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.

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ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are paid quarterly in March, June, $10,000
September, and December; capital gains, if
any, are paid annually in December NEWSPAPER ABBREVIATION
TxMBal
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., VANGUARD FUND NUMBER
since inception 103

INCEPTION DATE CUSIP NUMBER
September 6, 1994 921943304

NET ASSETS (ALL SHARE CLASSES) TICKER SYMBOL
AS OF DECEMBER 31, 1999 VTMFX
$330 million

SUITABLE FOR IRAS
No
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<PAGE>

FUND PROFILE--
VANGUARD TAX-MANAGED GROWTH AND INCOME FUND

The following profile summarizes key features of Vanguard Tax-Managed Growth and
Income Fund.

INVESTMENT OBJECTIVE

The Fund seeks to provide a tax-efficient investment return consisting of a
moderate level of current income and long-term capital growth.

INVESTMENT STRATEGIES

The Fund purchases stocks included in the Standard & Poor's 500 Index--an
independent index that is dominated by dividend-paying 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. For
more information, see "Security Selection" under PRIMARY INVESTMENT STRATEGIES.

PRIMARY RISKS

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 total returns for one
and five calendar years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.

----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
[BAR CHART]
1995 37.53%
1996 23.03%
1997 33.31%
1998 28.67%
1999 21.12%
----------------------------------------------------

During the period shown in the bar chart, the highest return for a calendar
quarter was 21.36% (quarter ended December 31, 1998) and the lowest return for a
quarter was -9.95% (quarter ended September 30, 1998).

<PAGE>

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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS SINCE INCEPTION*
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Vanguard Tax-Managed Growth and 21.12% 28.58% 26.26%
Income Fund
S&P 500 Index 21.04 28.56 26.22
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*September 6, 1994.
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FEES AND EXPENSES

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee*: 2% or 1%**

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.19%

*Includes redemptions by exchange to another fund.

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 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:

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1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS**
- --------------------------------------------------------------------------------
$124 $176 $107 $243
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$19 $61 $107 $243
- --------------------------------------------------------------------------------

<PAGE>

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.

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ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are paid quarterly in March, June, $10,000
September, and December; capital gains, if
any, are paid annually in December NEWSPAPER ABBREVIATION
TxMGI
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., VANGUARD FUND NUMBER
since inception 101

INCEPTION DATE CUSIP NUMBER
September 6, 1994 921943106

NET ASSETS (ALL SHARE CLASSES) AS OF TICKER SYMBOL
DECEMBER 31, 1999 VTGIX
$2.2 billion

SUITABLE FOR IRAS
No
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<PAGE>

FUND PROFILE--
VANGUARD TAX-MANAGED CAPITAL APPRECIATION FUND

The following profile summarizes key features of Vanguard Tax-Managed Capital
Appreciation Fund.

INVESTMENT OBJECTIVE

The Fund seeks to provide a tax-efficient investment return consisting of
long-term capital growth. The Fund may produce a small amount of taxable current
income, though not as part of its objective.

INVESTMENT STRATEGIES

The Fund purchases stocks included in the Russell 1000 Index-- an independent
index of the stocks of large- and mid-capitalization U.S. companies. The Fund
uses statistical methods to "sample" the Index, aiming to closely track its
investment performance while minimizing taxable dividend distributions. For more
information, see "Security Selection" under PRIMARY INVESTMENT STRATEGIES.

PRIMARY RISKS

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 total returns for one
and five calendar years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.

----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
[BAR CHART]
1995 34.38%
1996 20.92%
1997 27.29%
1998 27.95%
1999 33.50%
----------------------------------------------------

During the period shown in the bar chart, the highest return for a calendar
quarter was 25.47% (quarter ended December 31, 1998) and the lowest return for a
quarter was -13.09% (quarter ended September 30, 1998).

<PAGE>

9
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS SINCE INCEPTION*
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Vanguard Tax-Managed Capital Appreciation Fund 33.50% 28.72% 26.67%
Russell 1000 Index 20.91 28.05 25.71
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*September 6, 1994.
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FEES AND EXPENSES

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee*: 2% or 1%**

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.19%

*Includes redemptions by exchange to another fund.
**A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by 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.

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 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:

- --------------------------------------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS**
- --------------------------------------------------------------------------------
$124 $176 $107 $243
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$19 $61 $107 $243
- --------------------------------------------------------------------------------
<PAGE>

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.

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Paid annually in December $10,000

INVESTMENT ADVISER NEWSPAPER ABBREVIATION
The Vanguard Group, Valley Forge, Pa., TxMCap
since inception
VANGUARD FUND NUMBER
INCEPTION DATE 102
September 6, 1994
CUSIP NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 921943205
DECEMBER 31, 1999
$2.4 billion TICKER SYMBOL
VMCAX
SUITABLE FOR IRAS
No
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<PAGE>

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

The following profile summarizes key features of Vanguard Tax-Managed Small-Cap
Fund.

INVESTMENT OBJECTIVE

The Fund seeks to provide a tax-efficient investment return consisting of
long-term capital growth. The Fund may produce a small amount of taxable current
income, though not as part of its objective.

INVESTMENT STRATEGIES

The Fund purchases stocks included in the Standard & Poor's SmallCap 600
Index--an independent index 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. For
more information, see "Security Selection" under PRIMARY INVESTMENT STRATEGIES.

PRIMARY RISKS

PERFORMANCE/RISK INFORMATION

The Fund began operations on February 22, 1999, so performance information
(including annual total returns and average annual total returns) for a full
calendar year is not yet available.

FEES AND EXPENSES

The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are estimates based upon the expenses incurred in the partial fiscal year ended
December 31, 1999.

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.50%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee**: 2% or 1%***

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.13%
12b-1 Distribution Fee: None
Other Expenses: 0.06%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.19%

<PAGE>

*The 0.50% purchase fee is deducted from all purchases (including exchanges
from other Vanguard funds), but not from reinvested dividends and capital
gains.
**Includes redemptions by exchange to another fund.
***A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by 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.

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:

- --------------------------------------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS**
- --------------------------------------------------------------------------------
$174 $225 $157 $291
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$69 $111 $157 $291
- --------------------------------------------------------------------------------

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.

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Paid annually in December $10,000

INVESTMENT ADVISER NEWSPAPER ABBREVIATION
The Vanguard Group, Valley Forge, Pa., TxMSC
since inception
VANGUARD FUND NUMBER
INCEPTION DATE 116
February 22, 1999
CUSIP NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 921943403
DECEMBER 31, 1999
TICKER SYMBOL
$194 million VTMSX

SUITABLE FOR IRAS
No
- --------------------------------------------------------------------------------
<PAGE>

13
FUND PROFILE--
VANGUARD TAX-MANAGED INTERNATIONAL FUND

The following profile summarizes key features of Vanguard Tax-Managed
International Fund.

INVESTMENT OBJECTIVE

The Fund seeks to provide a tax-efficient investment return consisting of
long-term capital growth. The Fund may produce a small amount of taxable current
income, though not as part of its objective.

INVESTMENT STRATEGIES

The Fund purchases stocks included in the Morgan Stanley Capital International
(MSCI) EAFE Index, which is a market value-weighted index of approximately 1,000
securities listed on the stock exchanges of countries in Europe, Australia, and
Asia. The Fund uses statistical methods to "sample" the Index, aiming to closely
track its investment performance. For more information, see "Security Selection"
under PRIMARY INVESTMENT STRATEGIES.

PRIMARY RISKS

THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
o Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
o Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
o Country risk, which is the chance than a country's economy will be hurt by
political troubles, financial problems, or natural disasters.

PERFORMANCE/RISK INFORMATION

The Fund began operations on August 17, 1999, so performance information
(including annual total returns and average annual total returns) for a full
calendar year is not yet available.

FEES AND EXPENSES

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.25%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee**: 2% or 1%***

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fee: None
Other Expenses: 0.19%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.35%

<PAGE>
14

*The 0.25% purchase fee is deducted from all purchases (including exchanges
from other Vanguard funds), but not from reinvested dividends and capital
gains.
**Includes redemptions by exchange to another fund.
***A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by 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.

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:

- --------------------------------------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS**
- --------------------------------------------------------------------------------
$165 $252 $221 $467
- --------------------------------------------------------------------------------

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
periods below, as it would to those shown above):

- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$61 $137 $221 $467
- --------------------------------------------------------------------------------

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.

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Paid annually in December $10,000

INVESTMENT ADVISER NEWSPAPER ABBREVIATION
The Vanguard Group, Valley Forge, Pa., TxMln
since inception
VANGUARD FUND NUMBER
INCEPTION DATE 127
August 17, 1999
CUSIP NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 921943809
DECEMBER 31, 1999
$135 million TICKER SYMBOL
VTMGX
SUITABLE FOR IRAS
No
- --------------------------------------------------------------------------------
<PAGE>

MORE ON THE FUNDS

The following sections discuss other important features of the Vanguard
Tax-Managed Funds, including market exposure, security selection, other
investment policies, turnover rates, and costs and market-timing. You will also
find information about the risks of investing in the Funds throughout these
sections.

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 type of investment listed.
Market exposure is expected to play the most important role in achieving a
Fund's investment objective.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
VANGUARD TAX-MANAGED FUND
-------------------------------------------------------------------------------
GROWTH CAPITAL
MARKET EXPOSURE BALANCED AND INCOME APPRECIATION SMALL-CAP INTERNATIONAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common stocks 45-50% Dominated by 100% 100% Dominated by
Large- and Large-cap U.S. Large- and Small-cap U.S. Large-cap
mid-cap U.S. companies mid-cap U.S. companies foreign
companies companies companies
- -----------------------------------------------------------------------------------------------------
Municipal securities 50-55% None None None None
- -----------------------------------------------------------------------------------------------------
</TABLE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BALANCED FUNDS

Balanced funds are generally "middle-of-the-road" investments that seek to
provide some combination of growth, income, and conservation of capital by
investing in a mix of stocks, bonds, and/or money market instruments. Because
the prices of stocks and bonds often move in different directions, balanced
funds are able to use rewards from one type of investment to help offset the
risks from another.
- --------------------------------------------------------------------------------

U.S. STOCKS

Except for the Tax-Managed International Fund, which invests primarily in stocks
of companies outside the United States, each of the Funds invests primarily in
U.S. common stocks, with variations in the size of the companies on which the
Funds focus.

[FLAG] EACH FUND IS SUBJECT TO MARKET RISK, WHICH IS THE CHANCE 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 table below 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 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. (You will find a chart illustrating the volatility of the
international stock market later in the prospectus under "Foreign Stocks".)

<PAGE>

- --------------------------------------------------------------------------------
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.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.

- --------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
- --------------------------------------------------------------------------------

Keep in mind that the S&P 500 Index (which is the index tracked by the
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. The Tax-Managed Balanced and Capital Appreciation Funds hold mid-cap
stocks in addition to large-cap stocks. The Tax-Managed Small-Cap Fund holds
just small-cap stocks. The Tax-Managed International Fund holds mainly large-cap
foreign stocks.

[FLAG] THE FUNDS ARE SUBJECT, IN VARYING DEGREES, TO INVESTMENT STYLE RISK,
WHICH IS THE CHANCE THAT RETURNS FROM A SPECIFIC TYPE OF STOCK (FOR
INSTANCE, SMALL- OR MID-CAP) 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.

<PAGE>

FOREIGN STOCKS

The Tax-Managed International Fund seeks to provide a tax-efficient investment
return consisting of long-term capital growth by investing in a broadly
diversified group of stocks of foreign companies. Investments in foreign stocks
can be as risky, if not more risky, than U.S. stock investments. The prices of
international stocks and the prices of U.S. stocks have often moved in opposite
directions; these periods have, in the past, lasted as long as several years.

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING

Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could
negatively impact the returns Americans receive from a foreign investment.
- --------------------------------------------------------------------------------

Because it invests mainly in international stocks, the Tax-Managed
International Fund is subject to:

[FLAG] CURRENCY RISK, WHICH IS THE CHANCE THAT RETURNS WILL BE HURT BY A RISE
IN THE VALUE OF THE U.S. DOLLAR VERSUS FOREIGN CURRENCIES.

Conversely, when the U.S. dollar falls in value versus other currencies,
returns from international stocks are enhanced because a given sum in foreign
currency translates into more U.S. dollars.

The Fund is also subject to:

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

Returns on international stocks can be as volatile--or more volatile--than
returns on U.S. stocks. To illustrate the volatility of international stock
market returns for the U.S. dollar-based investor, the following table shows the
best, worst, and average total returns for international stocks over various
periods as measured by the MSCI EAFE Index, a widely used barometer of
international stock market activity. (Total returns consist of dividend income
plus change in market price.) Note that the returns shown in the table 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. Also, keep in mind that past
returns are not indicative of future returns and that volatility in the future
could be greater or less than past volatility.

<PAGE>

- --------------------------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 15.2 13.6 14.5 14.7
- --------------------------------------------------------------------------------

The Fund may enter into forward foreign currency contracts, which can help
protect its holdings against unfavorable short-term changes in exchange rates. A
forward foreign currency contract is an agreement to buy or sell a country's
currency at a specific price on a specific date, usually 30, 60, or 90 days in
the future. In other words, the contract guarantees an exchange rate on a given
date. Managers of international stock funds use these contracts to guard against
sudden, unfavorable changes in U.S. dollar/foreign currency exchange rates. The
Fund will use these contracts to gain currency exposure when investing in stock
index futures, and to settle trades in a foreign currency.

- --------------------------------------------------------------------------------
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 of
comparable quality and maturity 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 should
be able to sell your 5% bond for more than you paid.
- --------------------------------------------------------------------------------

MUNICIPAL SECURITIES

The 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 municipal
bonds purchased by the Fund 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
municipal securities purchased by the Fund may be rated in the fourth highest
rating category and, within that 25%, up to 5% may be lower rated or unrated.
The dollar-weighted average maturity of the Fund's municipal securities holdings
will range from 7-12 years.

<PAGE>

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

[FLAG] BECAUSE OF ITS BOND INVESTMENTS, THE TAX-MANAGED BALANCED FUND IS SUBJECT
TO INTEREST RATE RISK--WHICH IS THE CHANCE THAT BOND PRICES OVERALL WILL
FALL WHEN INTEREST RATES RISE.

Although bonds are often thought to be less risky than stocks, there have
been periods when bond prices have fallen significantly due to rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.

To illustrate the relationship between bond prices and interest rates, the
following table shows the impact of both a 1% and a 2% change (both up and down)
in interest rates on three bonds of different maturities, each with a face value
of $1,000.

- --------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT THE VALUE OF A $1,000 BOND
- --------------------------------------------------------------------------------
AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
- --------------------------------------------------------------------------------
*Assuming a 7% yield.
- --------------------------------------------------------------------------------

These figures are for illustrative purposes only and should not be regarded
as an indication of future returns from the bond market as a whole, or the
Tax-Managed Balanced Fund in particular.
Changes in interest rates will affect bond income as well as bond prices.

- --------------------------------------------------------------------------------
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 more than 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 in hope of higher yields; short-term bond
investors should be willing to accept lower yields in return for less
fluctuation in the value of their investment.
- --------------------------------------------------------------------------------

[FLAG] BECAUSE OF ITS BOND INVESTMENTS, THE TAX-MANAGED BALANCED FUND IS SUBJECT
TO INCOME RISK, WHICH IS THE CHANCE THAT THE FUND'S DIVIDENDS (INCOME)
WILL DECLINE DUE TO FALLING INTEREST RATES. INCOME RISK IS GENERALLY
GREATEST FOR SHORT-TERM BONDS AND LEAST FOR LONG-TERM BONDS.

Problems unique to a bond issuer can also cause problems for bond fund
shareholders.

<PAGE>

[FLAG] THE TAX-MANAGED BALANCED FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE
CHANCE THAT A BOND ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A
TIMELY MANNER.

The credit quality of the Tax-Managed Balanced Fund is expected to be very
high, and thus credit risk should be low. The average credit quality of the
Fund's holdings, as rated by Moody's Investors Service as of December 31, 1999,
was AA+.

Finally, because stock and bond prices often move in different directions,
the Tax- Managed Balanced Fund's bond holdings may help to dampen--but not
eliminate--some of the stock market volatility experienced by the Fund.
Likewise, changes in interest rates may not have as dramatic an effect on the
Fund as they would on a fund made up entirely of bonds.

- --------------------------------------------------------------------------------
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. The lower the rating by one of the
independent bond-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, and the
only stocks purchased by a Fund are those included in its target index. The
Tax-Managed Balanced Fund selects municipal securities, however, 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.

---------------------------------------------------------
TAX-MANAGED FUND INDEX INDEXING METHOD
---------------------------------------------------------
Balanced Russell 1000 Sampling
Growth and Income S&P 500 Replication
Capital Appreciation Russell 1000 Sampling
Small-Cap S&P SmallCap 600 Replication
International MSCI EAFE Sampling
---------------------------------------------------------

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
INDEXING METHODS

In seeking to track a particular index, funds generally use one of two methods
to select the stocks or bonds 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 the 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, the Tax-Managed Capital Appreciation Fund would invest about
10% of its assets in the financial services stocks of the index with overall
similar financial 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 as long as
the total value of these investments does not exceed 5% of the Fund's assets.

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

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

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

<PAGE>

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

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE

Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more
likely to generate capital gains that must be distributed to shareholders as
income subject to taxes. As of December 31, 1999, the average turnover rates
for all domestic and international stock funds were approximately 89% and 90%,
respectively, according to Morningstar, Inc.
- --------------------------------------------------------------------------------

TURNOVER RATES

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.
Generally, an index-oriented fund sells securities only to respond to redemption
requests or to adjust the number of shares held to reflect a change in the
fund's target index. Because of this, and the Funds' focus on avoiding taxable
gains, the turnover rate for each Fund has been fairly low. The Funds' turnover
rate for stocks is expected to remain below 20%; the Tax-Managed Balanced Fund's
turnover rate for municipal securities is expected to remain below 40%. (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
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.
- --------------------------------------------------------------------------------

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

<PAGE>

o There is a limit on the number of times you can exchange into and out of a
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
o 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 after one year but within five years of
purchase.
o The Funds reserve the right to stop offering shares at any time.

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' REDEMPTION FEE

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

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).
- --------------------------------------------------------------------------------

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

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

THE FUNDS AND VANGUARD

Each Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds and total net assets of more than $540
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.

<PAGE>

- --------------------------------------------------------------------------------
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 Tax-Managed Balanced Fund's expense ratio for Investor Shares in
fiscal year 1999 was 0.20% or $2.20 per $1,000 of average net assets. The
Tax-Managed Growth and Income and Capital Appreciation Funds' expense ratio for
Investor Shares in fiscal year 1999 were each 0.19%, or $1.90 per $1,000 of
average net assets. The expense ratio for the Tax-Managed Small-Cap Fund, which
began operations on February 22, 1999, was also 0.19%, or $1.90 per $1,000 of
average net assets, for fiscal year 1999. The expense ratio for the Tax-Managed
International Fund, which began operations on August 17, 1999, was 0.35%, or
$3.50 per $1,000 of average net assets, for fiscal year 1999. Management
expenses, which are one part of operating expenses, include investment advisory
fees as well as other costs of managing a fund--such as account maintenance,
reporting, accounting, legal, and other administrative expenses.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISERS

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

GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; A.B., Dartmouth College; M.B.A., University of Chicago.

The municipal securities portion of the Tax-Managed Balanced Fund is overseen
by:

CHRISTOPHER M. RYON, Principal of Vanguard; has worked in investment management
and with Vanguard since 1985; has managed portfolio investments since 1988;
B.S., Villanova University; M.B.A., Drexel University.
- --------------------------------------------------------------------------------

INVESTMENT ADVISER

The Vanguard Group (Vanguard), Valley Forge, Pennsylvania 19482, founded in
1975, serves as the Funds' adviser through its Core Management and Fixed Income
Groups. As of December 31, 1999, Vanguard served as adviser for about $371.4
billion in assets. Vanguard manages the Funds on an at-cost basis, subject to
the control of the Trustees and officers of the Funds. For the fiscal year ended
December 31, 1999, the advisory fees of the Tax-Managed Balanced, Growth and
Income, and Capital Appreciation Fund represented an effective annual rate of
.03%, .004%, and .004%, of each Fund's average net assets, respectively.
The Tax-Managed Small-Cap and International Funds began operations on
February 22, 1999, and August 17, 1999, respectively. Advisory expenses for the
first fiscal year of both of these Funds are estimated at an effective annual
rate of 0.01%.

<PAGE>

The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Funds' securities, and to seek out the best available price and
most favorable execution for all transactions. Also, the Funds may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Funds.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Funds.

DIVIDENDS, CAPITAL GAINS, AND TAXES

FUND DISTRIBUTIONS

Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends for the Tax-Managed Balanced and Growth
and Income Funds generally are distributed in March, June, September, and
December; income dividends for the Tax- Managed Capital Appreciation, Small-Cap,
and International Funds generally are distributed in December. Capital gains
distributions generally occur in December. 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 dividends or capital gains in cash, or you can have them automatically
reinvested in more shares of the Fund.

BASIC TAX POINTS

Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
o Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
o Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
o Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes (except that most
dividends paid by the Tax- Managed Balanced Fund, which invests in
municipal securities, are expected to be exempt from federal income taxes).
o Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
o While the Funds seek to minimize distributions of taxable capital gains,
they may not always achieve this goal. Capital gains distributions may vary
considerably from year to year as a result of the Funds' normal investment
activities and cash flows.
o A sale or exchange of Fund shares 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.
o Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
o The Tax-Managed International Fund may be subject to foreign taxes or
foreign tax withholding on dividends, interest, and some capital gains that
it receives on foreign securities. You may qualify for an offsetting credit
or deduction under U.S. tax laws for your portion of the Fund's foreign tax
obligations, provided that you meet certain requirements.

<PAGE>

See your tax adviser or IRS Publications for more information.
o The Tax-Managed Balanced Fund's income dividends from interest earned on
municipal securities of a state or its political subdivisions are generally
exempt from that state's income taxes. Almost all states, however, tax
interest earned on municipal securities of other states.

GENERAL INFORMATION

BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not : n provide us with
your correct taxpayer identification number; n certify that the taxpayer
identification number is correct; and n confirm that you are not subject to
backup withholding. Similarly, Vanguard must withhold from your account if the
IRS instructs us to do so. FOREIGN INVESTORS. The Vanguard funds generally do
not offer their shares for sale outside of the United States. Foreign investors
should be aware that U.S. withholding and estate taxes may apply to any
investments in Vanguard funds. INVALID ADDRESSES. If a dividend or capital gains
distribution check mailed to your address of record is returned as
undeliverable, Vanguard will automatically reinvest all future distributions
until you provide us with a valid mailing address. TAX CONSEQUENCES. This
prospectus provides general tax information only. If you are investing through a
tax-deferred retirement account, such as an IRA, special tax rules apply. Please
consult your tax adviser for detailed information about a fund's tax
consequences for you.

- --------------------------------------------------------------------------------
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 a fund earns from any stock
holdings and the interest it receives from any money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term, depending on whether the fund held the securities for one year or
less, or more than one year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"

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

SHARE PRICE

Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share for the Tax-Managed Balanced Fund 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. Because foreign securities markets may operate on days
which are not business days in the United States, the value of the Tax-Managed
International Fund's holdings may change on days when shareholders will not be
able to purchase or redeem shares.

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

Net asset value per share for the Tax-Managed Growth and Income, Capital
Appreciation, Small-Cap, and International Funds is computed in a similar way,
by dividing the net assets attributed to each class by the number of Fund shares
outstanding for that class.
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, TXMSC, and TXMIN for the Balanced, Growth and Income, Capital
Appreciation, Small-Cap, and International Funds, respectively.

FINANCIAL HIGHLIGHTS

The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years (except for the
Tax-Managed Small-Cap and International Funds, which did not start operations
until February 22, 1999, and August 17, 1999, respectively), and certain
information reflects financial results for a single Fund share. The total
returns in each table represent the BEFORE-TAX rate that an investor would have
earned or lost each period on an investment in the Fund (assuming reinvestment
of all dividend and capital gains distributions, and complete redemption at the
end of the period). This information has been derived from the financial
statements 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 report sent
to you without charge by contacting Vanguard.

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES

This explanation uses the Tax-Managed Balanced Fund as an example. The Fund
began fiscal 1999 with a net asset value (price) of $16.74 per share. During
the year, the Fund earned $.43 per share from investment income (interest and
dividends) and $2.13 per share from investments that had appreciated in value
or that were sold for higher prices than the Fund paid for them.

Shareholders received $.43 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.

The earnings ($2.56 per share) minus the distributions ($.43 per share)
resulted in a share price of $18.87 at the end of the year. This was an
increase of $2.13 per share (from $16.74 at the beginning of the year to $18.87
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 15.49% for the
year.

As of December 31, 1999, the Fund had $330 million in net assets. For the year,
its expense ratio was 0.20% ($2.00 per $1,000 of net assets); and its net
investment income amounted to 2.52% of its average net assets. It sold and
replaced securities valued at 13% of its net assets.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD TAX-MANAGED BALANCED FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $16.74 $14.67 $12.92 $11.85 $9.79
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .43 .39 .37 .36 .31
Net Realized and Unrealized Gain (Loss) on Investments 2.13 2.07 1.75 1.07 2.07
------------------------------------------------------------
Total from Investment Operations 2.56 2.46 2.12 1.43 2.38
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.43) (.39) (.37) (.36) (.32)
Distributions from Realized Capital Gains -- -- -- -- --
------------------------------------------------------------
Total Distributions (.43) (.39) (.37) (.36) (.32)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $18.87 $16.74 $14.67 $12.92 $11.85
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN* 15.49% 16.93% 16.55% 12.21% 24.52%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $330 $207 $120 $63 $39
Ratio of Total Expenses to Average Net Assets 0.20% 0.19% 0.17% 0.20% 0.20%
Ratio of Net Investment Income to Average Net Assets 2.52% 2.63% 2.77% 3.04% 3.06%
Turnover Rate 13% 7% 7% 5% 5%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

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

<PAGE>

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD TAX-MANAGED GROWTH AND INCOME FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $26.55 $20.88 $15.89 $13.16 $9.77
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .307 .29 .29 .27 .25
Net Realized and Unrealized Gain (Loss) on Investments 5.267 5.67 4.98 2.74 3.39
------------------------------------------------------------
Total from Investment Operations 5.574 5.96 5.27 3.01 3.64
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.314) (.29) (.28) (.28) (.25)
Distributions from Realized Capital Gains -- -- -- -- --
------------------------------------------------------------
Total Distributions (.314) (.29) (.28) (.28) (.25)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $31.81 $26.55 $20.88 $15.89 $13.16
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN* 21.12% 28.67% 33.31% 23.03% 37.53%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $2,240 $1,352 $579 $235 $98
Ratio of Total Expenses to Average Net Assets 0.19% 0.19% 0.17% 0.20% 0.20%
Ratio of Net Investment Income to Average Net Assets 1.11% 1.32% 1.62% 2.04% 2.37%
Turnover Rate 4% 4% 2% 7% 6%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

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

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD TAX-MANAGED CAPITAL APPRECIATION FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $25.69 $20.18 $15.95 $13.28 $9.95
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .117 .13 .11 .12 .08
Net Realized and Unrealized Gain (Loss) on Investments 8.487 5.51 4.24 2.66 3.34
------------------------------------------------------------
Total from Investment Operations 8.604 5.64 4.35 2.78 3.42
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.124) (.13) (.12) (.11) (.09)
Distributions from Realized Capital Gains -- -- -- -- --
------------------------------------------------------------
Total Distributions (.124) (.13) (.12) (.11) (.09)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $34.17 $25.69 $20.18 $15.95 $13.28
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN* 33.50% 27.95% 27.29% 20.92% 34.38%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $2,378 $1,479 $893 $517 $254
Ratio of Total Expenses to Average Net Assets 0.19% 0.19% 0.17% 0.20% 0.20%
Ratio of Net Investment Income to Average Net Assets 0.47% 0.62% 0.70% 0.91% 0.97%
Turnover Rate 12% 5% 4% 12% 7%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

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

<PAGE>
30

- --------------------------------------------------------------------------------
VANGUARD TAX-MANAGED SMALL-CAP FUND
FEB. 25* TO
DEC. 31,1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .049
Net Realized and Unrealized Gain (Loss)on Investments 2.615
------------------
Total from Investment Operations 2.664
------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.054)
Distributions from Realized Capital Gains --
------------------
Total Distributions (.054)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.61
================================================================================
TOTAL RETURN** 26.28%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $194
Ratio of Total Expenses to Average Net Assets 0.19%+
Ratio of Net Investment Income to Average Net Assets 0.70%+
Turnover Rate 27%
================================================================================
*Initial share purchase date. Subscription period for the fund was February 22,
1999, to March 24,1999, during which time all assets were held in money market
instruments. Performance measurement begins March 25, 1999.
**Total returns do not reflect the purchase fee of 0.50% beginning April 1,2000,
(1% from February 25, 1999 to March 31, 2000) or the 2% redemption fee.
+Annualized

- --------------------------------------------------------------------------------
VANGUARD TAX-MANAGED INTERNATIONAL FUND
AUG. 17* TO
DEC. 31,1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .03
Net Realized and Unrealized Gain (Loss) on Investments 1.97
------------------
Total from Investment Operations 2.00
------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.04)
Distributions from Realized Capital Gains --
------------------
Total Distributions (.04)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.96
================================================================================
TOTAL RETURN** 20.01%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $135
Ratio of Total Expenses to Average Net Assets 0.35%+
Ratio of Net Investment Income to Average Net Assets 0.96%+
Turnover Rate 7%
================================================================================
*Inception
**Total returns do not reflect the purchase fee of 0.25% beginning April 1,
2000 (0.75% from August 17, 1999 to March 31, 2000)
+Annualized

"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>
31

- --------------------------------------------------------------------------------
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 each Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOK]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [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 (ON-BOARD) [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 shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD TM www.vanguard.com [PC]
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 our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
o Open a new account.*
o Buy, sell, or exchange shares of most funds.
o Change your name/address.

<PAGE>

o Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP)
TEXT TELEPHONE: 1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
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 a Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$10,000.

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

<PAGE>

- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
Each 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 at that time is below $10,000. The low balance fee is
waived for investors who have aggregate Vanguard account assets of $50,000 or
more.
- --------------------------------------------------------------------------------
A NOTE ON PURCHASE FEES

The Tax-Managed Small-Cap and International Funds deduct a 0.50% fee and 0.25%
fee, respectively, from all purchases (including exchanges from other Vanguard
funds), but not from reinvested dividends or capital gains.

- --------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE]
open a new account
Complete and sign the account registration 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. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.

Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
Vanguard Tax-Managed Balanced Fund-103
Vanguard Tax-Managed Growth and Income Fund-101
Vanguard Tax-Managed Capital Appreciation Fund-102
Vanguard Tax-Managed Small-Cap Fund-116
Vanguard Tax-Managed International Fund-127
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 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division . . .

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . .[TELEPHONE]
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). (Note that
some restrictions apply to index fund accounts.)
- --------------------------------------------------------------------------------
<PAGE>

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). (Note that
some restrictions apply to index fund accounts.) 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 available.

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 have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction.

Wire to:
FRB ABA 021001088
HSBC Bank USA

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
The Vanguard Group (insert appropriate Fund number; see below)
Vanguard Tax-Managed Balanced Fund-103
Vanguard Tax-Managed Growth and Income Fund-101
Vanguard Tax-Managed Capital Appreciation Fund-102
Vanguard Tax-Managed Small-Cap Fund-116
Vanguard Tax-Managed International Fund-127

[Account number, or temporary number for a new account]
[Registered account owner(s)]
[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.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt a Fund's
operation or performance.
- --------------------------------------------------------------------------------
<PAGE>

35
REDEEMING SHARES

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

When Selling Shares:
o Vanguard sends the redemption proceeds to you or a designated third party.*
o You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 37.

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.
- --------------------------------------------------------------------------------
A NOTE OF REDEMPTION FEES

Each Fund imposes a 2% redemption fee on shares that are redeemed by any method
within 1 year of purchase. Each Fund imposes a 1% redemption fee on shares that
are redeemed by any method after 1 year but within 5 years of purchase.
Currently, redemption fees do not apply to Fund shares held through Vanguard's
separate recordingkeeping system for employee benefit plan accounts, due to
certain economies associated with these accounts. However, the Funds reserve the
right to impose redemption fees on their shares at any time if warranted by the
Funds' future costs of processing redemptions from these accounts.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [PC]
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 our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
<PAGE>
36

- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours-- to sell or exchange shares. You can exchange from a 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 you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
o The ten-digit account number.
o The name and address exactly as registered on the account.
o The primary Social Security or employer identification number as registered
on the account.
o The Personal Identification Number, if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.

Depending on your account registration type, additional documentation may be
required.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
37

For clients of Vanguard's Institutional Division . . .

If you redeem more than $250,000 worth of Fund shares within any 90-day period,
the Fund reserves the right to pay part or all of the redemption proceeds above
$250,000 in-kind, i.e., in securities, rather than in cash. If payment is made
in-kind, you may incur brokerage commissions if you elect to sell the securities
for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of two ways: check, or exchange
to another Vanguard fund.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:

REQUEST IN "GOOD ORDER"

All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
o The Fund name and account number.
o The amount of the transaction (in dollars or shares).
o Signatures of all owners exactly as registered on the account (for mail
requests).
o Signature guarantees (if required).*
o Any supporting legal documentation that may be required.
o Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S.stock exchange.

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 a Fund and
increase a Fund's costs for all shareholders, Vanguard limits account activity
as follows:
<PAGE>

o You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A FUND
during any 12-month period.
o Your round trips through a Fund must be at least 30 days apart.
o A Fund may refuse a share purchase at any time, for any reason.
o Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from a Fund followed by a purchase back into that
Fund. Also, a "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/
from another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of a
Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:

The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------

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>

In addition, you will receive financial reports about your 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
financial markets, a report from the advisers, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep each 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 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, notify our Client Services Department at
1-800-662-2739.

- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK]
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 taxable dividend and capital
gains distributions, and proceeds from the sale of shares.

- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOK]

Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.

- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)

<PAGE>

GLOSSARY OF INVESTMENT TERMS

ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.

BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.

BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.

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.

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

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

INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.

MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.

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

PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.

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 money you put into an investment.

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

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>

[THE VANGUARD GROUP (R)LOGO]
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 REPORTS
TO SHAREHOLDERS

Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.

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

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

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

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

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

TEXT TELEPHONE:
1-800-952-3335

WORLD WIDE WEB:
WWW.VANGUARD.COM

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

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

TEXT TELEPHONE:
1-800-749-7273

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 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at
the following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange Commission,
Washington, DC 20549-0102.

Funds' Investment Company Act
file number: 811-07175

P087N-04/10/2000

<PAGE>

VANGUARD
TAX-MANAGED FUNDS (R)
INSTITUTIONAL SHARES

Prospectus
April 10, 2000

This prospectus contains
financial data for the Funds
through the fiscal year ended
December 31, 1999.

VANGUARD TAX-MANAGED
GROWTH AND INCOME FUND

VANGUARD TAX-MANAGED
CAPITAL APPRECIATION FUND

VANGUARD TAX-MANAGED
SMALL-CAP FUND

VANGUARD TAX-MANAGED
INTERNATIONAL FUND

[MEMBERS OF THE VANGUARD GROUP (R) LOGO]

<PAGE>
VANGUARD TAX-MANAGED FUNDS INSTITUTIONAL SHARES
Prospectus

April 10, 2000

A Group of Tax-Managed Mutual Funds
<TABLE>
<CAPTION>

- ---------------------------------------------------------------------------------------
CONTENTS
- ---------------------------------------------------------------------------------------
<S> <C>
1 AN INTRODUCTION TO TAX-MANAGED INVESTING 21 SHARE PRICE

2 FUND PROFILES 22 FINANCIAL HIGHLIGHTS

2 Vanguard Tax-Managed Growth and Income 25 INVESTING WITH VANGUARD
Fund Institutional Shares
25 Services and Account Features
5 Vanguard Tax-Managed Capital Appreciation
Fund Institutional Shares 26 Types of Accounts

8 Vanguard Tax-Managed Small-Cap Fund 26 Buying Shares
Institutional Shares
28 Redeeming Shares
10 Vanguard Tax-Managed International Fund
Institutional Shares 31 Transferring Registration

12 MORE ON THE FUNDS 31 Fund and Account Updates

18 THE FUNDS AND VANGUARD 32 Mandatory Conversion to Investor
Shares
19 INVESTMENT ADVISER
GLOSSARY (inside back cover)
20 DIVIDENDS, CAPITAL GAINS, AND TAXES
- ---------------------------------------------------------------------------------------
</TABLE>

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

Each of the Vanguard Tax-Managed Funds offers two separate classes of shares:
investor and Institutional (except for Vanguard Tax-Managed Balanced Fund, which
offers Investor Shares only). This prospectus offers the Funds' Institutional
Shares, which have an investment minimum of $10 million and generally are not
available to investors who require special employee benefit plan services.
Please call Vanguard at 1-800-662-7447 to obtain a separate prospectus that
offers the Funds' Investor Shares, which have an investment minimum of $10,000.
The Funds' separate share classes have different expenses; as a result, their
investment performances will vary.

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

<PAGE>

AN INTRODUCTION TO TAX-MANAGED INVESTING

Most mutual funds seek to maximize pretax total returns, without regard to the
personal tax consequences for investors. Yet most 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:
o Low turnover. The Funds minimize turnover by employing an index-oriented
approach to stock investing. Instead of trading frequently, each Fund
simply buys and holds all--or a representative sample--of 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.
o 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.
o Bias against taxable dividend income. The Tax-Managed Capital Appreciation
Fund minimizes taxable dividend income by focusing on the lower-yielding
stocks in its target index (the Russell 1000 Index).
o 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 at least 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.

<PAGE>

FUND PROFILE--
VANGUARD TAX-MANAGED GROWTH AND INCOME FUND INSTITUTIONAL SHARES

The following profile summarizes key features of Vanguard Tax-Managed Growth and
Income Fund Institutional Shares.

INVESTMENT OBJECTIVE
The Fund seeks to provide a tax-efficient investment return consisting of a
moderate level of current income and long-term capital growth.

INVESTMENT STRATEGIES
The Fund purchases stocks included in the Standard & Poor's 500 Index--an
independent index dominated by dividend-paying 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. For
more information, see "Security Selection" under PRIMARY INVESTMENT STRATEGIES.

PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to investment style risk, which is the chance that returns
from large-capitalization stocks will trail returns from other asset classes or
the overall stock market. Large- 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
The following bar chart and table provide an indication of the risk of investing
in the Fund. The bar chart shows the performance of the Fund's Investor Shares
in each calendar year since inception. The table shows how the Fund's average
annual total returns of the Fund's Investor Shares for one and five calendar
years and since inception compare with those of a broad-based securities market
index. Keep in mind that the Fund's past performance does not necessarily
indicate how it will perform in the future.

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 and don't have a full calendar year of
performance. However, the two share classes are invested in the same portfolio
of securities and will have the same returns except to the extent that their
operating expenses differ.

<PAGE>

3
----------------------------------------------------
ANNUAL TOTAL RETURNS FOR INVESTOR SHARES
----------------------------------------------------
[BAR CHART]
1995 37.53%
1996 23.03%
1997 33.31%
1998 28.67%
1999 21.12%
----------------------------------------------------

- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Tax-Managed Growth and Income Fund
Institutional Shares 21.12% 28.58% 26.26%
S&P 500 Index 21.04 28.56 26.22
- --------------------------------------------------------------------------------
*September 6, 1994.
- --------------------------------------------------------------------------------

FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. Since the Fund did not begin offering
Institutional Shares until February 22, 1999, the expenses shown under Annual
Fund Operating Expenses are estimates based upon the expenses incurred in the
partial fiscal year ended December 31, 1999.

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee*: 2% or 1%**

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.08%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10%

<PAGE>

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:

- --------------------------------------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS**
- --------------------------------------------------------------------------------
$115 $148 $56 $128
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$10 $32 $56 $128
- --------------------------------------------------------------------------------

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.

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS SUITABLE FOR IRAS
Dividends are paid quarterly in March, June, No
September, and December; capital gains, if any,
are paid annually in December MINIMUM INITIAL INVESTMENT
$10 million
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., NEWSPAPER ABBREVIATION
since inception TxMGIIst

INCEPTION DATE VANGUARD FUND NUMBER
February 22, 1999 136

NET ASSETS (ALL SHARE CLASSES) AS OF CUSIP NUMBER
DECEMBER 31, 1999 921943700
$2.2 billion
TICKER SYMBOL
VTMIX
- --------------------------------------------------------------------------------
<PAGE>
5

FUND PROFILE--
VANGUARD TAX-MANAGED CAPITAL APPRECIATION FUND INSTITUTIONAL SHARES

The following profile summarizes key features of Vanguard Tax-Managed Capital
Appreciation Fund Institutional Shares.

INVESTMENT OBJECTIVE
The Fund seeks to provide a tax-efficient investment return consisting of
long-term capital growth. The Fund may produce a small amount of taxable current
income, though not as part of its objective.

INVESTMENT STRATEGIES
The Fund purchases stocks included in the Russell 1000 Index-- an independent
index of the stocks of large- and mid-capitalization U.S. companies. The Fund
uses statistical methods to "sample" the Index, aiming to closely track its
investment performance while minimizing taxable dividend distributions. For more
information, see "Security Selection" under PRIMARY INVESTMENT STRATEGIES.

PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to investment style risk, which is the chance that returns
from large- or mid-capitalization stocks will trail returns from other asset
classes or the overall stock market. Each type of stock tends 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
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the performance of the Investor Shares of the Fund
in each calendar year since inception. The table shows how the average annual
total returns of the Fund's Investor Shares for one and five calendar years and
since inception compare with those of a broad-based securities market index.
Keep in mind that the Fund's past performance does not necessarily indicate how
it will perform in the future.

<PAGE>

----------------------------------------------------
ANNUAL TOTAL RETURNS FOR INVESTOR SHARES
----------------------------------------------------
1995 34.38%
1996 20.92%
1997 27.29%
1998 27.95%
1999 33.50%
----------------------------------------------------

--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
--------------------------------------------------------------------
Vanguard Tax-Managed Capital Appreciation Fund
Institutional Shares 33.50% 28.72% 26.67%
Russell 1000 Index 20.91 28.05 25.71
--------------------------------------------------------------------
*September 6, 1994.
--------------------------------------------------------------------

FEES AND EXPENSES

The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. Since the Fund did not begin offering
Institutional Shares until February 22, 1999, the expenses shown under Annual
Fund Operating Expenses are estimates based upon the expenses incurred in the
partial fiscal year ended December 31, 1999.

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee*: 2% or 1%**

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.08%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10%

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 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:

<PAGE>

- --------------------------------------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS**
- --------------------------------------------------------------------------------
$115 $148 $56 $128
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$10 $32 $56 $128
- --------------------------------------------------------------------------------

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.

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Paid annually in December $10 million

INVESTMENT ADVISER NEWSPAPER ABBREVIATION
The Vanguard Group, Valley Forge, Pa., TxMCaIst
since inception
VANGUARD FUND NUMBER
INCEPTION DATE 135
February 24, 1999
CUSIP NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 921943601
DECEMBER 31, 1999
$2.5 billion TICKER SYMBOL
VTCIX
SUITABLE FOR IRAS
No
- --------------------------------------------------------------------------------
<PAGE>

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

The following profile summarizes key features of Vanguard Tax-Managed Small-Cap
Fund Institutional Shares.

INVESTMENT STRATEGIES
The Fund purchases stocks included in the Standard & Poor's SmallCap 600
Index--an independent index 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. For
more information, see "Security Selection" under PRIMARY INVESTMENT STRATEGIES.

PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to investment style risk, which is the chance that returns
from small-capitalization stocks 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. Many small-capitalization
companies are new, so their stocks lack a performance record.

PERFORMANCE/RISK INFORMATION
The Fund began operations on February 22, 1999, so performance information
(including annual total returns and average annual total returns) for a full
calendar year is not yet available.

FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. The expenses shown under Annual Fund
Operating Expenses are estimates based upon the expenses incurred in the partial
fiscal year ended December 31, 1999.

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.04%
12b-1 Distribution Fee: None
Other Expenses: 0.06%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10%

<PAGE>

*The 0.50% purchase fee is deducted from all purchases (including exchanges
from other Vanguard funds), but not from reinvested dividends and capital
gains.
**Includes redemptions by exchange to another fund.
***A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by 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.

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:

- --------------------------------------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS**
- --------------------------------------------------------------------------------
$165 $197 $106 $178
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$60 $82 $106 $178
- --------------------------------------------------------------------------------

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.

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS SUITABLE FOR IRAS
Paid annually in December No

INVESTMENT ADVISER MINIMUM INITIAL INVESTMENT
The Vanguard Group, Valley Forge, Pa., $10 million
since inception
NEWSPAPER ABBREVIATION
INCEPTION DATE TxMSCIst
April 21, 1999
VANGUARD FUND NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 118
DECEMBER 31, 1999
$213 million CUSIP NUMBER
921943502
- --------------------------------------------------------------------------------

<PAGE>
10

FUND PROFILE--
VANGUARD TAX-MANAGED INTERNATIONAL FUND INSTITUTIONAL SHARES

The following profile summarizes key features of Vanguard Tax-Managed
International Fund Institutional Shares.

INVESTMENT STRATEGIES
The Fund purchases stocks included in the Morgan Stanley Capital International
(MSCI) EAFE Index, which is a market value-weighted index of approximately 1,000
securities listed on the stock exchanges of countries in Europe, Australia, and
Asia. The Fund uses statistical methods to "sample" the Index, aiming to closely
track its investment performance. For more information, see "Security Selection"
under PRIMARY INVESTMENT STRATEGIES.

PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
o Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
o Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
o Country risk, which is the chance than a country's economy will be hurt by
political troubles, financial problems, or natural disasters.

PERFORMANCE/RISK INFORMATION
The Fund began operations on August 17, 1999, so performance information
(including annual total returns and average annual total returns) for a full
calendar year is not yet available.

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fee: None
Other Expenses: 0.09%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%

<PAGE>

*The .25% purchase fee is deducted from all purchases (including exchanges from
other Vanguard funds), but not from reinvested dividends and capital gains.

**Includes redemptions by exchange to another fund.
***A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by 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.

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:

- --------------------------------------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS**
- --------------------------------------------------------------------------------
$155 $220 $165 $342
- --------------------------------------------------------------------------------

*Includes a 1% redemption fee (for shares held at least one year but less than
five years). If you hold shares for less than one year, a 2% redemption fee
applies.
**Does not include redemption fee.

- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$51 $105 $165 $342
- --------------------------------------------------------------------------------

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.

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS SUITABLE FOR IRAS
Paid annually in December No

INVESTMENT ADVISER MINIMUM INITIAL INVESTMENT
The Vanguard Group, Valley Forge, Pa., $10 million
since inception
NEWSPAPER ABBREVIATION
INCEPTION DATE TxMlnIst
August 17, 1999
VANGUARD FUND NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 137
DECEMBER 31, 1999
$135 million CUSIP NUMBER
921943882
- --------------------------------------------------------------------------------
<PAGE>
12

MORE ON THE FUNDS

The following sections discuss other important features of the Vanguard
Tax-Managed Funds Institutional Shares, including market exposure, security
selection, other investment policies, turnover rates, and costs and
market-timing. You will also find information about the risks of investing in
the Funds throughout these sections.

MARKET EXPOSURE
U.S. STOCKS
Except for the Tax-Managed International Fund, which invests primarily in stocks
of companies outside the United States, each of the Funds invests primarily in
U.S. common stocks, with variations in the size of the companies on which the
Funds focus. The grid below shows, at a glance, the percentage of each Fund's
assets that is normally committed to each type of investment listed. Market
exposure is expected to play the most important role in achieving a Fund's
investment objective.

- --------------------------------------------------------------------------------
VANGUARD TAX-MANAGED FUND
----------------------------------------------------------------
GROWTH CAPITAL
MARKET EXPOSURE AND INCOME APPRECIATION SMALL-CAP INTERNATIONAL
- --------------------------------------------------------------------------------
Common stocks Dominated by 100% 100% Dominated by
Large-cap U.S. Large- and Small-cap U.S. Large-cap
companies mid-cap U.S. companies foreign
companies companies
- --------------------------------------------------------------------------------

[FLAG] EACH FUND IS SUBJECT TO MARKET RISK, WHICH IS THE CHANCE 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 table below 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 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. (You will find a chart illustrating the volatility of the
international stock market later in the prospectus under "Foreign Stocks".)
<PAGE>

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

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 11.0%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from 1995
through 1999). 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 the
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. The Tax-Managed Capital Appreciation Fund holds mid-cap stocks in
addition to large-cap stocks; the Tax-Managed Small-Cap Fund holds just
small-cap stocks; and the Tax-Managed International Fund holds mainly large-cap
foreign stocks.

[FLAG] THE FUNDS ARE SUBJECT, IN VARYING DEGREES, TO INVESTMENT STYLE RISK,
WHICH IS THE CHANCE THAT RETURNS FROM A SPECIFIC TYPE OF STOCK (FOR
INSTANCE, SMALL- OR MID-CAP) 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.

FOREIGN STOCKS
The Tax-Managed International Fund seeks to provide a tax-efficient investment
return consisting of long-term capital growth by investing in a broadly
diversified group of stocks of foreign companies. Investments in foreign stocks
can be as risky, if not more risky, than U.S. stock investments; the prices of
international stocks and the prices of U.S. stocks have often moved in opposite
directions. These periods have, in the past, lasted as long as several years.

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING

Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from a foreign investment.
- --------------------------------------------------------------------------------

Because it invests mainly in international stocks, the Tax-Managed
International Fund is subject to:

[FLAG] CURRENCY RISK, WHICH IS THE CHANCE THAT RETURNS WILL BE HURT BY A RISE IN
THE VALUE OF THE U.S. DOLLAR VERSUS FOREIGN CURRENCIES.

Conversely, when the U.S. dollar falls in value versus other currencies,
returns from international stocks are enhanced because a given sum in foreign
currency translates into more U.S. dollars.

This Fund is also subject to:

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

International investing involves other risks and considerations, including:
differences in accounting, auditing, and financial reporting standards;
generally higher costs for trading securities; foreign withholding taxes payable
on the Fund's securities, which can reduce dividend income available to
distribute to shareholders; and adverse changes in regulatory or legal climates.
Returns on international stocks can be as volatile--or more volatile--than
returns on U.S. stocks. To illustrate the volatility of international stock
market returns for the U.S. dollar-based investor, the following table shows the
best, worst, and average total returns for international stocks over various
periods as measured by the MSCI EAFE Index, a widely used barometer of
international stock market activity. (Total returns consist of dividend income
plus change in market price.) Note that the returns shown in the table 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. Also, keep in mind that past
returns are not indicative of future returns and that volatility in the future
could be greater or less than past volatility.

<PAGE>

15
- --------------------------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 15.2 13.6 14.5 14.7
- --------------------------------------------------------------------------------

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969 to
1999. Keep in mind that this was a particularly favorable period for foreign
markets. For instance, over 10-year periods, foreign stocks provided an average
return of 14.5%, compared to 11.1% for U.S. stocks (as measured by the S&P 500
Index) during the same time frame. These average returns reflect past
performance on international stocks; you should not regard them as an indication
of future returns from either foreign markets as a whole or the Tax-Managed
International Fund in particular.
The Fund may enter into forward foreign currency contracts, which can help
protect its holdings against unfavorable short-term changes in exchange rates. A
forward foreign currency contract is an agreement to buy or sell a country's
currency at a specific price on a specific date, usually 30, 60, or 90 days in
the future. In other words, the contract guarantees an exchange rate on a given
date. Managers of international stock funds use these contracts to guard against
sudden, unfavorable changes in U.S. dollar/foreign currency exchange rates. The
Fund will use these contracts to gain currency exposure when investing in stock
index futures, and to settle trades in a foreign currency.

SECURITY SELECTION

Each of the Funds employs an index-oriented approach to stock investing, and the
only stocks purchased by a Fund are those included in its target index. The grid
below shows, at a glance, the stock index tracked by each Fund and the indexing
method employed.

---------------------------------------------------------
TAX-MANAGED FUND INDEX INDEXING METHOD
---------------------------------------------------------
Growth and Income S&P 500 Replication
Capital Appreciation Russell 1000 Sampling
Small-Cap S&P SmallCap 600 Replication
International MSCI EAFE Sampling
---------------------------------------------------------

<PAGE>

- --------------------------------------------------------------------------------
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 as long as
the total value of these investments does not exceed 5% of the Fund's assets.

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

The reasons for which a Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in its benchmark index.

<PAGE>

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

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE

Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of December 31, 1999, the average turnover rates for all
domestic and international stock funds were approximately 89% and 90%,
respectively, according to Morningstar, Inc.
- --------------------------------------------------------------------------------

TURNOVER RATES

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.
Generally, an index-oriented fund sells securities only to respond to redemption
requests or to adjust the number of shares held to reflect a change in the
funds' target index. Because of this, and the Funds' focus on avoiding taxable
gains, the turnover rate for each Fund has been fairly low. The Funds' turnover
rate is expected to remain below 20%. (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
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.
- --------------------------------------------------------------------------------

COSTS AND MARKET-TIMING

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' REDEMPTION FEE

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

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE

THE FUNDS AND VANGUARD

<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 expense ratios for the Institutional Shares of Tax-Managed Growth
and Income, Capital Appreciation, and Small-Cap Funds, which began operations
on February 22, 1999, are each expected to be 0.10%, or $1.00 per $1,000 of
average net assets, for fiscal year 1999. The expense ratio for the Tax-Managed
International Fund, which began operations on August 17, 1999, is 0.25%, or
$2.50 per $1,000 of average net assets, for fiscal year 1999. Management
expenses, which are one part of operating expenses, include investment advisory
fees as well as other costs of managing a fund--such as account maintenance,
reporting, accounting, legal, and other administrative expenses.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER

The individual primarily responsible for overseeing investments for the
Institutional Shares of the Tax-Managed Growth and Income Fund, the Tax-Managed
Capital Appreciation Fund, the Tax-Managed Small-Cap Fund, and the Tax-Managed
International Fund is:

INVESTMENT ADVISER

The Vanguard Group (Vanguard), Valley Forge, Pennsylvania 19482, founded in
1975, serves as the Funds' adviser through its Core Management Group. As of
December 31, 1999, Vanguard served as adviser for about $371.4 billion in
assets. Vanguard manages the Funds on an at-cost basis, subject to the control
of the Trustees and officers of the Funds. For the fiscal year ended December
31, 1999, the advisory fees of the Tax-Managed Balanced, Growth and Income, and
Capital Appreciation Fund represented an effective annual rate of 0.03%,0.004%,
and 0.004%, of each Fund's average net assets, respectively.
The Tax-Managed Small-Cap and International Funds began operations on
February 22, 1999, and August 17, 1999, respectively. Advisory expenses for the
first fiscal year of both of these Funds are estimated at an effective annual
rate of 0.01%.

In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Funds.

<PAGE>

DIVIDENDS, CAPITAL GAINS, AND TAXES

FUND DISTRIBUTIONS
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends for the Tax-Managed Growth and Income
Fund generally are distributed in March, June, September, and December; income
dividends for the Tax-Managed Capital Appreciation, Small-Cap, and International
Funds generally are distributed in December. Capital gains distributions
generally occur in December. 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 dividends or capital
gains in cash, or you can have them automatically reinvested in more shares of
the Funds.

BASIC TAX POINTS

Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
o Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
o Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
o Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
o Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
o While the Funds seek to minimize distributions of taxable capital gains,
they may not always achieve this goal. Capital gains distributions may vary
considerably from year to year as a result of the Funds' normal investment
activities and cash flows.
o A sale or exchange of Fund shares 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.
o Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
o The Tax-Managed International Fund may be subject to foreign taxes or
foreign tax withholding on dividends, interest, and some capital gains that
it receives on foreign securities. You may qualify for an offsetting credit
or deduction under U.S. tax laws for your portion of the Funds' foreign tax
obligations, provided that you meet certain requirements. See your tax
adviser or IRS Publications for more information.

GENERAL INFORMATION

BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
o provide us with your correct taxpayer identification number;
o certify that the taxpayer identification number is correct; and
o confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
<PAGE>

INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.

- --------------------------------------------------------------------------------
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 a fund earns from any stock holdings
and the interest it receives from any money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"

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 dividing the net assets attributed to the
Institutional class by the number of shares outstanding for that class.
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.

<PAGE>

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
TXMGIIST, TXMCAIST, TXMSCIST, and TXMINIST for the Growth and Income, Capital
Appreciation, Small-Cap, and International Funds Institutional Shares,
respectively.

FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years and certain
information reflects financial results for a single Fund share. The total
returns in each table represent the BEFORE-TAX rate that an investor would have
earned or lost each period on an investment in the Fund (assuming reinvestment
of all dividend and capital gains distributions, and complete redemption at the
end of the period). This information has been derived from the financial
statements 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 report sent
to you without charge by contacting Vanguard.

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES

This explanation uses the Tax-Managed Capital Appreciation Fund Institutional
Shares as an example. The Fund began on February 22, 1999 with a net asset
value (price) of $26.32 per share. During the year, the Fund earned $.129 per
share from investment income (interest and dividends) and $7.88 per share from
investments that had appreciated in value or that were sold for higher prices
than the Fund paid for them.

Shareholders received $.15 per share in the form of dividend and capital gains
distributions.

The earnings ($8.00 per share) minus the distributions ($.15 per share)
resulted in a share price of $34.18 at the end of the year. This was an
increase of $7.86 per share (from $26.32 on February 22, 1999 to $34.18 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 30.43% for the
period.

As of December 31, 1999, the Fund had $165 million in net assets. For the year,
its expense ratio was 0.10% ($1.00 per $1,000 of net assets); and its net
investment income amounted to 0.56% of its average net assets. It sold and
replaced securities valued at 12% of its net assets.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
VANGUARD TAX-MANAGED GROWTH AND INCOME FUND
MAR. 4* TO
DEC. 31,1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $26.99
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .274
Net Realized and Unrealized Gain (Loss) on Investments 4.882
-------------
Total from Investment Operations 5.156
-------------

DISTRIBUTIONS
Dividends from Net Investment Income (.336)
Distributions from Realized Capital Gains --
-------------
Total Distributions (.336)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $31.81
================================================================================
TOTAL RETURN** 19.23%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $108
Ratio of Total Expenses to Average Net Assets 0.10%+
Ratio of Net Investment Income to Average Net Assets 1.18%+
Turnover Rate 4%
================================================================================
*Inception
**Total returns do not reflect the 2% redemption fee on shares held less than
one year or the 1% redemption fee on shares held at least one year but less
than five years.
+Annualized
<PAGE>
24

- --------------------------------------------------------------------------------
VANGUARD TAX-MANAGED CAPITAL APPRECIATION FUND
FEB. 24* TO
DEC. 31,1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $26.32
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .129
Net Realized and Unrealized Gain (Loss) on Investments 7.877
-------------------
Total from Investment Operations 8.006
-------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.146)
Distributions from Realized Capital Gains --
-------------------
Total Distributions (.146)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $34.18
================================================================================
TOTAL RETURN** 30.43%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $165
Ratio of Total Expenses to Average Net Assets 0.10%+
Ratio of Net Investment Income to Average Net Assets 0.56%+
Turnover Rate 12%
================================================================================
*Inception
**Total returns do not reflect the 2% redemption fee on shares held less than
one year or the 1% redemption fee on shares held at least one year but less
than five years.
+Annualized.

- --------------------------------------------------------------------------------
VANGUARD TAX-MANAGED SMALL-CAP FUND
APR. 21* TO
DEC. 31,1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.76
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .044
Net Realized and Unrealized Gain (Loss) on Investments 1.866
------------------
Total from Investment Operations 1.910
------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.060)
Distributions from Realized Capital Gains --
------------------
Total Distributions (.060)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.61
- --------------------------------------------------------------------------------
TOTAL RETURN** 17.77%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $19
Ratio of Total Expenses to Average Net Assets 0.10%+
Ratio of Net Investment Income to Average Net Assets 0.74%+
Turnover Rate 27%
================================================================================
*Inception
**Total returns do not reflect the purchase fee of 0.50% beginning April 1,
2000 (1% from February 25, 1999 to March 3, 2000), the 2% redemption fee on
shares held less than one year or the 1% redemption fee on shares held at least
one year but less than five years.
+Annualized

<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?
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 each Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [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 (ON-BOARD)[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 shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD TM www.vanguard.com [PC]
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 our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
o Open a new account.*
o Buy, sell, or exchange shares of most funds.
o Change your name/address.
o Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.

*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: 1-888-809-8102
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.
- --------------------------------------------------------------------------------

<PAGE>

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
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 a Fund into Institutional Shares provided that you meet the minimum initial
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 OF PURCHASE FEES

- --------------------------------------------------------------------------------
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
HSBC Bank USA

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

<PAGE>

In favor of:
Vanguard Tax-Managed Growth and Income Fund Institutional Shares-136
Vanguard Tax-Managed Capital Appreciation Fund Institutional Shares-135
Vanguard Tax-Managed Small-Cap Fund Institutional Shares-118
Vanguard Tax-Managed International Fund Institutional Shares-137
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
- --------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.

Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below):
Vanguard Tax-Managed Growth and Income Fund Institutional Shares-136
Vanguard Tax-Managed Capital Appreciation Fund Institutional Shares-135
Vanguard Tax-Managed Small-Cap Fund Institutional Shares-118
Vanguard Tax-Managed International Fund Institutional Shares-137
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 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 . . .[TELEPHONE]
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). (Note that some restrictions apply to index fund accounts.)

add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or 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
1-800-662-6273

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

<PAGE>
28

IMPORTANT NOTE: Once you have initiated 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.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt a Fund's
operation or performance.
- --------------------------------------------------------------------------------

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

When Selling Shares:

o Vanguard sends the redemption proceeds to you or a designated third party.*
o You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 30.

When Exchanging Shares:
o The redemption proceeds are used to purchase shares of a different Vanguard
fund.
o You must meet the receiving fund's minimum investment requirements.
o 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.
o In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
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.
- --------------------------------------------------------------------------------
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 after one year but within five years of
purchase. Currently, redemption fees do not apply to Fund shares held through
Vanguard's separate recordkeeping system for employee benefit plan accounts, due
to certain economies associated with these accounts. However, the Funds reserve
the right to impose redemption fees on their shares at any time if warranted by
the Funds' future costs of processing redemptions from these accounts.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------

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

The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [PC]
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 our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or your assigned Vanguard Associate
during business hours--to sell or exchange shares. You can exchange from a 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 you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
o The ten-digit account number.
o The name and address exactly as registered on the account.
o The primary Social Security or employer identification number as registered
on the account.
o The Personal Identification Number, if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES Vanguard reserves the right to revise or
terminate the telephone redemption privilege at any time, without notice. In
addition, Vanguard can stop selling shares or postpone payment at times when the
New York Stock Exchange is closed or under any emergency circumstances as
determined by the U.S. Securities and Exchange Commission. If you experience
difficulty making a telephone redemption during periods of drastic economic or
market change, you can send us your request by regular or express mail. Follow
the instructions on selling or exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
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
<PAGE>

different name, address, taxpayer identification number, or account type), you
must provide Vanguard with written instructions that include the guaranteed
signatures of all current owners of the fund from which you wish to redeem.
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of two ways: check, or exchange
to another Vanguard fund.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:

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

o The Fund name and account number.
o The amount of the transaction (in dollars or shares).
o Signatures of all owners exactly as registered on the account (for mail
requests).
o Signature guarantees (if required).*
o Any supporting legal documentation that may be required.
o Any outstanding certificates representing shares to be redeemed.
* For instance, a signature guarantee must be provided by all registered
account shareholders when redemption proceeds are to be sent to a different
person or address. A signature guarantee can be obtained from most
commercial and savings banks, credit unions, trust companies, or member
firms of a U.S. stock exchange.
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 a Fund and
increase a Fund's costs for all shareholders, Vanguard limits account activity
as follows:
o You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A FUND
during any 12-month period.
o Your round trips through a Fund must be at least 30 days apart.

<PAGE>

o A Fund may refuse a share purchase at any time, for any reason.
o Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.

A "round trip" is a redemption from a Fund followed by a purchase back into that
Fund. Also, a "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of a
Fund.
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------

TRANSFERRING REGISTRATION

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

FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about your 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
financial markets, a report from the advisers, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep each 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 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, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
<PAGE>

- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK]
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 and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOK]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------

MANDATORY CONVERSION TO INVESTOR SHARES
The Funds reserve the right to convert an investor's Institutional Shares into
Investor Shares of a Fund if the investor's account balance falls below $10
million. Any such conversion will be preceded by written notice to the investor.
No transaction fee will be imposed on share class conversions.
- --------------------------------------------------------------------------------
<PAGE>