VANGUARD MASSACHUSETTS TAX EXEMPT FUNDS, N-1A, 1998-09-17

VANGUARD MASSACHUSETTS TAX EXEMPT FUNDS
N-1A, 1998-09-17

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT (NO. ______) UNDER
THE SECURITIES ACT OF 1933

Pre-Effective Amendment No. ___________

Post-Effective Amendment No. ___________

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940

VANGUARD MASSACHUSETTS TAX-EXEMPT 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 December 2. 1998.

Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement becomes effective.

REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A) MAY
DETERMINE.

We have elected to register an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 of the Investment Company Act
of 1940.

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VANGUARD MASSACHUSETTS TAX-EXEMPT FUNDS

CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A
Item Number Location in Prospectus
----------- ----------------------
<S> <C> <C>
Item 1. Front and Back Cover Pages.................. Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments, Risks,
and Performance............................. Fund Profile
Item 3. Risk/Return Summary: Fee Table.............. Not Applicable
Item 4. Investment Objectives, Principal Investment
Strategies, and Related Risks............... Fund Profile; A Word About Risk; Who Should
Invest; Primary Investment Strategies;
Item 5. Management's Discussion of
Fund Performance............................ Not Applicable
Item 6. Management, Organization, and Capital
Structure................................... The Fund and Vanguard; Investment
Adviser
Shareholder Information..................... Share Price; Buying Shares; Redeeming
Shares; Dividends, Capital Gains, and Taxes;
Investing with Vanguard
Item 8. Distribution Arrangements................... Not Applicable
Item 9. Financial Highlights Information............ Not Applicable

Form N-1A Location in Statement
Item Number of Additional Information
----------- --------------------------
Item 10. Cover Page and Table of Contents............ Cover Page; Table of Contents
Item 11. Fund History................................ Description of the Trust
Item 12. Description of the Fund and its Investments
and Risks................................... Investment Objective and Policies;
Description of the Trust; and Fundamental
Investment Limitations
Item 13. Management of the Fund...................... Management of the Trust
Item 14. Control Persons and Principal Holders
of Securities............................... Management of the Trust
Item 15. Investment Advisory and Other Services...... Investment Advisory Services
Item 16. Brokerage Allocation and Other Practices.... Portfolio Transactions
Item 17. Capital Stock and Other Securities.......... Description of the Trust
Item 18. Purchase, Redemption and Pricing of Shares.. Purchase of Shares; Redemption of Shares;
and Share Price of the Trust
Item 19. Taxation of the Fund........................ Description of the Trust
Item 20. Underwriters................................ Not Applicable
Item 21. Calculation of Performance Data............. Yield & Total Return
Item 22. Financial Statements........................ Not Applicable
</TABLE>

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[FRONT COVER]
Vanguard
Massachusetts High-Grade Tax-Exempt Fund

Prospectus
December 3, 1998

This is the Fund's initial prospectus, so it contains no performance data.

SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED SEPTEMBER 17, 1998

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

<PAGE>

[INSIDE FRONT COVER]

Vanguard Massachusetts High-Grade Tax-Exempt Fund

A Federal and Massachusetts State Tax-Exempt Income Mutual Fund

Contents

Introduction to Tax-Exempt Investing

1 Fund Profile 9 Financial Highlights

3 Additional Information 10 Investing with Vanguard

3. A Word About Risk 10 Services and Account Features

3 Who Should Invest 11 Types of Accounts

4. Primary Investment Strategies 12 Buying Shares

6 The Fund and Vanguard 15 Redeeming Shares

7. Investment Adviser 15 Transferring Registration

7 Year 2000 Challenge 16 Fund and Account Updates

7 Dividends, Capital Gains, and Taxes Glossary (inside back cover)

8 Share Price

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Why Reading This Prospectus Is Important

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

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.

<PAGE>

AN INTRODUCTION TO TAX-EXEMPT INVESTING

Taxable versus tax-exempt funds

Tax-exempt funds provide income that is exempt from federal taxes and, in the
case of state tax-exempt funds, state taxes as well. These funds are usually
best-suited for income-oriented investors in a high tax bracket. You may not
always profit, however, from a tax-exempt investment. That is because the yields
on tax-exempt bonds are typically lower than those on taxable bonds.

To determine whether a state tax-exempt fund--such as Vanguard
Massachusetts High-Grade Tax-Exempt Fund--is more suitable for you than a
taxable fund, you should compute the tax-exempt fund's taxable equivalent yield.
This figure enables you to compare your potential return on a tax-exempt fund
with the return on a taxable fund.

To compute the taxable equivalent yield:

o First figure out your effective state bracket. To do this, subtract your
federal tax-bracket from 100%; then multiply that number by your state
bracket. For example, if you are in a o % state tax bracket and a 36%
federal tax bracket, your effective state bracket would be o %
([100%-36%] x o ).

o Then, add up your federal tax bracket and effective state bracket. This sum
is your combined tax bracket. In this example, your combined tax bracket
would be o % (36% + o %).

o Finally, divide the tax-exempt fund's yield by the difference between 100%
and your combined tax bracket. Continuing with this example, and assuming
that you are considering a tax-exempt fund with a 5% yield, your taxable
equivalent yield would be o % (5% divided by [100%- o %]).

In this example, you would choose the state tax-exempt fund if its taxable
equivalent yield of o % were greater than the yield of a similar, though
taxable, investment.

Remember that we have used assumed tax brackets in this example. Make sure
to verify your actual tax brackets--federal, state, and local (if any)--before
calculating taxable equivalent yields of your own.

YOU SHOULD BE AWARE THAT TAX-ADVANTAGED INVESTMENTS LIKE THE FUND ARE
PARTICULARLY VULNERABLE TO FEDERAL AND STATE TAX LAW CHANGES--FOR INSTANCE, IF
THE INTERNAL REVENUE SERVICE RULED THAT THE INCOME FROM CERTAIN TYPES OF
STATE-ISSUED BONDS COULD NO LONGER BE CONSIDERED TAX-EXEMPT.

Fund Profile

The following profile summarizes key features of Vanguard Massachusetts
High-Grade Tax-Exempt Fund. More detailed information about these features can
be found later in the prospectus.

INVESTMENT OBJECTIVE
The Fund is a municipal bond fund intended for Massachusetts residents only. It
seeks to provide a high level of income that is exempt from both federal and
Massachusetts personal income taxes.

INVESTMENT STRATEGIES
The Fund invests primarily in high-quality municipal bonds issued by
Massachusetts state and local governments and regional governmental authorities.
For more information on security selection, see page ____.

<PAGE>

[FLAG] PRIMARY RISKS
The Fund is subject to several risks, any of which could cause investors to lose
money. The Fund is subject to:

o interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
o state specific risk, which is the chance that the Fund, because it
invests primarily in securities issued by Massachusetts and its
municipalities, is more vulnerable to unfavorable developments in
Massachusetts than funds that invest in municipal bonds of many states.
o call risk, which is the chance that during periods of falling interest
rates, a bond issuer will "call"--or repay--a high-yielding bond before
its maturity date. Forced to reinvest the unanticipated proceeds at
lower interest rates the Fund would experience a decline in income and
the potential for taxable capital gains.
o credit risk, which is the chance that bond issuers will fail to repay
interest and principal in a timely manner.
o manager risk, which is the chance that poor security selection will
cause the Fund to underperform other funds with similar investment
objectives.
o concentration risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of a few securities.
The Fund is considered non-diversified, which means that it may invest a
greater percentage of its assets in the securities of particular issuers
as compared to other mutual funds.

FEES AND EXPENSES
The following tables describe the fees and expenses you would pay if you buy and
hold shares of the Fund.

Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None

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The expenses shown in the following table are based on estimated amounts for the
current fiscal year.

Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management and Administrative Expenses: o%
Investment Advisory Expenses: o%
12b-1 Distribution Fees: None
Other Expenses (Marketing, Taxes, Auditing, etc.): o%
Total Operating Expenses (Expense Ratio): .20%
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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 one-year and three-year periods
if you invest $10,000 in the Fund. This example assumes that the Fund provides a
return of 5% a year, and that operating expenses remain the same. The results
apply whether or not you redeem your investment at the end of each period.

1 Year 3 Years
------ -------

$o $o

This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.

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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 fund expenses can, over time,
have a dramatic effect on a fund's performance.

- -------------------------------------------------------------------------------
Plain Talk About
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. We expect the Fund's expense ratio for the current fiscal year to be
.20%, or $2.00 per $1,000 of average net assets. The average tax-exempt bond
mutual fund had expenses in 1998 of o%, or $X.XX per $1,000 of average net
assets, according to Lipper Analytical Services, which reports on the mutual
fund industry.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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<S> <C>
Additional Information
Dividends and Capital Gains Minimum Initial Investment
Dividends are declared daily and paid on the first $3,000; $1,000 for custodial accounts for minors
business day of each month; capital gains, if any,
are paid annually in December Newspaper Abbreviation
MAHiGd
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Vanguard Fund Number
Pennsylvania, since inception 168

Inception Date
December 1, 1998 CUSIP Number
o
Suitable for IRAs
No Ticker Symbol
o
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</TABLE>
<PAGE>

A Word About Risk

This prospectus describes the risks you would face as an investor in Vanguard
Massachusetts High-Grade Tax-Exempt Fund. It is important to keep in mind one of
the main axioms of investing: The higher the risk of losing money, the higher
the potential reward. The reverse, also, is generally true: The lower the risk,
the lower the potential reward. As you consider an investment in Vanguard
Massachusetts High-Grade Tax-Exempt Fund, you should also take into account your
personal tolerance for the daily fluctuations of the bond market, as well as
your need for current income.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
- -------------------------------------------------------------------------------

Who Should Invest

The Fund may be a suitable investment for you if:

o You are a Massachusetts resident in a high tax bracket.

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

o You are looking for current income that is exempt from both federal
and Massachusetts personal income taxes.

o You are not looking for growth of capital over the long-term. You
are willing to accept significant fluctuations in the Fund's share
price.

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Plain Talk About
Costs and Market Timing
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
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Vanguard Massachusetts High-Grade Tax-Exempt Fund is intended to be a
long-term investment vehicle and therefore does not permit market-timing. Do not
invest in this Fund if you are a market timer.

<PAGE>

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Primary Investment Strategies

This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective, a high level of income that is exempt from both federal
and Massachusetts personal income taxes. In addition, this section discusses
several important risks--interest rate risk, call risk, manager risk and credit
risk--faced by investors in the Fund. The Fund's Board of Trustees oversees the
management of the Fund, and may change the investment strategies in the
interests of shareholders.

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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, housing); for operating
expenses; or for loans to public institutions and facilities.
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
Plain Talk About
Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--you would have to lower
your asking price. On the other hand, if interest rates were falling and 4%
bonds were being offered, you would be able to sell your 5% bond for more than
you paid.
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Market Exposure
The Fund's primary strategy is to invest chiefly in Massachusetts state and
local municipal bonds. Bond prices as well as income are affected by changes in
interest rates.

[FLAG] The Fund is subject to interest rate risk, which is the possibility that
bond prices overall will decline over short or even long periods due to rising
interest rates. Interest rate risk generally is highest for funds that invest in
longer-term bonds.

In the past, bond investors have seen the value of their
investment rise and fall--sometimes significantly--with changes in interest
rates. Between December 1976 and September 1981, for instance, rising interest
rates caused long-term bond prices to fall by almost 48%.

Because Massachusetts High-Grade Tax-Exempt Fund invests mainly in bonds,
changes in interest rates will have a significant impact on the value of the
Fund's assets. To illustrate how much of an impact, the following table shows
the effect of a 1% change and a 2% change (both up and down) in interest rates
on a bond with a face value of $1,000, similar to those that will be purchased
by the Fund.

<PAGE>

The Value Of A $1,000 Investment
After A Change In Interest Rates
<TABLE>
<CAPTION>

<S> <C> <C> <C> <C>
Yield/Average 1% 1% 2% 2%
Maturity Increase Decrease Increase Decrease

4.94%/9.2 years $920 $1,067 $856 $1,150
</TABLE>

These figures are for illustration only; you should not regard
them as an indication of future returns from the Fund or the municipal bond
market as a whole.

While falling interest rates tend to strengthen bond prices,
they can cause another sort of problem for bond investors--bond calls.

[FLAG] The Fund is subject to call risk, which is the possibility that during
periods of falling interest rates, a bond issuer will "call"--or repay--a
high-yielding bond before its maturity date. Forced to reinvest the
unanticipated proceeds at lower interest rates, the Fund would experience a
decline in income--and the potential for taxable capital gains.

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Plain Talk About
Callable Bonds
Although bonds are issued with clearly defined maturities, a bond issuer may be
able to redeem, or call, a bond earlier than its maturity date. The bond holder
must now replace the called bond with a bond that may have a lower yield than
the original. One way for bond investors to protect themselves against call risk
is to purchase a bond early in its lifetime, when it is less likely to be
called. Another way is to buy bonds with call protection--that is, assurance
that a bond will not be called for a specific time period, such as ten years.
- -------------------------------------------------------------------------------

Security Selection
Vanguard Fixed Income Group, the Fund's investment adviser, selects securities
for purchase by the Fund.

Types of securities. The Fund invests primarily in high-grade bonds issued by
the Commonwealth of Massachusetts, its local governments, and public financing
authorities. The Fund may also invest in municipal bonds issued by certain U.S.
territories, and up to 20% of the Fund's assets may be invested in securities
that are subject to the alternative minimum tax.

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Plain Talk About
Alternative Minimum Tax
Certain tax-exempt bonds whose proceeds are used to fund private, for-profit
organizations subject to the Alternative Minimum Tax (AMT)--a special tax system
designed to ensure that individuals pay at least some federal taxes. Although
AMT bond income is exempt from federal income tax, a very limited number of
taxpayers who have many tax deductions may have to pay Alternative Minimum Tax
on the income from bonds considered "tax-preference items."
- -------------------------------------------------------------------------------

[FLAG] The Fund is subject to manager risk, which is the possibility that
Vanguard Fixed Income Group will do a poor job of selecting securities.

<PAGE>

Credit quality. At least 75% of the Fund's assets will be invested in
high-grade municipal bonds, which are municipal bonds that have been rated in
one of the top three rating categories by an independent bond-rating agency. Up
to 25% of the Fund's assets may be invested in bonds that have been rated in the
fourth highest rating category. Within that 25%, up to 5% may be invested in
lower rated securities or securities that are unrated.

[FLAG] The Fund is subject to credit risk, which is the possibility that a bond
issuer will fail to repay interest and principal in a timely manner.

The Fund tries to minimize credit risk by investing mostly in
high-grade securities and by continuously monitoring the credit quality of its
holdings. However, the Fund may hold onto bonds that have been downgraded, even
if they are no longer eligible for purchase by the Fund.

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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) 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."
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Maturity. The Fund is allowed to invest in bonds of any maturity.
However, the Fund is expected to maintain a dollar-weighted average maturity of
between 15 and 25 years.

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

Turnover Rate
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long they have been held. The Fund's
turnover rate is not expected to exceed o%.

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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).

<PAGE>

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

Other Investment Policies and Risks

Besides investing in Massachusetts-issued bonds, the Fund may make certain other
kinds of investments to achieve its objective.

The Fund may invest, to a limited extent, in bond (interest rate) futures and
options contracts, and other types of derivatives. Losses (or gains) involving
futures can sometimes be substantial--in part because a relatively small price
movement in a futures contract may result in an immediate and substantial loss
(or gain) for a fund. This Fund will not use futures and options for speculative
purposes or as leveraged investments that magnify the gains or losses of an
investment. The value of all futures contracts in which the Fund acquires an
interest cannot exceed 20% of total assets.
The reasons for which the Fund may use futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in bonds.
o To reduce the Fund's transaction costs or add value when these
instruments are favorably priced.
In unusual circumstances, such as a national financial emergency or a
temporary decline in the availability of Massachusetts obligations, up to 20% of
the Fund's assets may be invested in securities that generate income subject to
Massachusetts state or federal personal income taxes. Such securities could
include municipal bonds issued by other states or taxable fixed income
securities.
In addition, the Fund may purchase tax-exempt securities on a
"when-issued" basis. In these situations, the Fund agrees to buy securities at a
certain price, even if the market price of the securities at the time of
delivery is higher or lower than the agreed-upon purchase price.
The Fund usually will hold only a small percentage of its assets in
cash reserves. However, the Fund may, from time to time, hold cash reserves
without limit as a temporary defensive measure in response to adverse market,
economic, political, or other conditions. In taking such measures, the Fund may
not achieve its investment objective.

The Fund and Vanguard

The Fund is a member of The Vanguard Group, a family of more than o investment
companies with more than o distinct investment portfolios holding assets worth
more than $370 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.

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Plain Talk About
Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- -------------------------------------------------------------------------------

<PAGE>
Investment Adviser

Vanguard Fixed Income Group, P.O. Box 2600, Valley Forge, PA 19482, provides
advisory services on an at-cost basis to Massachusetts High-Grade Tax-Exempt
Fund.

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Plain Talk About
The Fund's Adviser
Vanguard Fixed Income Group currently manages more than $o billion in assets and
provides investment advisory services on an at-cost basis to more than o
Vanguard funds.
The managers responsible for overseeing the implementation of
the Fund's investment strategy are:
Ian A. MacKinnon, Managing Director of Vanguard; fixed income
investment adviser since 1974, primarily responsible for Vanguard's internal
fixed income policy and strategy since 1980; B.A. from Lafayette College, M.B.A.
from Pennsylvania State University.
o
- -------------------------------------------------------------------------------

The Fixed Income Group chooses brokers or dealers to handle the
purchase and sale of the Fund's securities, and is responsible for getting the
best available price and most favorable execution from these brokers with
respect to all transactions. The Fund may direct the Group to use a particular
broker for certain transactions in exchange for commission rebates or research
services provided to the Fund. However, the Group will not pay higher
commissions specifically for the purpose of obtaining research services. When
the Fund purchases a newly-issued security at a fixed price, the Group may
designate certain members of the underwriting syndicate to receive compensation
associated with that transaction. Certain dealers have agreed to rebate a
portion of their compensation directly to the Fund to offset its management
expenses.

Year 2000 Challenge

The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted,
high-quality performance from our computer systems before, during, and after
2000. In July 1998, we completed the renovation and initial testing of our
internal systems. Vanguard is diligently working with external partners,
suppliers, and vendors, including fund managers and other service providers, to
assure that the systems with which we interact remain operational at all times.
In addition to taking every reasonable step to secure out internal
systems and external relationships, Vanguard is further developing contingency
plans intended to assure that unexpected systems failures will not adversely
affect the Fund's operations. Vanguard intends to monitor these processes
through the rollover of 1999 into 2000 and to implement quickly alternate
solutions if necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer system failure at a company or governmental unit affects
the price of securities the Fund owns.

Dividends, Capital Gains, and Taxes

The Fund's dividends accrue daily. On the first business day of every month, the
Fund distributes to shareholders virtually all of its income from interest and
dividends as dividend distributions. Any capital gains realized from the sale of
securities are distributed annually in December. In addition, the Fund may
occasionally be required to make supplemental dividend or capital gains
distributions at some other time during the year. You can receive distributions
of income or capital gains in cash, or you may have them automatically invested
in more shares of the Fund. In either case, dividend distributions are expected
to be free

<PAGE>

from federal, Massachusetts, and municipal income taxes. On the other hand,
distributions of capital gains will be taxable to most shareholders regardless
of whether they are reinvested or paid in cash. It is important to note that
distributions of capital gains (but not dividends) that are declared in
December--if paid to you by the end of January--are taxed as if they had been
paid to you in December.
If you have chosen to receive dividend and/or capital gains
distributions in cash, and the postal or other delivery service is unable to
deliver checks to your address of record, we will change the distribution option
so that all dividends and other distributions are automatically invested in
additional shares. We will not pay interest on uncashed distribution checks.

o The short-term capital gains that you receive are considered ordinary
income for tax purposes.
o Any distributions of net long-term capital gains by the Fund may be
taxable to you as long-term capital gains, no matter how long you've
owned shares in the Fund. Although the Fund does not seek to realize
capital gains, such gains are realized from time to time as byproducts of
the ordinary investment activities of the Fund. Keep in mind, however,
that capital gains are not expected to be a significant part of the Fund's
investment return.
o If you sell or exchange shares, any gain or loss you have is a taxable
event. This means that you may have a capital gain to report as income, or
a capital loss to report as a deduction, when you complete your federal
income tax return.
o Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and
local income taxes as well. For example, if you move from Massachusetts to
another state, your Portfolio shares will become fully taxable.
The tax information in this prospectus is provided as general
information. You should consult your own tax adviser about the tax consequences
of an investment in either of the Portfolios.

- -------------------------------------------------------------------------------
Plain Talk About
Distributions
As a shareholder, you are entitled to your share of a 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 distributions. Income
dividends come from interest the fund earns from its money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term depending on whether the fund held the securities for less than or
more than one year.
- -------------------------------------------------------------------------------

Share Price

The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share is computed by adding up the total value of the Fund's
investments and other assets, subtracting any of its liabilities (debts), and
then dividing by the number of Fund shares outstanding:

<PAGE>

Total Assets - Liabilities
Net Asset Value = ----------------------------------
Number of Shares Outstanding

Knowing the daily net asset value is useful to you as a shareholder
because it indicates the current value of your investment. The Fund's NAV,
multiplied by the number of shares you own, gives you the dollar amount you
would have received had you sold all of your shares back to the Fund that day.
A Note on Pricing: The Fund's investments will be priced at their
market value when market quotations are readily available. When these quotations
are not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings
of most major newspapers under the heading "Vanguard Funds." Different
newspapers use different abbreviations of the Fund's name, but the most common
is MAHiGd.
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.

<PAGE>

- --------------------------------------------------------------------------------
Investing with Vanguard

Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to
do business with us.
The following sections of the prospectus briefly explain the many
services we offer. Booklets providing detailed information are available on the
services marked with a o . 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.

Checkwriting
Method for drawing money from your account by writing a check for $250 or more.

Telephone Redemptions (Sales and Exchanges)
Automatically set up for this Fund unless you notify us otherwise.

Vanguard Direct Deposit Service(a)
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.

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

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

Access Vanguard(..) www.vanguard.com
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:
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(a))
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.

Investor Information Department: 1-800-662-7447 (SHIP) Text Telephone:
1-800-952-3335 Call Vanguard for information on our funds, fund services, and
retirement accounts, and to request literature.

<PAGE>

Client Services Department: 1-800-662-2739 (CREW) Text Telephone: 1-800-662-2738
Call Vanguard for information on your account, account transactions, and account
statements.

Services for Clients of Vanguard's Institutional Division: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.

Types of Accounts

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

For One or More People
Open an account in the name of one (individual) or more (joint tenants) people.

For Holding Personal Trust Assets
Invest assets held in an existing personal trust.

For an Organization
Open an account as a corporation, partnership, endowment, foundation, or other
entity.

Buying Shares

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

Minimum Investment to . . .
open a new account
$3,000

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

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

By Mail to . . .
open a new account
Complete and sign the application form and enclose your check.

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

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

<PAGE>

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

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

By Telephone to . . .
open a new account
Call Vanguard Tele-Account* 24 hours a day or Client Services during business
hours to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer I.D., and account type).

add to an existing account
Call Vanguard Tele-Account* 24 hours a day or Client Services during business
hours to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer I.D., and account type). Use Vanguard Fund Express (see
Services and Account Features) to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is in place.

Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.

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

By Wire to Open a New Account or Add to an Existing Account
Call Client Services to arrange your wire transaction.

Wire to:
CoreStates Bank, N.A.
ABA 031000011
CoreStates No. 0101 9897
[Temporary Account Number]
Vanguard Massachusetts High Grade Tax-Exempt Fund
[Account Registration]
Attention: Vanguard

You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
Keep in mind that if you buy or sell Fund shares through a registered
broker/dealer or investment adviser, the broker/dealer or adviser may charge you
a service fee.

A Note on Large Purchases
It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt the Fund's operation or performance.
<PAGE>

Redeeming Shares
The ability to redeem (that is, sell or exchange) Fund shares by telephone is
automatically established 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.
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.

How to Sell Shares
You can withdraw any part of your account, at any time, by selling shares. Sale
proceeds are normally mailed within two business days after Vanguard receives
your request. Proceeds of wire redemptions are sent to your bank one business
day after Vanguard or its appointed agent receives your request. The sale price
of your shares will be the Fund's next-determined net asset value after Vanguard
receives all required documents in good order.
Good order means that the request includes:
o Fund name and account number.
o Amount of the transaction (in dollars or shares).
o Signatures of all owners exactly as registered on the account.
o Signature guarantees (if required).
o Any supporting legal documentation that may be required.
o Any certificates you are holding for the account.
Sale or exchange requests received after the close of trading on the
Exchange are processed at the next business day's net asset value. No interest
will accrue on amounts represented by uncashed redemption checks. The Fund will
not cancel any trade (e.g., purchase, redemption, or exchange) believed to be
authentic, once the trade request has been received in writing or by telephone
with a confirmation number assigned.

Note: Some written requests (such as those requesting that redemptions be paid
to a different payee or address than that of the account owner) require a
signature guarantee from a bank, broker, or other acceptable financial
institution. A notary public cannot provide a signature guarantee.

How to Exchange Shares
An exchange is the selling of shares of one Vanguard fund to purchase shares of
another. Although we make every effort to maintain the exchange privilege,
Vanguard reserves the right to revise or terminate the exchange privilege, limit
the amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can disrupt the management of the Fund and
increase transaction costs, Vanguard limits exchange activity to two substantive
exchange redemptions (at least 30 days apart) from the Fund during any 12-month
period. "Substantive" means either a dollar amount or a series of movements
between Vanguard funds that Vanguard determines, in its sole discretion, could
adversely affect the management of the Fund.
Before you exchange into a new Vanguard fund, be sure to read its
prospectus.

Selling or Exchanging Shares by Mail
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

<PAGE>

with a different registration (including a different name, address, or
taxpayer identification number), you must provide Vanguard with written
instructions that include the guaranteed signatures of all current account
owners.

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

Selling or Exchanging Shares by Telephone
Call Vanguard Tele-Account* 24 hours a day or Client Services during business
hours to sell or exchange shares. You can exchange shares from this Fund to open
an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.

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

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

Selling or Exchanging Shares Online
Access Vanguard www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).

Note: The Vanguard funds whose shares you cannot exchange online or by
telephone are Vanguard Index Funds, Vanguard Balanced Index Fund, Vanguard
International Equity Index Fund, Vanguard REIT Index Fund, Vanguard Total
International Stock Index Fund, and Vanguard Growth and Income Fund. If you sell
shares of these funds online, you will receive a redemption check at your
address of record. These funds do, however, permit online
exchanges within IRAs and other retirement accounts.

Selling or Exchanging Shares by Check
You can sell shares by writing a check for $250 or more.

A Note on Large Redemptions
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to delay delivery of your redemption proceeds up to seven days if the amount
will disrupt the Fund's operation or performance.
If a shareholder redeems more than $250,000 worth of Fund shares within
any 90-day period, the Fund reserves the right to pay part or all of the
redemption proceeds above $250,000 in kind, i.e., in securities, rather than in
cash. If payment is made in kind, the shareholder may incur brokerage
commissions if the shareholder elects to sell the securities for cash.

Transferring Registration

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

<PAGE>

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 19482-2600 Wayne, PA 19087-1815

Fund and Account Updates

Statements and Reports
We will send you clear, concise account and tax statements to help you keep
track of your Fund account throughout the year as well as when you are preparing
your income tax returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
markets, a report from the advisers, a listing of the Fund's holdings, and other
financial statements.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Investor Information Department at 1-800-662-7447.

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

Portfolio Summary
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.

Fund Financial Reports
Mailed in February and August for this Fund.

Tax Statements
Generally mailed in January; report previous year's taxable distributions, and
proceeds from the sale of shares.

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

Checkwriting Statement
Sent monthly to shareholders using Vanguard's checkwriting option. Our clear,
easy-to-use statement provides images of the front and back of each checkwriting
draft paid in the previous month. This consolidated statement is sent instead of
the original canceled drafts, which will not be returned.

<PAGE>

[INSIDE BACK COVER]

Glossary of Investment Terms

Alternative Minimum Tax (AMT)
A separate tax system designed to ensure that individuals pay at least a minimum
amount of federal income taxes. Certain securities used to fund private,
for-profit activities are subject to the AMT.

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 an dto make regular interest payments until
that date.

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

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

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.

Insured Bonds
Bonds whose payments of both principal and interest are guaranteed. The
insurance does not guarantee the value of the bonds, only that bond payments
will be made in a timely fashion.

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

Maturity
The date when a bond issuer agrees to return the bond's principal, or face
value, to the bond's buyer.

Municipal Bond
A bond issued by a state or local government. Dividend income from municipal
bonds is generally free from federal income taxes, as well as taxes in the state
in which it was issued.

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.

<PAGE>

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>

[BACK COVER]
[Lock-up logo and return address]

For More Information
If you'd like more information about Vanguard Massachusetts High Grade
Tax-Exempt Fund, the following documents are available free upon request:

Annual/Semiannual Report to Shareholders
Additional information about the Fund's investments will be available in annual
and semiannual reports to shareholders once the Fund begins operations. In these
reports, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its most
recent fiscal year.

Statement of Additional Information (SAI) The SAI provides more detailed
information about the Fund.

The current SAI is 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 (once they are
available) or the SAI, or to request additional information about the Fund or
other Vanguard funds, please contact us as follows:

The Vanguard Group
Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-1110

Telephone: 1-800-662-7447 (SHIP)
Text Telephone: 1-800-952-3335

www.vanguard.com
E-mail: [email protected]

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

Client Services Department
Telephone: 1-800-662-2739 (CREW)
Text Telephone: 1-800-662-2738

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

<PAGE>
SUBJECT TO COMPLETION
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 17, 1998

PART B
VANGUARD MASSACHUSETTS TAX-EXEMPT FUNDS (the "Trust")
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER __, 1998

This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectus (dated December __, 1998). To obtain the
Prospectus please call:

Investor Information Department
1-800-662-7447

TABLE OF CONTENTS
Page
----
Description of the Trust.............................................. B-1
Investment Objective and Policies..................................... B-3
Massachusetts Risk Factors............................................ B-7
Yield and Total Return................................................ B-8
Share Price........................................................... B-9
Purchase of Shares.................................................... B-9
Redemption of Shares.................................................. B-9
Dividends, Capital Gains and Taxes.................................... B-10
Investment Limitations................................................ B-10
Management of the Trust............................................... B-12
Investment Management................................................. B-15
Portfolio Transactions................................................ B-15
Performance Measures.................................................. B-16
Appendix A - Description of Municipal Bonds and their Ratings......... B-19

DESCRIPTION OF THE TRUST
Organization

The Trust was organized as a Delaware business trust on August 17, 1998.
The Trust is registered with the United States Securities and Exchange
Commission under the Investment Company Act of 1940 (the "1940 Act") as an
open-end, non-diversified management investment company. It currently offers the
following series of shares:

Vanguard Massachusetts High-Grade Tax-Exempt Fund (the "Fund")

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

Service Providers

CUSTODIAN. First Union Bank, Philadelphia, PA, serves as the Fund's
custodian. The custodian is responsible for maintaining the Trust's assets and
keeping all necessary accounts and records.

<PAGE>

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

CHARACTERISTICS OF THE TRUST'S SHARES

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

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

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

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

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

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

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

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

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

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

TAX STATUS OF THE FUND

The Fund qualifies as a "regulated investment company" under Subchapter M
of the Internal Revenue Code. This special tax status means that the Fund will
not be liable for federal tax on income and capital gains distributed to

B-2

<PAGE>

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

INVESTMENT OBJECTIVE AND POLICIES

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

Futures Contracts and Options. The Fund may enter into bond futures
contracts, options, and options on futures contracts for the following reasons:
to simulate full investment, in the underlying securities while retaining a
cash balance for Fund management purposes, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns from intermarket
arbitrage opportunities when a futures contract is mispriced relative to the
underlying security or index. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. Futures contracts
which are standardized as to maturity date and underlying financial instrument
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. Government agency. Assets committed to futures
contracts will be segregated to the extent required by law.

Most futures contracts are closed out before the settlement date without
the making or taking of delivery. Closing out an open futures position is done
by taking an opposite position ("buying" a contract which has previously been
"sold," "selling" a contract previously purchased) in an identical contract to
terminate the position. Brokerage commissions are incurred when a futures
contract is bought or sold.

Futures traders are required to make a good faith margin deposit in cash
or government securities with a broker or custodian to initiate and maintain
open positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
The Fund expects to earn interest income on its margin deposits.

After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes, to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder.

Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations
in the market value of the underlying securities.

Under CFTC regulations, the Fund may use futures transactions for bona
fide hedging purposes only, except that the Fund may establish non-hedging
futures positions if the aggregate initial margin and premiums for such
positions do not exceed five percent of the value of the Fund's assets.

Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Funds will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of portfolio securities.

Restrictions on the Use of Futures Contracts. The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the Fund's
total assets. In addition, the Fund will not enter into futures contracts to
the extent that its outstanding obligations to purchase securities under these
contracts would exceed 20% of the Fund's total assets.

B-3
<PAGE>

Risk Factors in Futures Transactions. Positions in futures contracts may
be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, the Fund may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge. The Fund will minimize the risk that it will be unable to
close out a futures contract by only entering into futures contracts which are
traded on national futures exchanges and for which there appears to be a liquid
secondary market.

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies of the Fund are engaged in only for hedging purposes, the
investment advisers do not believe that the Fund is subject to the risks of
loss frequently associated with futures transactions. The Fund would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.

Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is
also possible that the Fund could both lose money on futures contracts and
experience a decline in the value of its portfolio securities. There is also
the risk of losing the margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or related
option.

Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The

B-4

<PAGE>

daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby prompt liquidation of future positions and subjecting some
futures traders to substantial losses.

Other Types of Derivatives

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

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

FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Except for transactions the
Fund has identified as hedging transactions, the Fund is required for federal
income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on futures held as of the end of the year as well as
those actually realized during the year. In most cases, any gain or loss
recognized with respect to a futures contract is considered to be 60% long-term
capital gain or loss and 40% short-term capital gain or loss, without regard to
the holding period of the contract. Furthermore, sales of futures contracts
which are imbedded to hedge against a change in the value of securities held by
the Fund may affect the holding period of such securities and, consequently, the
nature of the gain or loss on such securities upon disposition. The Fund may be
required to defer the recognition of losses on futures contracts to the extent
of any unrecognized gains on related positions held by the Fund.

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

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

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<PAGE>

Municipal Lease Obligations

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

TURNOVER RATE. While the turnover rate is not a limiting factor when
management deems changes appropriate, it is anticipated that the annual turnover
rate for the Fund will not normally exceed 100%. A rate of turnover of 100%
could occur, for example, if all the securities held by the Fund are replaced
within a period of one year.

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

The Fund will not invest more than 15% of its net assets in illiquid
securities.

If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. While the Fund's investment
adviser determines the liquidity of restricted securities on a daily basis, the
Board oversees and retains ultimate responsibility for the adviser's decisions.
The factors the Board considers in monitoring these decisions include the
valuation of a security, the availability of qualified institutional buyers, and
the availability of information on the security's issuer.

B-6

<PAGE>

REPURCHASE AGREEMENTS. The Fund, along with other members of the
Vanguard Group, may invest in repurchase agreements with commercial banks,
brokers or dealers, either for defensive purposes due to market conditions or to
generate income from its excess cash balances. A repurchase agreement is an
agreement under which the Fund acquires a money market instrument (generally a
security issued by the U.S. Government or an agency thereof, a banker's
acceptance or a certificate of deposit) from a commercial bank, broker or
dealer, subject to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may be considered a
loan collateralized by securities. The resale price reflects an agreed upon
interest rate effective for the period the instrument is held by the Fund and is
unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by the Fund (including accrued interest
earned thereon) must have a total value in excess of the value of the repurchase
agreement and are held by a custodian bank until repurchased. In addition, the
Trust's Board of Trustees monitors repurchase agreement transactions generally
and has established guidelines and standards for review by the investment
adviser of the creditworthiness of any bank, broker or dealer party to a
repurchase agreement. No more than an aggregate of 15% of the Fund's net assets,
at the time of investment, will be invested in repurchase agreements having
maturities longer than seven days and in securities subject to legal or
contractual restrictions on resale or for which there are no readily available
market quotations.

MASSACHUSETTS RISK FACTORS

IN GENERAL.

ECONOMY.

FISCAL POLICY.

OTHER.

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<PAGE>

YIELD AND TOTAL RETURN

The Fund had not yet commenced operations as of the date of this
Statement of Additional Information.

SHARE PRICE

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

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

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

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

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

The Fund's share price can be found daily in the mutual fund listings
of most major newspapers under the heading of Vanguard Funds.

B-8

<PAGE>

PURCHASE OF SHARES

The purchase price of shares of the Fund is the net asset value per
share next determined after the order is received. The net asset value per share
is calculated as of the close of the New York Stock Exchange on each day the
Exchange is open for business. An order received prior to the close of the
Exchange will be executed at the price computed on the date of receipt; and an
order received after the close of the Exchange will be executed at the price
computed on the next day the Exchange is open.

The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Trust, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of the Fund's shares.

Trading Shares through Charles Schwab

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

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

REDEMPTION OF SHARES

The Fund may suspend redemtpion privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an emergency
exists as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.

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

If the Board of Trustees determines that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make payment wholly
or partly in cash, the Fund may pay the redemption price in whole or in part by
a distribution in kind of readily marketable securities held by the Fund in lieu
of cash in conformity with applicable rules of the Commission. Investors may
incur brokerage charges on the sale of such securities so received in payment of
redemptions.

B-9

<PAGE>

Signature Guarantees. To protect your account, the Trust and Vanguard
from fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Trust to verify the identity of a person who has
authorized a redemption from your account. Signature guarantees are required in
connection with: (1) all redemptions, regardless of the amount involved, when
the proceeds are to be paid to someone other than the registered owner(s); and
(2) share transfer requests. These requirements are not applicable to
redemptions in Vanguard's prototype plans except in connection with: (1)
distributions made when the proceeds are to be paid to someone other than the
plan participant; (2) certain authorizations to effect exchanges by telephone;
and (3) when proceeds are to be wired. These requirements may be waived by the
Trust in certain instances.

Signature guarantees can be obtained from a bank, broker or any other
guarantor that Vanguard deems acceptable. Notaries public are not acceptable
guarantors.

The signature guarantees must appear either: (1) on the written request
for redemption; or (2) on a separate instrument for assignment ("stock power")
which should specify the total number of shares to be redeemed.

INVESTMENT LIMITATIONS

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

Borrowing. The Fund may not borrow money, except for temporary or
emergency purposes in an amount not exceeding 15% of its net assets.

Commodities. The Fund may not invest in commodities, except that it may
invest in bond futures contracts, bond options, and options on bond futures
contracts.

Diversification. With respect to 50% of its total assets, the Fund may
not purchase securities of any issuer if, as a result, more than 5% of the
Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.

B-10

<PAGE>

Loans. The Fund may not lend money to any person except by purchasing
fixed income securities that are publicly distributed, lending its portfolio
securities, or through Vanguard's interfund lending program.

Real Estate. The Fund may not invest directly in real estate, although
it may invest in securities of companies that deal in real estate and bonds
secured by real estate.

Senior Securities. The Fund may not issue senior securities.

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

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

The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.

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<PAGE>
MANAGEMENT OF THE TRUST

Trustees and Officers

The Officers of the Trust manage its day-to-day operations and are
responsible to the Trust's Board of Trustees. The Trustees set broad policies
for the Fund and choose its Officers. The following is a list of the Trustees
and Officers of the Trust and a statement of their present positions and
principal occupations during the past five years. Each Trustee also serves as a
Director of The Vanguard Group, Inc., and as a Trustee of each of the 35
investment companies administered by Vanguard (34 in the case of Mr. Malkiel).
The mailing address of the Trustees and Officers of the Trust is Post Office Box
876, Valley Forge, PA 19482.

JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Trustee*
Senior Chairman and Director of The Vanguard Group, Inc., and Trustee of each of
the investment companies in the The Vanguard Group. Director of the Mead Corp.
(Paper Products), General Accident Insurance, and Chris-Craft Industries, Inc.
(Broadcasting & Plastics Manufacturer).

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

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

JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson and Johnson (Pharmaceuticals/Consumer Products), Director of
Johnson & Johnson*MERCK Consumer Pharmaceuticals Co., Women First HealthCare,
Inc. (Research and Education Institution), Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.

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

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

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

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

B-12

<PAGE>

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

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

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

KAREN E. WEST, (DOB: 9/13/1946) Controller*
Principal of The Vanguard Group, Inc.; Controller of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
- --------------------------------------------------------------------------------
*Officers of the Trust are "interested persons" as defined in the Investment
Company Act of 1940.

The Vanguard Group

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

Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services, furnishings and equipment.
Each Trust pays its share of Vanguard's total expenses which are allocated among
the funds under methods approved by the Board of Trustees of each Trust. In
addition, each Trust bears its own direct expenses such as legal, auditing and
custodian fees. In order to generate additional revenues for Vanguard and
thereby reduce the Trusts' expenses, Vanguard also provides certain
administrative services to other organizations.

The Trust's Officers are also officers and employees of Vanguard. No
officer or employee owns, or is permitted to own, any securities of any external
adviser for the Trusts.

The Vanguard Group adheres to a Code of Ethics established pursuant to
Rule 17j-l under the Investment Company Act of 1940. The Code is designed to
prevent unlawful practices in connection with the purchase or sale of securities
by persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines similar to, and in many
cases more restrictive than, those recommended by a blue ribbon panel of mutual
fund industry executives.

Vanguard was established and operates under an Amended and Restated
Funds' Service Agreement which was approved by the shareholders of each of the
Trusts. The amounts which each of the Trusts have invested are adjusted from
time to time in order to maintain the proportionate relationship between each
Trust's relative net assets and its contribution to Vanguard's capital. At
November 30, 1998, the Trust had not yet commenced operations or contributed
capital to Vanguard. The Trusts' Amended and Restated Funds' Service Agreement
provides as follows: (a) each Vanguard Trust may invest up to .40% of its
current assets in Vanguard, and (b) there is no other limitation on the dollar
amount each Vanguard Trust may contribute to Vanguard's capitalization.

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

B-13

<PAGE>
advisory and other services provided to the Trusts by third parties.

Distribution. Vanguard Marketing Corporation, a wholly-owned subsidiary
of The Vanguard Group, Inc., provides all distribution and marketing activities
for the Trusts in the Group. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of
Vanguard. The Trustees and Officers of Vanguard determine the amount to be spent
annually on distribution activities, the manner and amount to be spent on each
Trust, and whether to organize new investment companies.

One half of the distribution expenses of a marketing and promotional
nature is allocated among the Trusts based upon relative net assets. The
remaining one half of those expenses is allocated among the Trusts based upon
each Trust's sales for the preceding 24 months relative to the total sales of
the Trusts as a Group, provided, however, that no Trust's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of the average distribution expense rate for Vanguard,
and that no Trust shall incur annual distribution expenses in excess of 20/100
of 1% of its average month-end net assets.

Investment Advisory Services. Vanguard also provides investment
advisory services to several Vanguard Trusts. These services are provided on an
at-cost basis from a money management staff employed directly by Vanguard. The
compensation and other expenses of this staff are paid by the Funds utilizing
these services.

Trustee Compensation
- --------------------

The individuals in the table on page 15 generally serve as Trustee of
all Vanguard Group members, and each member pays a proportionate share of the
Trustees' compensation. The members employ their officers on a shared basis, as
well. However, officers are compensated by The Vanguard Group, Inc., not the
members.

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

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

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

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

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

B-14
<PAGE>
INVESTMENT MANAGEMENT

The Fund receives all investment advisory services on an
"internalized," at-cost basis from an experienced investment management staff
employed directly by The Vanguard Group, Inc. ("Vanguard"), a subsidiary jointly
owned by the Fund and the other Funds in The Vanguard Group of Investment
Companies. The investment management staff is supervised by the Senior Officers
of the Fund.

The investment management staff is responsible for: maintaining the
specified standards; making changes in specific issues in light of changes in
the fundamental basis for purchasing such securities; and adjusting the Fund to
meet cash inflow (or outflow), which reflects net purchases and exchanges of
shares by investors (or net redemptions of shares) and reinvestment of the
Fund's income.

A change in securities held by the Fund is known as "portfolio
turnover" and may involve the payment by the Fund of dealer mark-ups,
underwriting commissions and other transaction costs on the sales of securities
as well as on the reinvestment of the proceeds in other securities. The annual
portfolio turnover rate for the Funds will be set forth under the heading
"Financial Highlights" in the Funds Prospectus. The portfolio turnover rate is
not a limiting factor when management deems it desirable to sell or purchase
securities. It is impossible to predict whether or not the portfolio turnover
rate in future years will vary significantly from the rates in recent years.

PORTFOLIO TRANSACTIONS

How Transactions Are Effected

The types of securities in which the Fund invests are generally
purchased and sold through principal transactions, meaning that the Fund
normally purchases securities directly from the issuer or a primary market-maker
acting as principal for the securities on a net basis. Brokerage commissions are
not paid on these transactions, although the purchase price for securities
usually includes an undisclosed compensation. Purchases from underwriters of
securities typically include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers typically
include a dealer's mark-up (i.e., a spread between the bid and the asked
prices).

How Brokers and Dealers are Selected

Vanguard's Fixed Income Group chooses brokers or dealers to handle the
purchase and sale of the Fund's securities, and is responsible for getting the
best available price and most favorable execution for all transactions. When the
Fund purchases a newly issued security at a fixed price, the Group may designate
certain members of the underwriting syndicate to receive compensation associated
with that transaction. Certain dealers have agreed to rebate a portion of such
compensation directly to the Fund to offset their management expenses. The Group
is required to seek best execution of all transactions and is not authorized to
pay a brokerage commission in excess of that which another broker might have
charged for effecting the same transaction solely on account of the receipt of
research or other services.

How the Reasonableness of Brokerage Commissions is Evaluated

As previously explained, the types of securities that the Fund's
purchases do not normally involve the payment of brokerage commissions. If any
brokerage commissions are paid, however, the Fixed Income Group will evaluate
their reasonableness by considering: (a) historical commission rates; (b) rates
which other institutional investors are paying, based upon publicly available
information; (c) rates quoted by brokers and dealers; (d) the size of a
particular transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular transaction in
terms of both execution and settlement; (f) the level and type of business done
with a particular firm over a period of time; and (g) the extent to which the
broker or dealer has capital at risk in the transaction.

B-15
<PAGE>

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

PERFORMANCE MEASURES

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

Each of the investment company members of The Vanguard Group, including
Vanguard World Fund, may from time to time, use one or more of the following
unmanaged indexes for comparative performance purposes.

Standard & Poor's 500 Composite Stock Price Index -- is a well
diversified list of 500 companies representing the U.S. Stock Market.

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

B-16
<PAGE>

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

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

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

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

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

Russell 3000 Stock Index -- a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly traded
stocks in the U.S.

Russell 2000 Stock Index -- composed of the 2,000 smallest stocks
contained in the Russell 3000, representing approximately 7% of the Russell
3000 total market capitalization.

Russell 2000(R) Value Index -- contains stocks from the Russell 2000 Index
with a less-than-average growth orientation.

Morgan Stanley Capital International EAFE Index -- is an arithmetic,
market value-weighted average of the performance of over 900 securities listed
on the stock exchanges of countries in Europe, Australasia and the Far East.

Goldman Sachs 100 Convertible Bond Index -- currently includes 71 bonds
and 29 preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.

Salomon Brothers GNMA Index -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.

Salomon Brothers High-Grade Corporate Bond Index -- consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.

Lehman Long-Term Treasury Bond -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.

Merrill Lynch Corporate & Government Bond -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.

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

Lehman Brothers Long-Term Corporate Bond Index -- is a subset of the
Lehman Corporate Bond Index covering all corporate, publicly issued,
fixed-rate, nonconvertible U.S. debt issues rated at least Baa, with at least
$50 million principal outstanding and maturity greater than 10 years.

Bond Buyer Municipal Bond Index -- is a yield index on current coupon
high-grade general obligation municipal bonds.

Standard & Poor's Preferred Index -- is a yield index based upon the
average yield of four high-grade, non-callable preferred stock issues.

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

B-17
<PAGE>

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

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

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

Lehman Long-Term Corporate AA or Better Bond Index -- consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.

Lehman Brothers Aggregate Bond Index -- is a market weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated Baa -- or better. The Index has a
market value of over $4 trillion.

Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB -- or better with maturities
between 1 and 5 years. The index has a market value of over $1.6 trillion.

Lehman Brothers Mutual Fund Intermediate (5-10) Government/Corporate Index
- -- is a market weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB -- or better with maturities between
5 and 10 years. The index has a market value of over $700 billion.

Lehman Brothers Long (10+) Government/Corporate Index -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB -- or better with maturities greater than 10
years. The index has a market value of over $900 billion.

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

Lipper Balanced Fund Average -- an industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.

Lipper Non-Government Money Market Fund Average -- an industry benchmark
of average non-government money market funds with similar investment objectives
and policies, as measured by Lipper Analytical Services, Inc.

Lipper Government Money Market Fund Average -- an industry benchmark of
average government money market funds with similar investment objectives and
policies, as measured by Lipper Analtyical Services, Inc.

B-18

<PAGE>

APPENDIX A -- DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS

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

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

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

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

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

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

B-19

<PAGE>

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

Similarly, from time to time proposals have been introduced before
State and local legislatures to restrict or eliminate the State and local income
tax exemption for interest on Municipal Bonds. Similar proposals may be
introduced in the future. If any such proposal were enacted, it might restrict
or eliminate the ability of each Portfolio to achieve its respective investment
objective. In that event, the Fund's Trustees and Officers would reevaluate its
investment objective and policies and consider recommending to its shareholders
changes in such objective and policies. (For more information please refer to
"Risk Factors" on page B-7.)

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

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

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

B-20

<PAGE>

Excerpts from Standard & Poor's Corporation's Municipal Bond ratings:
AAA -- has the highest rating assigned by S&P; extremely strong capacity to pay
principal and interest; AA -- has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in a small degree;
A -- has a strong capacity to pay principal and interest, although somewhat more
susceptible to the adverse changes in circumstances and economic conditions; BBB
- -- regarded as having an adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters but adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
principal and interest than for bonds in A category; BB -- B - CCC -- CC
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with terms of obligation; BB is being paid; D -- in
default, and payment of principal and/or interest is in arrears.

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

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

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

B-21

<PAGE>
PART C

VANGUARD MASSACHUSETTS TAX-EXEMPT FUNDS

OTHER INFORMATION

Item 23. Exhibits

Exhibit Description
- ------- -----------
(a) Declaration of Trust*
(b) By-Laws*
(c) Not Applicable
(d) Not Applicable
(e) Not Applicable
(f) Reference is made to the section entitled "Management of the Trust"
in Part B of this Registration Statement
(g) Form of Custodian Agreement**
(h) Form of Amended and Restated Funds' Service Agreement**
(i) Legal Opinion**
(j) Not Applicable
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable

- -------------
* Filed Herewith
** To Be Filed

Item 24. Persons Controlled by or Under Common Control with the Fund

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

Item 25. Indemnification

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

C-1
<PAGE>

Item 26. Business and Other Connections of the Investment Adviser

The Vanguard Group, Inc. ("Vanguard"), is an investment adviser
registered under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"). The list required by this Item 26 of officers and directors of Vanguard,
together with any information as to any business profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated herein by reference to Schedules B
and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File
No. 801-11953).

Item 27. Principal Underwriters

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

Item 28. Location of Accounts and Records

All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder will be maintained at the
offices of the Registrant; Registrant's Transfer Agent, The Vanguard Group,
Inc., Valley Forge, Pennsylvania 19482; and the Registrant's custodian, First
Union Bank, Philadelphia, PA.

Item 29. Management Services

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

Item 30. Undertakings

Not Applicable

C-2

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Town of Valley Forge and the Commonwealth of
Pennsylvania, on the 17th day of September, 1998.

VANGUARD MASSACHUSETTS TAX-EXEMPT FUNDS

BY: (signature)
-------------------------------------
Raymond J. Klapinsky
Trustee

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:

Signature Title Date
----------- ----- ----

BY: /s/ Raymond J. Klapinsky Raymond J. Klapinsky, September 17, 1998
------------------------ Trustee

BY: /s/ Richard F. Hyland Richard F. Hyland, September 17, 1998
------------------------ Trustee

<PAGE>

EXHIBIT INDEX

DECLARATION OF TRUST................................................ EXHIBIT A
BY-LAWS ............................................................ EXHIBIT B

<PAGE>
Exhibit A

AGREEMENT AND DECLARATION OF TRUST

VANGUARD MASSACHUSETTS TAX-EXEMPT FUNDS

a Delaware Business Trust

Principal Place of Business:

100 Vanguard Boulevard
Malvern, Pennsylvania 19355

<PAGE>

AGREEMENT AND DECLARATION OF TRUST

VANGUARD MASSACHUSETTS TAX-EXEMPT FUNDS

WHEREAS, this AGREEMENT AND DECLARATION OF TRUST is made and
entered into as of the date set forth below by the Trustees named hereunder for
the purpose of forming a Delaware business trust in accordance with the
provisions hereinafter set forth,

NOW, THEREFORE, the Trustees hereby direct that a Certificate
of Trust be filed with the Office of the Secretary of State of the State of
Delaware and do hereby declare that the Trustees will hold IN TRUST all cash,
securities and other assets which the Trust now possesses or may hereafter
acquire from time to time in any manner and manage and dispose of the same upon
the following terms and conditions for the pro rata benefit of the holders of
Shares in this Trust.

ARTICLE I.

Name and Definitions

Section 1. Name. This trust shall be known as "VANGUARD
MASSACHUSETTS TAX-EXEMPT FUNDS" and the Trustees shall conduct the business of
the Trust under that name or any other name as they may from time to time
determine.

Section 2. Definitions. Whenever used herein, unless otherwise
required by the context or specifically provided:

(a) The "Trust" refers to the Delaware business trust
established by this Agreement and Declaration of Trust, as amended from time to
time;

(b) The "Trust Property" means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the account
of the Trust;

(c) "Trustees" refers to the persons who have signed this
Agreement and Declaration of Trust, so long as they continue in office in
accordance with the terms hereof, and all other persons who may from time to
time be duly elected or appointed to serve on the Board of Trustees in
accordance with the provisions hereof, and reference herein to a Trustee or the
Trustees shall refer to such person or persons in their capacity as trustees
hereunder;

<PAGE>

(d) "Shares" means the shares of beneficial interest into
which the beneficial interest in the Trust shall be divided from time to time
and includes fractions of Shares as well as whole Shares;

(e) "Shareholder" means a record owner of outstanding Shares;

(f) "Person" means and includes individuals, corporations,
partnerships, trusts, foundations, plans, associations, joint ventures, estates
and other entities, whether or not legal entities, and governments and agencies
and political subdivisions thereof, whether domestic or foreign;

(g) The "1940 Act" refers to the Investment Company Act of
1940 and the Rules and Regulations thereunder, all as amended from time to time.
References herein to specific sections of the 1940 Act shall be deemed to
include such Rules and Regulations as are applicable to such sections as
determined by the Trustees or their designees;

(h) The terms "Commission" and "Principal Underwriter" shall
have the respective meanings given them in Section 2(a)(7) and Section
(2)(a)(29) of the 1940 Act;

(i) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust, as amended or restated from time to time;

(j) "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time;

(k) The term "Interested Person" has the meaning given it in
Section 2(a)(19) of the 1940 Act;

(l) "Investment Adviser" or "Adviser" means a party furnishing
services to the Trust pursuant to any contract described in Article IV, Section
7(a) hereof;

(m) "Series" refers to each Series of Shares established and
designated under or in accordance with the provisions of Article III.

ARTICLE II.

Purpose of Trust

The purpose of the Trust is to conduct, operate and carry on
the business of a management investment company registered under the 1940 Act
through one or more Series investing primarily in securities.

2
<PAGE>

ARTICLE III.

Section 1. Division of Beneficial Interest. The beneficial
interest in the Trust shall at all times be divided into an unlimited number of
Shares, with a par value of $ .001 per Share. The Trustees may authorize the
division of Shares into separate Series and the division of Series into separate
classes of Shares. The different Series shall be established and designated, and
the variations in the relative rights and preferences as between the different
Series shall be fixed and determined, by the Trustees. If only one Series shall
be established, the Shares shall have the rights and preferences provided for
herein and in Article III, Section 6 hereof to the extent relevant and not
otherwise provided for herein.

Subject to the provisions of Section 6 of this Article III,
each Share shall have voting rights as provided in Article V hereof, and holders
of the Shares of any Series shall be entitled to receive dividends, when, if and
as declared with respect thereto in the manner provided in Article VI, Section 1
hereof. No Share shall have any priority or preference over any other Share of
the same Series with respect to dividends or distributions of the Trust or
otherwise. All dividends and distributions shall be made ratably among all
Shareholders of a Series (or class) from the assets held with respect to such
Series according to the number of Shares of such Series (or class) held of
record by such Shareholders on the record date for any dividend or distribution
or on the date of termination of the Trust, as the case may be. Shareholders
shall have no preemptive or other right to subscribe to any additional Shares or
other securities issued by the Trust or any Series. The Trustees may from time
to time divide or combine the Shares of a Series into a greater or lesser number
of Shares of such Series without thereby materially changing the proportionate
beneficial interest of such Shares in the assets held with respect to that
Series or materially affecting the rights of Shares of any other Series.

Section 2. Ownership of Shares. The ownership of Shares shall
be recorded on the books of the Trust or a transfer or similar agent for the
Trust, which books shall be maintained separately for the Shares of each Series.
No certificates evidencing the ownership of Shares shall be issued except as the
Board of Trustees may otherwise determine from time to time. The Trustees may
make such rules as they consider appropriate for the transfer of Shares of each
Series (or class) and similar matters. The record books of the Trust as kept by
the Trust or any transfer or similar agent, as the case may be, shall be
conclusive as to the identity of the Shareholders of each Series and as to the
number of Shares of each Series held from time to time by each Shareholder.

Section 3. Investments in the Trust. Investments may be
accepted by the Trust from such Persons, at such times, on such terms, and for
such consideration as the Trustees from time to time may authorize. Each
investment shall be credited to the Shareholder's account in the form of full
and fractional Shares of the Trust, in such Series (or class) as the purchaser
shall select, at the net asset value per Share next determined for such Series
(or class) after receipt of

<PAGE>

the investment; provided, however, that the Trustees may, in their sole
discretion, impose a sales charge or reimbursement fee upon investments in the
Trust.

Section 4. Status of Shares and Limitation of Personal
Liability. Shares shall be deemed to be personal property giving only the rights
provided in this instrument and the By-Laws of the Trust. Every Shareholder by
virtue of having become a Shareholder shall be held to have expressly assented
and agreed to the terms hereof. The death of a Shareholder during the existence
of the Trust shall not operate to terminate the Trust, nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but shall
entitle such representative only to the rights of said deceased Shareholder
under this Declaration of Trust. Ownership of Shares shall not entitle a
Shareholder to any title in or to the whole or any part of the Trust Property or
right to call for a partition or division of the same or for an accounting, nor
shall the ownership of Shares constitute the Shareholders as partners or joint
venturers. Neither the Trust nor the Trustees, nor any officer, employee or
agent of the Trust shall have any power to bind personally any Shareholder, or
to call upon any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder may at any time agree to pay.

Section 5. Power of Board of Trustees to Change Provisions
Relating to Shares. Notwithstanding any other provision of this Declaration of
Trust to the contrary, and without limiting the power of the Board of Trustees
to amend the Declaration of Trust as provided elsewhere herein, the Board of
Trustees shall have the power to amend this Declaration of Trust, at any time
and from time to time, in such manner as the Board of Trustees may determine in
their sole discretion, without the need for Shareholder action, so as to add to,
delete, replace or otherwise modify any provisions relating to the Shares
contained in this Declaration of Trust, provided that before adopting any such
amendment without Shareholder approval the Board of Trustees shall determine
that it is consistent with the fair and equitable treatment of all Shareholders
and that Shareholder approval is not required by the 1940 Act or other
applicable law. If Shares have been issued, Shareholder approval shall be
required to adopt any amendments to this Declaration of Trust which would
adversely affect to a material degree the rights and preferences of the Shares
of any Series (or class) or to increase or decrease the par value of the Shares
of any Series (or class).

Section 6. Establishment and Designation of Shares. The
establishment and designation of any Series (or class) of Shares shall be
effective upon the adoption by a majority of the Trustees, of a resolution which
sets forth such establishment and designation and the relative rights and
preferences of such Series (or class). Each such resolution shall be
incorporated herein by reference upon adoption.

Shares of each Series (or class) established pursuant to this
Section 6, unless otherwise provided in the resolution establishing such Series,
shall have the following relative rights and preferences:

<PAGE>

(a) Assets Held with Respect to a Particular Series. All
consideration received by the Trust for the issue or sale of Shares of a Series,
including dividends and distributions paid by, and reinvested in, such Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof from whatever source
derived, including, without limitation, any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably be held with respect to that Series for all purposes, subject only
to the rights of creditors, and shall be so recorded upon the books of account
of the Trust. Such consideration, assets, income, earnings, profits and proceeds
thereof, from whatever source derived, including, without limitation, any
proceeds derived from the sale, exchange or liquidation of such assets, and any
funds or payments derived from any reinvestment of such proceeds, in whatever
form the same may be, are herein referred to as "assets held with respect to"
that Series. In the event that there are any assets, income, earnings, profits
and proceeds thereof, funds or payments which are not readily identifiable as
assets held with respect to any particular Series (collectively "General
Assets"), the Trustees shall allocate such General Assets to, between or among
any one or more of the Series in such manner and on such basis as the Trustees,
in their sole discretion, deem fair and equitable, and any General Asset so
allocated to a particular Series shall be held with respect to that Series. Each
such allocation by the Trustees shall be conclusive and binding upon the
Shareholders of all Series for all purposes in absence of manifest error.

(b) Liabilities Held with Respect to a Particular Series. The
assets of the Trust held with respect to each Series shall be charged with the
liabilities of the Trust with respect to such Series and all expenses, costs,
charges and reserves attributable to such Series, and any general liabilities of
the Trust which are not readily identifiable as being held in respect of a
Series shall be allocated and charged by the Trustees to and among any one or
more Series in such manner and on such basis as the Trustees in their sole
discretion deem fair and equitable. The liabilities, expenses, costs, charges,
and reserves so charged to a Series are herein referred to as "liabilities held
with respect to" that Series. Each allocation of liabilities, expenses, costs,
charges and reserves by the Trustees shall be conclusive and binding upon the
holders of all Series for all purposes in absence of manifest error. All Persons
who have extended credit which has been allocated to a particular Series, or who
have a claim or contract which has been allocated to a Series, shall look
exclusively to the assets held with respect to such Series for payment of such
credit, claim, or contract. In the absence of an express agreement so limiting
the claims of such creditors, claimants and contracting parties, each creditor,
claimant and contracting party shall be deemed nevertheless to have agreed to
such limitation unless an express provision to the contrary has been
incorporated in the written contract or other document establishing the
contractual relationship.

(c) Dividends, Distributions, Redemptions, and Repurchases. No
dividend or distribution including, without limitation, any distribution paid
upon termination of the Trust or of any Series (or class) with respect to, or
any redemption or repurchase of, the Shares of any Series (or class) shall be
effected by the Trust other than from the assets held with respect to such
Series, nor shall any Shareholder of any Series otherwise have any right or
claim against the

<PAGE>

assets held with respect to any other Series except to the extent that such
Shareholder has such a right or claim hereunder as a Shareholder of such other
Series. The Trustees shall have full discretion to determine which items shall
be treated as income and which items as capital; and each such determination and
allocation shall be conclusive and binding upon the Shareholders in absence of
manifest error.

(d) Voting. All Shares of the Trust entitled to vote on a
matter shall vote without differentiation between the separate Series on a
one-vote-per-each dollar (and a fractional vote for each fractional dollar) of
the net asset value of each share (including fractional shares) basis; provided
however, if a matter to be voted on affects only the interests of not all Series
(or class of a Series), then only the Shareholders of such affected Series (or
class) shall be entitled to vote on the matter.

(e) Equality. All the Shares of each Series shall represent an
equal proportionate undivided interest in the assets held with respect to such
Series (subject to the liabilities of such Series and such rights and
preferences as may have been established and designated with respect to classes
of Shares within such Series), and each Share of a Series shall be equal to each
other Share of such Series.

(f) Fractions. Any fractional Share of a Series shall have
proportionately all the rights and obligations of a whole share of such Series,
including rights with respect to voting, receipt of dividends and distributions
and redemption of Shares.

(g) Exchange Privilege. The Trustees shall have the authority
to provide that the holders of Shares of any Series shall have the right to
exchange such Shares for Shares of one or more other Series in accordance with
such requirements and procedures as may be established by the Trustees.

(h) Combination of Series. The Trustees shall have the
authority, without the approval of the Shareholders of any Series unless
otherwise required by applicable law, to combine the assets and liabilities held
with respect to any two or more Series into assets and liabilities held with
respect to a single Series.

(i) Elimination of Series. At any time that there are no
Shares outstanding of a Series (or class), the Trustees may abolish such Series
(or class).

ARTICLE IV.

The Board of Trustees

Section 1. Number, Election and Tenure. The number of Trustees
constituting the Board of Trustees shall be fixed from time to time by a written
instrument signed, or by resolution approved at a duly constituted meeting, by a
majority of the Board of Trustees, provided, however, that the number of
Trustees shall in no event be less than one (1) nor more

<PAGE>

than fifteen (15). Subject to the requirements of Section 16(a) of the 1940 Act,
the Board of Trustees, by action of a majority of the then Trustees at a duly
constituted meeting, may fill vacancies in the Board of Trustees and remove
Trustees with or without cause. Each Trustee shall serve during the continued
lifetime of the Trust until he or she dies, resigns, is declared bankrupt or
incompetent by a court of competent jurisdiction, or is removed. Any Trustee may
resign at any time by written instrument signed by him and delivered to any
officer of the Trust or to a meeting of the Trustees. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.
Except to the extent expressly provided in a written agreement with the Trust,
no Trustee resigning and no Trustee removed shall have any right to any
compensation for any period following his or her resignation or removal, or any
right to damages or other payment on account of such removal. Any Trustee may be
removed at any meeting of Shareholders by a vote of two-thirds of the total
combined net asset value of all Shares of the Trust issued and outstanding. A
meeting of Shareholders for the purpose of electing or removing one or more
Trustees may be called (i) by the Trustees upon their own vote, or (ii) upon the
demand of Shareholders owning 10% or more of the Shares of the Trust in the
aggregate.

Section 2. Effect of Death, Resignation, etc. of a Trustee.
The death, declination, resignation, retirement, removal, or incapacity of one
or more Trustees, or all of them, shall not operate to annul the Trust or to
revoke any existing agency created pursuant to the terms of this Declaration of
Trust. Whenever a vacancy in the Board of Trustees shall occur, until such
vacancy is filled as provided in Article IV, Section 1, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by this Declaration
of Trust.

Section 3. Powers. Subject to the provisions of this
Declaration of Trust, the business of the Trust shall be managed by the Board of
Trustees, and such Board shall have all powers necessary or convenient to carry
out that responsibility including the power to engage in transactions of all
kinds on behalf of the Trust. Trustees, in all instances, shall act as
principals and are and shall be free from the control of the Shareholders. The
Trustees shall have full power and authority to do any and all acts and to make
and execute any and all contracts, documents and instruments that they may
consider desirable, necessary or appropriate in connection with the
administration of the Trust. Without limiting the foregoing, the Trustees may:
adopt, amend and repeal By-Laws not inconsistent with this Declaration of Trust
providing for the regulation and management of the affairs of the Trust; elect
and remove such officers and appoint and terminate such agents as they consider
appropriate; appoint from their own number and establish and terminate one or
more committees consisting of two or more Trustees who may exercise the powers
and authority of the Board of Trustees to the extent that the Trustees
determine; employ one or more custodians of the assets of the Trust and may
authorize such custodians to employ subcustodians and to deposit all or any part
of such assets in a system or systems for the central handling of securities or
with a Federal Reserve Bank, retain a transfer agent or a shareholder servicing
agent, or both; provide for the issuance and distribution of Shares by the Trust
directly or through one or more Principal Underwriters or otherwise; redeem,
repurchase and transfer Shares pursuant to applicable law; set record dates for
the determination

<PAGE>

of Shareholders with respect to various matters; declare and pay dividends and
distributions to Shareholders of each Series from the assets of such Series;
establish from time to time, in accordance with the provisions of Article III,
Section 6 hereof, any Series of Shares, each such Series to operate as a
separate and distinct investment medium and with separately defined investment
objectives and policies and distinct investment purpose; and in general delegate
such authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian, transfer or shareholder servicing agent, Investment Manager or
Principal Underwriter. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration of Trust, the presumption shall be in favor of a
grant of power to the Trustees and unless otherwise specified herein or required
by the 1940 Act or other applicable law, any action by the Board of Trustees
shall be deemed effective if approved or taken by a majority of the Trustees
then in office or a majority of any duly constituted committee of Trustees. Any
action required or permitted to be taken at any meeting of the Board of
Trustees, or any committee thereof, may be taken without a meeting if all
members of the Board of Trustees or committee (as the case may be) consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of the Board of Trustees, or committee, except as otherwise
provided in the 1940 Act.

Without limiting the foregoing, the Trust shall have power and
authority:

(a) To invest and reinvest cash and cash items, to hold cash
uninvested, and to subscribe for, invest in, reinvest in, purchase or otherwise
acquire, own, hold, pledge, sell, assign, transfer, exchange, distribute, write
options on, lend or otherwise deal in or dispose of contracts for the future
acquisition or delivery of all types of securities, futures contracts and
options thereon, and forward currency contracts of every nature and kind,
including, without limitation, all types of bonds, debentures, stocks, preferred
stocks, negotiable or non-negotiable instruments, obligations, evidences of
indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, bankers' acceptances, and other securities of any kind,
issued, created, guaranteed, or sponsored by any and all Persons, including,
without limitation, states, territories, and possessions of the United States
and the District of Columbia and any political subdivision, agency, or
instrumentality thereof, any foreign government or any political subdivision of
the U.S. Government or any foreign government, or any international
instrumentality or organization, or by any bank or savings institution, or by
any corporation or organization organized under the laws of the United States or
of any state, territory, or possession thereof, or by any corporation or
organization organized under any foreign law, or in "when issued" contracts for
any such securities, futures contracts and options thereon, and forward currency
contracts, to change the investments of the assets of the Trust; and to exercise
any and all rights, powers, and privileges of ownership or interest in respect
of any and all such investments of every kind and description, including,
without limitation, the right to consent and otherwise act with respect thereto,
with power to designate one or more Persons, to exercise any of said rights,
powers, and privileges in respect of any of said instruments;

<PAGE>

(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
lease, or write options with respect to or otherwise deal in any property rights
relating to any or all of the assets of the Trust or any Series;

(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and to execute
and deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power and
discretion with relation to securities or property as the Trustees shall deem
proper;

(d) To exercise powers and right of subscription or otherwise
which in any manner arise out of ownership of securities;

(e) To hold any security or property in a form not indicating
that it is trust property, whether in bearer, unregistered or other negotiable
form, or in its own name or in the name of a custodian or subcustodian or a
nominee or nominees or otherwise or to authorize the custodian or a subcustodian
or a nominee or nominees to deposit the same in a securities depository, subject
in each case to the applicable provisions of the 1940 Act;

(f) To consent to, or participate in, any plan for the
reorganization, consolidation or merger of any corporation or issuer of any
security which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and to pay
calls or subscriptions with respect to any security held in the Trust;

(g) To join with other security holders in acting through a
committee, depository, voting trustee or otherwise, and in that connection to
deposit any security with, or transfer any security to, any such committee,
depository or trustee, and to delegate to them such power and authority with
relation to any security (whether or not so deposited or transferred) as the
Trustees shall deem proper, and to agree to pay, and to pay, such portion of the
expenses and compensation of such committee, depository or trustee as the
Trustees shall deem proper;

(h) To litigate, compromise, arbitrate, settle or otherwise
adjust claims in favor of or against the Trust or a Series, or any matter in
controversy, including but not limited to claims for taxes;

(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;

(j) To borrow funds or other property in the name of the Trust
or Series exclusively for Trust purposes;

(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof;

<PAGE>

(l) To purchase and pay for entirely out of Trust Property
such insurance as the Trustees may deem necessary, desirable or appropriate for
the conduct of the business, including, without limitation, insurance policies
insuring the assets of the Trust or payment of distributions and principal on
its portfolio investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, Investment Manager, principal
underwriters, or independent contractors of the Trust, individually against all
claims and liabilities of every nature arising by reason of holding Shares,
holding, being or having held any such office or position, or by reason of any
action alleged to have been taken or omitted by any such Person as Trustee,
officer, employee, agent, Investment Manager, Principal Underwriter, or
independent contractor, including any action taken or omitted that may be
determined to constitute negligence, whether or not the Trust would have the
power to indemnify such Person against liability; and

(m) To adopt, establish and carry out pension, profit-sharing,
share bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans, trusts and provisions, including the purchasing of life insurance
and annuity contracts as a means of providing such retirement and other
benefits, for any or all of the Trustees, officers, employees and agents of the
Trust.

The Trust shall not be limited to investing in obligations
maturing before the possible termination of the Trust or one or more of its
Series. The Trust shall not in any way be bound or limited by any present or
future law or custom in regard to investment by fiduciaries. The Trust shall not
be required to obtain any court order to deal with any assets of the Trust or
take any other action hereunder.

Section 4. Payment of Expenses by the Trust. Subject to the
provisions of Article III, Section 6(b), the Trustees are authorized to pay or
cause to be paid out of the principal or income of the Trust or Series, or
partly out of the principal and partly out of income, and to charge or allocate
the same to, between or among such one or more of the Series that may be
established or designated pursuant to Article III, Section 6, all expenses,
fees, charges, taxes and liabilities incurred or arising in connection with the
Trust or Series, or in connection with the management thereof, including, but
not limited to, the Trustees' compensation and such expenses and charges for the
services of the Trust's officers, employees, Investment Manager^, Principal
Underwriter, auditors, counsel, custodian, transfer agent, Shareholder servicing
agent, and such other agents or independent contractors and such other expenses
and charges as the Trustees may deem necessary or proper to incur.

Section 5. Ownership of Assets of the Trust. Title to all of
the assets of the Trust shall at all times be considered as vested in the Trust,
except that the Trustees shall have power to cause legal title to any Trust
Property to be held by or in the name of one or more of the Trustees, or in the
name of the Trust, or in the name of any other Person as nominee, on such terms
as the Trustees may determine. Upon the resignation, incompetency, bankruptcy,
removal, or death of a Trustee he or she shall automatically cease to have any
such title in any of the Trust Property, and the title of such Trustee in the
Trust Property shall vest automatically in the

<PAGE>

remaining Trustees. Such vesting and cessation of title shall be effective
whether or not conveyancing documents have been executed and delivered. The
Trustees may determine that the Trust or the Trustees, acting for and on behalf
of the Trust, shall be deemed to hold beneficial ownership of any income earned
on the securities owned by the Trust, whether domestic or foreign.

Section 6. Service Contracts.

(a) The Trustees may, at any time and from time to time,
contract for exclusive or nonexclusive advisory, management and/or
administrative services for the Trust or for any Series with any Person; and any
such contract may contain such other terms as the Trustees may determine,
including without limitation, authority for the Investment Adviser to determine
from time to time without prior consultation with the Trustees what investments
shall be purchased, held, sold or exchanged and what portion, if any, of the
assets of the Trust shall be held uninvested and to make changes in the Trust's
investments, and such other responsibilities as may specifically be delegated to
such Person.

(b) The Trustees may also, at any time and from time to time,
contract with any Persons, appointing such Persons exclusive or nonexclusive
distributor or Principal Underwriter for the Shares of one or more of the Series
or other securities to be issued by the Trust. Every such contract may contain
such other terms as the Trustees may determine.

(c) The Trustees are also empowered, at any time and from time
to time, to contract with any Persons, appointing such Person(s) to serve as
custodian(s), transfer agent and/or shareholder servicing agent for the Trust or
one or more of its Series. Every such contract shall comply with such terms as
may be required by the Trustees.

(d) The Trustees are further empowered, at any time and from
time to time, to contract with any Persons to provide such other services to the
Trust or one or more of the Series, as the Trustees determine to be in the best
interests of the Trust and the applicable Series.

(e) The fact that:

(i) any of the Shareholders, Trustees, or officers of the
Trust is a shareholder, director, officer, partner, trustee,
employee, Manager, adviser, Principal Underwriter,
distributor, or affiliate or agent of or for any Person with
which an advisory, management or administration contract, or
Principal Underwriter's or distributor's contract, or
transfer, shareholder servicing or other type of service
contract may be made, or that

(ii) any Person with which an advisory, management or
administration contract or Principal Underwriter's or
distributor's contract, or transfer, shareholder servicing or
other type of service contract may be made also has an
advisory, management or administration contract, or principal
underwriter's or distributor's

11
<PAGE>

contract, or transfer, shareholder servicing or other service
contract, or has other business or interests with any other
Person,

shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
applicable requirements of the 1940 Act.

ARTICLE V.

Shareholders' Voting Powers and Meetings

Section 1. Voting Powers. Subject to the provisions of Article
III, Sections 5 and 6(d), the Shareholders shall have right to vote only (i) for
the election or removal of Trustees as provided in Article IV, Section 1, and
(ii) with respect to such additional matters relating to the Trust as may be
required by the applicable provisions of the 1940 Act, including Section 16(a)
thereof, and (iii) on such other matters as the Trustees may consider necessary
or desirable. Each shareholder shall have one vote for each dollar (and a
fractional vote for each fractional dollar) of the net asset value of each share
(including fractional shares) held by such shareholder on the record date on
each matter submitted to a vote at a meeting of shareholders. For purposes of
this section, net asset value shall be determined pursuant to Section 3 of
Article VIII of the Trustee's Bylaws as of the record date for such meeting set
pursuant to Section 5 of such Bylaws. There shall be no cumulative voting in the
election of Trustees. Votes may be made in person or by proxy. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed valid
unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger.

Section 2. Voting Power and Meetings. Meetings of the
Shareholders may be called by the Trustees for the purposes described in Section
1 of this Article V. A meeting of Shareholders may be held at any place
designated by the Trustees. Written notice of any meeting of Shareholders shall
be given or caused to be given by the Trustees by delivering personally or
mailing such notice not more than ninety (90), nor less than ten (10) days
before such meeting, postage prepaid, stating the time and place of the meeting,
to each Shareholder at the Shareholder's address as it appears on the records of
the Trust. Whenever notice of a meeting is required to be given to a Shareholder
under this Declaration of Trust, a written waiver thereof, executed before or
after the meeting by such Shareholder or his or her attorney thereunto
authorized and filed with the records of the meeting, or actual attendance at
the meeting of Shareholders in person or by proxy, shall be deemed equivalent to
such notice.

Section 3. Quorum and Required Vote. Except as otherwise
provided by the Investment Company Act of 1940 or in the Trust's Declaration of
Trust, at any meeting of shareholders, the presence in person or by proxy of the
holders of record of Shares issued and outstanding and entitled to vote
representing more than fifty percent of the total combined net asset value of
all Shares issued and outstanding and entitled to vote shall constitute a quorum
for

<PAGE>

the transaction of any business at the meeting. Any meeting of Shareholders may
be adjourned from time to time by a majority of the votes properly cast upon the
question of adjourning a meeting to another date and time, whether or not a
quorum is present, and the meeting may be held as adjourned within a reasonable
time after the date set for the original meeting without further notice. Subject
to the provisions of Article III, Section 6(d) and the applicable provisions of
the 1940 Act, when a quorum is present at any meeting, a majority vote of the
combined net asset value of all shares issued outstanding and shall decide any
questions except only a plurality vote shall be necessary to elect Trustees.

Section 4. Action by Written Consent. Any action taken by
Shareholders may be taken without a meeting if all the holders of Shares
entitled to vote on the matter are provided with not less than 7 days written
notice thereof and written consent to the action is filed with the records of
the meetings of Shareholders by the holders of the number of votes that would be
required to approve the matter as provided in Article V, Section 3. Such consent
shall be treated for all purposes as a vote taken at a meeting of Shareholders.

Section 5. Record Dates. For the purpose of determining the
Shareholders who are entitled to vote or act at any meeting or any adjournment
thereof, the Trustees may fix a time, which shall be not more than ninety (90)
nor less than ten (10) days before the date of any meeting of Shareholders, as
the record date for determining the Shareholders having the right to notice of
and to vote at such meeting and any adjournment thereof, and in such case only
Shareholders of record on such record date shall have such right,
notwithstanding any transfer of shares on the books of the Trust after the
record date. For the purpose of determining the Shareholders who are entitled to
receive payment of any dividend or of any other distribution, the Trustees may
fix a date, which shall be before the date for the payment of such dividend or
distribution, as the record date for determining the Shareholders having the
right to receive such dividend or distribution. Nothing in this Section shall be
construed as precluding the Trustees from setting different record dates for
different Series.

ARTICLE VI.

Net Asset Value, Distributions, and Redemptions

Section 1. Determination of Net Asset Value, Net Income, and
Distributions. Subject to Article III, Section 6 hereof, the Trustees, in their
absolute discretion, may prescribe and shall set forth in the By-laws or in a
duly adopted resolution of the Trustees such bases and time for determining the
per Share net asset value of the Shares of any Series and the declaration and
payment of dividends and distributions on the Shares of any Series, as they may
deem necessary or desirable.

Section 2. Redemptions and Repurchases. The Trust shall
purchase such Shares as are offered by any Shareholder for redemption, upon
receipt by the Trust or a Person designated by the Trust that the Trust redeem
such Shares or in accordance with such procedures for redemption as the Trustees
may from time to time authorize; and the Trust will pay therefor

<PAGE>

the net asset value thereof, in accordance with the By-Laws and the applicable
provisions of the 1940 Act. Payment for said Shares shall be made by the Trust
to the Shareholder within seven days after the date on which the request for
redemption is received in proper form. The obligation set forth in this Section
2 is subject to the provision that in the event that any time the New York Stock
Exchange (the "Exchange") is closed for other than weekends or holidays, or if
permitted by the Rules of the Commission during periods when trading on the
Exchange is restricted or during any emergency which makes it impracticable for
the Trust to dispose of the investments of the applicable Series or to determine
fairly the value of the net assets held with respect to such Series or during
any other period permitted by order of the Commission for the protection of
investors, such obligations may be suspended or postponed by the Trustees.

The redemption price may in any case or cases be paid in cash
or wholly or partly in kind in accordance with Rule 18f-1 under the 1940 Act if
the Trustees determine that such payment is advisable in the interest of the
remaining Shareholders of the Series of which the Shares are being redeemed.
Subject to the foregoing, the selection and quantity of securities or other
property so paid or delivered as all or part of the redemption price shall be
determined by or under authority of the Trustees. In no case shall the Trust be
liable for any delay of any corporation or other Person in transferring
securities selected for delivery as all or part of any payment in kind.

Section 3. Redemptions at the Option of the Trust. The Trust
shall have the right, at its option, upon 30 days notice to the affected
Shareholder at any time to redeem Shares of any Shareholder at the net asset
value thereof as described in Section 1 of this Article VI: (i) if at such time
such Shareholder owns Shares of any Series having an aggregate net asset value
of less than a minimum value determined from time to time by the Trustees; or
(ii) to the extent that such Shareholder owns Shares of a Series equal to or in
excess of a maximum percentage of the outstanding Shares of such Series
determined from time to time by the Trustees; or (iii) to the extent that such
Shareholder owns Shares equal to or in excess of a maximum percentage,
determined from time to time by the Trustees, of the outstanding Shares of the
Trust.

Section 4. Transfer of Shares. The Trust shall transfer shares
held of record by any Person to any other Person upon receipt by the Trust or a
Person designated by the Trust of a written request therefore in such form and
pursuant to such procedures as may be approved by the Trustees.

ARTICLE VII.

Compensation and Limitation of Liability

Section 1. Compensation of Trustees. The Trustees as such
shall be entitled to reasonable compensation from the Trust, and they may fix
the amount of such compensation from time to time. Nothing herein shall in any
way prevent the employment of any Trustee to provide advisory, management,
legal, accounting, investment banking or other services to the Trust and to be
specially compensated for such services by the Trust.

<PAGE>

Section 2. Indemnification and Limitation of Liability. The
Trustees shall not be responsible or liable in any event for any neglect or
wrong-doing of any officer, agent, employee, Manager or Principal Underwriter of
the Trust, nor shall any Trustee be responsible for the act or omission of any
other Trustee, and, subject to the provisions of the Bylaws, the Trust out of
its assets may indemnify and hold harmless each and every Trustee and officer of
the Trust from and against any and all claims, demands, costs, losses, expenses,
and damages whatsoever arising out of or related to such Trustee's performance
of his or her duties as a Trustee or officer of the Trust; provided that nothing
herein contained shall indemnify, hold harmless or protect any Trustee or
officer from or against any liability to the Trust or any Shareholder to which
he or she would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.

Every note, bond, contract, instrument, certificate or
undertaking and every other act or thing whatsoever issued, executed or done by
or on behalf of the Trust or the Trustees or any of them in connection with the
Trust shall be conclusively deemed to have been issued, executed or done only in
or with respect to their or his or her capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon.

Section 3. Trustee's Good Faith Action, Expert Advice, No Bond
or Surety. The exercise by the Trustees of their powers hereunder shall be
binding upon everyone interested in or dealing with the Trust. A Trustee shall
be liable to the Trust and to any Shareholder solely for his or her own willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee, and shall not be liable for
errors of judgment or mistakes of fact or law. The Trustees may take advice of
counsel or other experts with respect to the meaning and operation of this
Declaration of Trust, and shall be under no liability for any act or omission in
accordance with such advice nor for failing to follow such advice. The Trustees
shall not be required to give any bond as such, nor any surety if a bond is
required.

Section 4. Insurance. The Trustees shall be entitled and
empowered to the fullest extent permitted by law to purchase with Trust assets
insurance for liability and for all expenses reasonably incurred or paid or
expected to be paid by a Trustee or officer in connection with any claim,
action, suit or proceeding in which he or she becomes involved by virtue of his
or her capacity or former capacity with the Trust, whether or not the Trust
would have the power to indemnify him or her against such liability under the
provisions of this Article.

15
<PAGE>

ARTICLE VIII.

Miscellaneous

Section 1. Liability of Third Persons Dealing with Trustees.
No Person dealing with the Trustees shall be bound to make any inquiry
concerning the validity of any transaction made or to be made by the Trustees or
to see to the application of any payments made or property transferred to the
Trust or upon its order.

Section 2. Termination of Trust or Series. Unless terminated
as provided herein, the Trust shall continue without limitation of time. The
Trust may be terminated at any time by the Trustees upon 60 days prior written
notice to the Shareholders. Any Series may be terminated at any time by the
Trustees upon 60 days prior written notice to the Shareholders of that Series.

Upon termination of the Trust (or any Series, as the case may
be), after paying or otherwise providing for all charges, taxes, expenses and
liabilities held, severally, with respect to each Series (or the applicable
Series, as the case may be), whether due or accrued or anticipated as may be
determined by the Trustees, the Trust shall, in accordance with such procedures
as the Trustees consider appropriate, reduce the remaining assets held,
severally, with respect to each Series (or the applicable Series, as the case
may be), to distributable form in cash or shares or other securities, and any
combination thereof, and distribute the proceeds held with respect to each
Series (or the applicable Series, as the case may be), to the Shareholders of
that Series, as a Series, ratably according to the number of Shares of that
Series held by the several Shareholders on the date of termination.

Section 3. Merger and Consolidation. The Trustees may cause
(i) the Trust or on or more of its Series to the extent consistent with
applicable law to be merged into or consolidated with another Trust, series or
Person, (ii) the Shares of the Trust or any Series to be converted into
beneficial interests in another business trust (or series thereof), (iii) the
Shares to be exchanged for assets or property under or pursuant to any state or
federal statute to the extent permitted by law or (iv) a sale of assets of the
Trust or one or more of its Series. Such merger or consolidation, Share
conversion, Share exchange or sale of assets must be authorized by vote as
provided in Article V, Section 3 herein; provided that in all respects not
governed by statute or applicable law, the Trustees shall have power to
prescribe the procedure necessary or appropriate to accomplish a sale of assets,
Share exchange, merger or consolidation, including the power to create one or
more separate business trusts to which all or any part of the assets,
liabilities, profits or losses of the Trust may be transferred and to provide

<PAGE>

for the conversion of Shares of the Trust or any Series into beneficial
interests in such separate business trust or trusts (or series thereof); and
further provided that no vote of shareholders will be required to approve an
acquisition by the Trust or one or more of its Series of all or substantially
all of the assets of another investment company or any series thereof in
exchange solely for Shares.

Section 4. Amendments. This Declaration of Trust may be
restated and/or amended at any time by vote of majority of the Trustees then
holding office. Any such restatement and/or amendment hereto shall be effective
immediately upon execution and approval. The Certificate of Trust of the Trust
may be restated and/or amended by a similar procedure, and any such restatement
and/or amended by a similar procedure, and any such restatement an/or amendment
shall be signed by at least one of the Trustees and shall be effective
immediately upon filing with the Office of the Secretary of State of the State
of Delaware or upon such future date as may be stated therein.

Section 5. Filing of Copies, References, Headings. The
original or a copy of this instrument and of each restatement and/or amendment
hereto shall be kept at the office of the Trust where it may be inspected by any
Shareholder. Anyone dealing with the Trust may rely on a certificate by an
officer of the Trust as to whether or not any such restatements and/or
amendments have been made and as to any matters in connection with the Trust
hereunder; and, with the same effect as if it were the original, may rely on a
copy certified by an officer of the Trust to be a copy of this instrument or of
any such restatements and/or amendments. In this instrument and in any such
restatements and/or amendment, references to this instrument, and all
expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to
this instrument as amended or affected by any such restatements and/or
amendments. Headings are placed herein for convenience of reference only and
shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. Whenever the singular number is used
herein, the same shall include the plural; and the neuter, masculine and
feminine genders shall include each other, as applicable. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original.

Section 6. Applicable Law. This Agreement and Declaration of
Trust is created under and is to be governed by and construed and administered
according to the laws of the State of Delaware and the Delaware Business Trust
Act, as amended from time to time (the "Act"). The Trust shall be a Delaware
business trust pursuant to such Act, and without limiting the provisions hereof,
the Trust may exercise all powers which are ordinarily exercised by such a
business trust.

<PAGE>

Section 7. Provisions in Conflict with Law or Regulations.

(a) The provisions of the Declaration of Trust are severable,
and if the Trustees shall determine, with the advice of counsel, that any of
such provisions is in conflict with the 1940 Act, the regulated investment
company provisions of the Internal Revenue Code or with other applicable laws
and regulations, the conflicting provision shall be deemed never to have
constituted a part of the Declaration of Trust; provided, however, that such
determination shall not affect any of the remaining provisions of the
Declaration of Trust or render invalid or improper any action taken or omitted
prior to such determination.

(b) If any provision of the Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect such provision in any other jurisdiction or any
other provision of the Declaration of Trust in any jurisdiction.

Section 8. Business Trust Only. It is the intention of the
Trustees to create a business trust pursuant to the Act, and thereby to create
only the relationship of trustee and beneficial owners within the meaning of
such Act between the Trustees and each Shareholder. It is not the intention of
the Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment, joint venture, or any form of legal
relationship other than a business trust pursuant to such Act. Nothing in this
Declaration of Trust shall be construed to make the Shareholders, either by
themselves or with the Trustees, partners or members of a joint stock
association.

Section 9. Use of the Name "The Vanguard Group, Inc.". The
name "The Vanguard Group, Inc." and any variants thereof and all rights to the
use of the name "The Vanguard Group, Inc." or any variants thereof shall be the
sole and exclusive property of The Vanguard Group, Inc. ("VGI"). VGI has
permitted the use by the Trust of the identifying word "Vanguard" and the use of
the name "Vanguard" as part of the name of the Trust and the name of any Series
of Shares. Upon the Trust's withdrawal from the Amended and Restated Funds'
Service Agreement among the Trust, the other investment companies within the
Vanguard Group of Investment Companies and VGI, and upon the written request of
VGI, the Trust and any Series of Shares thereof shall cease to use or in any way
to refer to itself as related to "The Vanguard Group, Inc." or any variant
thereof.

18
<PAGE>

IN WITNESS WHEREOF, the Trustees named below do hereby make
and enter into this Declaration of Trust as of the 17th day of August, 1998.

Richard F. Hyland

Raymond J. Klapinsky

THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS

100 Vanguard Boulevard
Malvern, PA 19355

19
<PAGE>

TABLE OF CONTENTS
-----------------
Page
----

ARTICLE I. Name and Definitions........................................... 1
Section 1. Name.................................................... 1
Section 2. Definitions............................................. 1
(a) The Trust.................................................. 1
(b) Trust Property............................................. 1
(c) Trustees................................................... 1
(d) Shares..................................................... 2
(e) Shareholder................................................ 2
(f) Person..................................................... 2
(g) 1940 Act................................................... 2
(h) Commission and Principal Underwriter....................... 2
(i) Declaration of Trust....................................... 2
(j) By-Laws.................................................... 2
(k) Interested Person.......................................... 2
(l) Investment Adviser......................................... 2
(m) Series..................................................... 2

ARTICLE II. Purpose of Trust.............................................. 2

ARTICLE III. Shares........................................................ 3
Section 1. Division of Beneficial Interest......................... 3
Section 2. Ownership of Shares..................................... 3
Section 3. Investments in the Trust................................ 4
Section 4. Status of Shares and Limitation of Personal Liability... 4
Section 5. Power of Board of Trustees to Change Provisions
Relating to Shares...................................... 4
Section 6. Establishment and Designation of Shares................. 5
(a) Assets Held with Respect to a Particular Series............ 5
(b) Liabilities Held with Respect to a Particular Series....... 5
(c) Dividends, Distributions, Redemptions, and Repurchases..... 6
(d) Voting..................................................... 6
(e) Equality................................................... 6
(f) Fractions.................................................. 7
(g) Exchange Privilege......................................... 7
(h) Combination of Series...................................... 7
(i) Elimination of Series...................................... 7

(i)

<PAGE>

ARTICLE IV. The Board of Trustees......................................... 7
Section 1. Number, Election and Tenure............................. 7
Section 2. Effect of Death, Resignation, etc. of a Trustee......... 8
Section 3. Powers.................................................. 8
Section 4. Payment of Expenses by the Trust........................ 11
Section 5. Ownership of Assets of the Trust........................ 12
Section 6. Service Contracts....................................... 12

ARTICLE V. Shareholders' Voting Powers and Meetings....................... 13
Section 1. Voting Powers........................................... 13
Section 2. Voting Power and Meetings............................... 14
Section 3. Quorum and Required Vote................................ 14
Section 4. Action by Written Consent............................... 14
Section 5. Record Dates............................................ 14

ARTICLE VI. Net Asset Value, Distributions, and Redemptions............... 15
Section 1. Determination of Net Asset Value, Net Income, and
Distributions........................................... 15
Section 2. Redemptions and Repurchases............................. 15
Section 3. Redemptions at the Option of the Trust.................. 16
Section 4. Transfer of Shares...................................... 16

ARTICLE VII. Compensation and Limitation of Liability..................... 16
Section 1. Compensation of Trustees................................ 16
Section 2. Indemnification and Limitation of Liability............. 16
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond
or Surety............................................... 17
Section 4. Insurance............................................... 17

ARTICLE VIII. Miscellaneous............................................... 17
Section 1. Liability of Third Persons Dealing with Trustees........ 17
Section 2. Termination of Trust or Series.......................... 18
Section 3. Merger and Consolidation................................ 18
Section 4. Amendments.............................................. 18
Section 5. Filing of Copies, References, Headings.................. 19
Section 6. Applicable Law.......................................... 19
Section 7. Provisions in Conflict with Law or Regulations.......... 19
Section 8. Business Trust Only..................................... 20
Section 9. Use of the Name "The Vanguard Group, Inc.".............. 20

(ii)

<PAGE>
Exhibit B

BY-LAWS

VANGUARD MASSACHUSETTS TAX-EXEMPT FUNDS
ARTICLE I

Fiscal Year and Offices

Section 1. Fiscal Year. Unless otherwise provided by
resolution of the Board of Trustees, the fiscal year of the Trust shall begin on
the 1st day of February and end on the last day of January.

Section 2. Delaware Office. The Board of Trustees shall
establish a registered office in the State of Delaware and shall appoint as the
Trust's registered agent for service of process in the State of Delaware an
individual resident of the State of Delaware or a Delaware corporation or a
foreign corporation authorized to transact business in the State of Delaware; in
each case the business office of such registered agent for service of process
shall be identical with the registered Delaware office of the Trust.

Section 3. Other Offices. The Board of Trustees may at any
time establish branch or subordinate offices at any place or places where the
Trust intends to do business.

ARTICLE II

Meetings of Shareholders

Section 1. Place of Meeting. Meetings of the shareholders for
the election of trustees shall be held in such place as shall be fixed by
resolution of the Board of Trustees and stated in the notice of the meeting.

Section 2. Annual Meetings. An Annual Meeting of shareholders
will not be held unless the Investment Company Act of 1940 requires the election
of trustees to be acted upon.

Section 3. Special Meetings. Special Meetings of the
shareholders may be called at any time by the Chairman, or President, or by a
majority of the Board of Trustees, and shall be called by the Secretary upon
written request of the holders of shares entitled to cast not less than twenty
percent of all the votes entitled to be cast at such meeting provided that (a)
such

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<PAGE>

request shall state the purposes of such meeting and the matters proposed to be
acted on and (b) the shareholders requesting such meeting shall have paid to the
Trust the reasonable estimated cost of preparing and mailing the notice thereof,
which the Secretary shall determine and specify to such shareholders. No special
meeting need be called upon the request of shareholders entitled to cast less
than a majority of all votes entitled to be cast at such meeting to consider any
matter which is substantially the same as a matter voted on at any meeting of
the shareholders held during the preceding twelve months. The foregoing
provisions of this section 3 notwithstanding a special meeting of shareholders
shall be called upon the request of the holders of at least ten percent of the
votes entitled to be cast for the purpose of consideration removal of a trustee
from office as provided in section 16(c) of the Investment Company Act of 1940.

Section 4. Notice. Not less than ten, nor more than ninety
days before the date of every Annual or Special Shareholders Meeting, the
Secretary shall cause to be mailed to each shareholder entitled to vote at such
meeting at his (her) address (as it appears on the records of the Trust at the
time of mailing) written notice stating the time and place of the meeting and,
in the case of a Special Meeting of Shareholders, shall be limited to the
purposes stated in the notice. Notice of adjournment of a shareholders meeting
to another time or place need not be given, if such time and place are announced
at the meeting.

Section 5. Record Date for Meetings. Subject to the provisions
of the Declaration of Trust, the Board of Trustees may fix in advance a date not
more than ninety, nor less than ten days, prior to the date of any annual or
special meeting of the shareholders as a record date for the determination of
the shareholders entitled to receive notice of, and to vote at any meeting and
any adjournment thereof; and in such case such shareholders and only such
shareholders as shall be shareholders of record on the date so fixed shall be
entitled to receive notice of and to vote at such meeting and any adjournment
thereof as the case may be, notwithstanding any transfer of any stock on the
books of the Trust after any such record date fixed as aforesaid.

Section 6. Quorum. Except as otherwise provided by the
Investment Company Act of 1940 or in the Trust's Declaration of Trust, at any
meeting of shareholders, the presence in person or by proxy of the holders of
record of Shares issued and outstanding and entitled to vote representing more
than fifty percent of the total combined net asset value of all Shares issued
and outstanding and entitled to vote shall constitute a quorum for the
transaction of any business at the meeting.

If, however, a quorum shall not be present or represented at any meeting of the
shareholders, the holders of a majority of the votes present or in person or by
proxy shall have the power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented to a date not more than 120 days after the original

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<PAGE>

record date. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified.

Section 7. Voting. Each shareholder shall have one vote for
each dollar (and a fractional vote for each fractional dollar) of the net asset
value of each share (including fractional shares) held by such shareholder on
the record date set pursuant to Section 5 on each matter submitted to a vote at
a meeting of shareholders. For purposes of this section and Section 6 of this
Article II, net asset value shall be determined pursuant to Section 3 Article
VIII of these Bylaws as of the record date for such meeting set pursuant to
Section 5. There shall be no cumulative voting in the election of trustees.
Votes may be made in person or by proxy.

At all meetings of the shareholders, a quorum being present, all matters shall
be decided by majority of the votes entitled to be cast held by shareholders
present in person or by proxy, unless the question is one for which by express
provision of the laws of the State of Delaware, the Investment Company Act of
1940, as from time to time amended, or the Declaration of Trust, a different
vote is required, in which case such express provision shall control the
decision of such question. At all meetings of shareholders, unless the voting is
conducted by inspectors, all questions relating to the qualification of voters
and the validity of proxies and the acceptance or rejection of votes shall be
decided by the Chairman of the meeting.

Section 8. Inspectors. At any election of trustees, the Board
of Trustees prior thereto may, or, if they have not so acted, the Chairman of
the meeting may appoint one or more inspectors of election who shall first
subscribe an oath of affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after the election make a certificate of the result of the
vote taken.

Section 9. Stock Ledger and List of Shareholders. It shall be
the duty of the Secretary or Assistant Secretary of the Trust to cause an
original or duplicate share ledger to be maintained at the office of the Trust's
transfer agent. Such share ledger may be in written form or any other form
capable of being converted into written form within a reasonable time for visual
inspection.

Section 10. Action Without Meeting. Any action to be taken by
shareholders may be taken without a meeting if (a) all shareholders entitled to
vote on the matter consent to the action in writing, and (b) all shareholders
entitled to notice of the meeting but not entitled to vote at it sign a written
waiver of any right to dissent, and (c) the written consents are filed with the
records of the meeting of shareholders. Such consent shall be treated for all
purposes as a vote at a meeting.

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<PAGE>

ARTICLE III

Trustees

Section 1. General Powers. The business of the Trust shall be
managed under the direction of its Board of Trustees, which may exercise all
powers of the Trust, except such as are by statute, or the Declaration of Trust,
or by these Bylaws conferred upon or reserved to the shareholders.

Section 2. Number and Term of Office. The number of trustees
which shall constitute the whole Board shall be determined from time to time by
the Board of Trustees, but shall not be fewer than the minimum number permitted
by applicable laws, nor more than fifteen. Each trustee elected shall hold
office until his successor is elected and qualified. Trustees need not be
shareholders.

Section 3. Elections. Provided a quorum is present, the
trustees shall be elected by the vote of a plurality of the votes present in
person or by proxy, except that any vacancy on the Board of Trustees may be
filled by a majority vote of the Board of Trustees, although less than a quorum,
subject to the requirements of Section 16(a) of the Investment Company Act of
1940.

Section 4. Place of Meeting. Meetings of the Board of
Trustees, regular or special, may be held at any place as the Board may from
time to time determine.

Section 5. Quorum. At all meetings of the Board of Trustees,
one-third of the entire Board of Trustees shall constitute a quorum for the
transaction of business provided that in no case may a quorum be less than two
persons. The action of a majority of the trustees present at any meeting at
which a quorum is present shall be the action of the Board of Trustees unless
the concurrence of a greater proportion is required for such action by the
Investment Company Act of 1940, these Bylaws or the Declaration of Trust. If a
quorum shall not be present at any meeting of trustees, the trustees present
thereat may by a majority vote adjourn the meeting from time to time without
notice other than announcement at the meeting, until a quorum shall be present.

Section 6. Regular Meetings. Regular meetings of the Board of
Trustees may be held without additional notice at such time and place as shall
from time to time be determined

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<PAGE>

by the Board of Trustees provided that notice of any change in the time or place
of such meetings shall be sent promptly to each trustee not present at the
meeting at which such change was made in the manner provided for notice of
special meetings.

Section 7. Special Meetings. Special meetings of the Board of
Trustees may be called by the Chairman or President on one day's notice to each
trustee; Special meetings shall be called by the Chairman or President or
Secretary in like manner and on like notice on the written request of two
trustees.

Section 8. Telephone Meeting. Members of the Board of Trustees
or a committee of the Board of Trustees may participate in a meeting by means of
a conference telephone or similar communications equipment if all persons
participating in the meeting can hear each other at the same time.

Section 9. Informal Actions. Any action required or permitted
to be taken at any meeting of the Board of Trustees or of any committee thereof
may be taken without a meeting, if a written consent to such action is signed by
all members of the Board or of such committee, as the case may be, and such
written consent is filed with the minutes of proceedings of the Board or
committee.

Section 10. Committees. The Board of Trustees may by
resolution passed by a majority of the entire Board appoint from among its
members an Executive Committee and other committees composed of two or more
trustees, and may delegate to such committees, in the intervals between meetings
of the Board of Trustees, any or all of the powers of the Board of Trustees in
the management of the business and affairs of the Trust.

Section 11. Action of Committees. In the absence of an
appropriate resolution of the Board of Trustees, each committee may adopt such
rules and regulations governing its proceedings, quorum and manner of acting as
it shall deem proper and desirable, provided that the quorum shall not be less
than two trustees. The committees shall keep minutes of their proceedings and
shall report the same to the Board of Trustees at the meeting next succeeding,
and any action by the committee shall be subject to revision and alteration by
the Board of Trustees, provided that no rights of third persons shall be
affected by any such revision or alteration. In the absence of any member of
such committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Trustees to act in the
place of such absent member.

Section 12. Compensation. Any trustee, whether or not he is a
salaried officer or employee of the Trust, may be compensated for his services
as trustee or as a member of a

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<PAGE>

committee of trustees, or as chairman of a committee by fixed periodic payments
or by fees for attendance at meetings or by both, and in addition may be
reimbursed for transportation and other expenses, all in such manner and amounts
as the Board of Trustees may from time to time determine.

ARTICLE IV

Notices

Section 1. Form. Notices to shareholders shall be in writing
and delivered personally or mailed to the shareholders at their addresses
appearing on the books of the Trust. Notices to trustees shall be oral or by
telephone or telegram or in writing delivered personally or mailed to the
trustees at their addresses appearing on the books of the Trust. Notice by mail
shall be deemed to be given at the time when the same shall be mailed. Subject
to the provisions of the Investment Company Act of 1940, notice to trustees need
not state the purpose of a regular or special meeting.

Section 2. Waiver. Whenever any notice of the time, place or
purpose of any meeting of shareholders, trustees or a committee is required to
be given under the provisions of the Declaration of Trust or these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to such
notice and filed with the records of the meeting, whether before or after the
holding thereof, or actual attendance at the meeting of shareholders in person
or by proxy, or at the meeting of trustees or a committee in person, shall be
deemed equivalent to the giving of such notice to such persons.

ARTICLE V

Officers

Section 1. Executive Officers. The officers of the Trust shall
be chosen by the Board of Trustees and shall include a Chairman, President, a
Secretary and a Treasurer. The Board of Trustees may, from time to time, elect
or appoint a Controller, one or more Vice Presidents, Assistant Secretaries and
Assistant Treasurers. The Board of Trustees, at its discretion, may also appoint
a trustee as Senior Chairman of the Board who shall perform and execute such
executive and administrative duties and powers as the Board of Trustees shall
from time to time prescribe. The same person may hold two or more offices,
except that no person shall be both President and Vice-President and no officer
shall execute, acknowledge or verify

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<PAGE>

any instrument in more than one capacity, if such instrument is required by law,
the Declaration of Trust or these Bylaws to be executed, acknowledged or
verified by two or more officers.

Section 2. Election. The Board of Trustees shall choose a
Chairman, President, a Secretary and a Treasurer.

Section 3. Other Officers. The Board of Trustees from time to
time may appoint such other officers and agents as it shall deem advisable, who
shall hold their offices for such terms and shall exercise powers and perform
such duties as shall be determined from time to time by the Board. The Board of
Trustees from time to time may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties.

Section 4. Compensation. The salaries or other compensation of
all officers and agents of the Trust shall be fixed by the Board of Trustees,
except that the Board of Trustees may delegate to any person or group of persons
the power to fix the salary or other compensation of any subordinate officers or
agents appointed pursuant to Section 3 of this Article V.

Section 5. Tenure. The officers of the Trust shall serve at
the pleasure of the Board of Trustees. Any officer or agent may be removed by
the affirmative vote of a majority of the Board of Trustees whenever, in its
judgment, the best interests of the Trust will be served thereby. In addition,
any officer or agent appointed pursuant to Section 3 may be removed, either with
or without cause, by any officer upon whom such power of removal shall have been
conferred by the Board of Trustees. Any vacancy occurring in any office of the
Trust by death, resignation, removal or otherwise shall be filled by the Board
of Trustees, unless pursuant to Section 3 the power of appointment has been
conferred by the Board of Trustees on any other officer.

Section 6. President and Chief Executive Officer. The
President shall be the Chief Executive Officer of the Trust, unless the Board of
Trustees designates the Chairman as Chief Executive Officer. The Chief Executive
Officer shall see that all orders and resolutions of the Board are carried into
effect. The Chief Executive Officer shall also be the Chief Administrative
Officer of the Trust and shall perform such other duties and have such other
powers as the Board of Trustees may from time to time prescribe.

Section 7. Chairman. The Chairman of the Board shall perform
and execute such duties and administrative powers as the Board of Trustees shall
from time to time prescribe.

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<PAGE>

Section 8. Senior Chairman of the Board. The Senior Chairman
of the Board, if one shall be chosen, shall perform and execute such executive
duties and administrative powers as the Board of Trustees shall from time to
time prescribe.

Section 9. Vice-President. The Vice-Presidents, in order of
their seniority, shall, in the absence or disability of the Chief Executive
Officer, perform the duties and exercise the powers of the Chief Executive
Officer and shall perform such other duties as the Board of Trustees or the
Chief Executive Officer may from time to time prescribe.

Section 10. Secretary. The Secretary shall attend all meetings
of the Board of Trustees and all meetings of the shareholders and record all the
proceedings thereof and shall perform like duties for any committee when
required. He shall give, or cause to be given, notice of meetings of the
shareholders and of the Board of Trustees, shall have charge of the records of
the Trust, including the stock books, and shall perform such other duties as may
be prescribed by the Board of Trustees or Chief Executive Officer, under whose
supervision he shall be. He shall keep in safe custody the seal of the Trust
and, when authorized by the Board of Trustees, shall affix and attest the same
to any instrument requiring it. The Board of Trustees may give general authority
to any other officer to affix the seal of the Trust and to attest the affixing
by his signature.

Section 11. Assistant Secretaries. The Assistant Secretaries
in order of their seniority, shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary and shall
perform such other duties as the Board of Trustees shall prescribe.

Section 12. Treasurer. The Treasurer, unless another officer
has been so designated, shall be the Chief Financial Officer of the Trust. He
shall have general charge of the finances and books of account of the Trust.
Except as otherwise provided by the Board of Trustees, he shall have general
supervision of the funds and property of the Trust and of the performance by the
custodian of its duties with respect thereto. He shall render to the Board of
Trustees, whenever directed by the Board, an account of the financial condition
of the Trust and of all his transactions as Treasurer. He shall cause to be
prepared annually a full and correct statement of the affairs of the Trust,
including a balance sheet and a statement of operations for the preceding fiscal
year. He shall perform all the acts incidental to the office of Treasurer,
subject to the control of the Board of Trustees.

Section 13. Assistant Treasurer. The Assistant Treasurer shall
in the absence or disability of the Treasurer, perform the duties and exercise
the powers of the Treasurer and shall perform such other duties as the Board of
Trustees may from time to time prescribe.

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ARTICLE VI

Indemnification and Insurance

Section 1. Agents, Proceedings and Expenses. For the purpose
of this Article, "agent" means any person who is or was a trustee or officer of
this Trust and any person who, while a trustee or officer of this Trust, is or
was serving at the request of this Trust as a trustee, director, officer,
partner, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise; "Trust" includes any
domestic or foreign predecessor entity of this Trust in a merger, consolidation,
or other transaction in which the predecessor's existence ceased upon
consummation of the transaction; "proceeding" means any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative; and "expenses" includes without limitation attorney's fees and
any expenses of establishing a right to indemnification under this Article.

Section 2. Actions Other Than by Trust. This Trust shall
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding (other than an action by or in the right of this Trust) by
reason of the fact that such person is or was an agent of this Trust, against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such proceeding, if it is determined that
person acted in good faith and reasonably believed: (a) in the case of conduct
in his official capacity as an agent of the Trust, that his conduct was in the
Trust's best interests and (b) in all other cases, that his conduct was at least
not opposed to the Trust's best interests and (c) in the case of a criminal
proceeding, that he had no reasonable cause to believe the conduct of that
person was unlawful. The termination of any proceeding by judgment, order or
settlement shall not of itself create a presumption that the person did not meet
the requisite standard of conduct set forth in this Section. The termination of
any proceeding by conviction, or a plea of nolo contendere or its equivalent, or
an entry of an order of probation prior to judgment, creates a rebuttable
presumption that the person did not meet the requisite standard of conduct set
forth in this Section.

Section 3. Actions by the Trust. This Trust shall indemnify
any person who was or is a party or is threatened to be made a party to any
proceeding by or in the right of this Trust to procure a judgment in its favor
by reason of the fact that that person is or was an agent of this Trust, against
expenses actually and reasonably incurred by that person in connection with the
defense or settlement of that action if that person acted in good faith, in a
manner that person believed to be in the best interests of this Trust and with
such care, including reasonable inquiry, as an ordinarily prudent person in a
like position would use under similar circumstances.

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Section 4. Exclusion of Indemnification. Notwithstanding any
provision to the contrary contained herein, there shall be no right to
indemnification for any liability arising by reason of willful misfeasance, bad
faith, gross negligence, or the reckless disregard of the duties involved in the
conduct of the agent's office with this Trust.

No indemnification shall be made under Sections 2 or 3 of this
Article:

(a) In respect of any proceeding as to which that person
shall have been adjudged to be liable on the basis
that personal benefit was improperly received by him,
whether or not the benefit resulted from an action
taken in the person's official capacity; or

(b) In respect of any proceeding as to which that person
shall have been adjudged to be liable in the
performance of that person's duty to this Trust,
unless and only to the extent that the court in which
that action was brought shall determine upon
application that in view of all the relevant
circumstances of the case, that person is fairly and
reasonably entitled to indemnity for the expenses
which the court shall determine; however, in such
case, indemnification with respect to any proceeding
by or in the right of the Trust or in which liability
shall have been adjudged by reason of the disabling
conduct set forth in the preceding paragraph shall be
limited to expenses; or

(c) Of amounts paid in settling or otherwise disposing of
a proceeding, with or without court approval, or of
expenses incurred in defending a proceeding which is
settled or otherwise disposed of without court
approval, unless the required approval set forth in
Section 6 of this Article is obtained.

Section 5. Successful Defense by Agent. To the extent that an
agent of this Trust has been successful, on the merits or otherwise, in the
defense of any proceeding referred to in Sections 2 or 3 of this Article before
the court or other body before whom the proceeding was brought, the agent shall
be indemnified against expenses actually and reasonably incurred by the agent in
connection therewith, provided that the Board of Trustees, including a majority
who are disinterested, non-party trustees, also determines that based upon a
review of the facts, the agent was not liable by reason of the disabling conduct
referred to in Section 4 of this Article.

Section 6. Required Approval. Except as provided in Section 5
of this Article, any indemnification under this Article shall be made by this
Trust only if authorized in the specific case on a determination that
indemnification of the agent is proper in the circumstances

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because the agent has met the applicable standard of conduct set forth in
Sections 2 or 3 of this Article and is not prohibited from indemnification
because of the disabling conduct set forth in Section 4 of this Article, by:

(a) A majority vote of a quorum consisting of trustees
who are not parties to the proceeding and are not
interested persons of the Trust (as defined in the
Investment Company Act of 1940);

(b) A written opinion by an independent legal counsel; or

(c) The shareholders; however, shares held by agents who
are parties to the proceeding may not be voted on the
subject matter under this Sub-Section.

Section 7. Advance of Expenses. Expenses incurred in defending
any proceeding may be advanced by this Trust before the final disposition of the
proceeding if (a) receipt of a written affirmation by the agent of his good
faith belief that he has met the standard of conduct necessary for
indemnification under this Article and a written undertaking by or on behalf of
the agent, such undertaking being an unlimited general obligation to repay the
amount of the advance if it is ultimately determined that he has not met those
requirements, and (b) a determination that the facts then known to those making
the determination would not preclude indemnification under this Article.
Determinations and authorizations of payments under this Section must be made in
the manner specified in Section 6 of this Article for determining that the
indemnification is permissible.

Section 8. Other Contractual Rights. Nothing contained in this
Article shall affect any right to indemnification to which persons other than
Trustees and officers of this Trust or any subsidiary hereof may be entitled by
contract or otherwise.

Section 9. Limitations. No indemnification or advance shall be
made under this Article, except as provided in Sections 5 or 6 in any
circumstances where it appears:

(a) That it would be inconsistent with a provision of the
Agreement and Declaration of Trust of the Trust, a
resolution of the shareholders, or an agreement in
effect at the time of accrual of the alleged cause of
action asserted in the proceeding in which the
expenses were incurred or other amounts were paid
which prohibits or otherwise limits indemnification;
or

(b) That it would be inconsistent with any condition
expressly imposed by a court in approving a
settlement.

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Section 10. Insurance. Upon and in the event of a
determination by the Board of Trustees of this Trust to purchase such insurance,
this Trust shall purchase and maintain insurance on behalf of any agent or
employee of this Trust against any liability asserted against or incurred by the
agent or employee in such capacity or arising out of the agent's or employee's
status as such to the fullest extent permitted by law.

Section 11. Fiduciaries of Employee Benefit Plan. This Article
does not apply to any proceeding against any trustee, investment manager or
other fiduciary of an employee benefit plan in that person's capacity as such,
even though that person may also be an agent of this Trust as defined in Section
1 of this Article. Nothing contained in this Article shall limit any right to
indemnification to which such a trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.

ARTICLE VII

Shares of Beneficial Interest

Section 1. Certificates. A certificate or certificates
representing and certifying the class and the full, but not fractional, number
of shares of beneficial interest owned by each shareholder in the Trust shall
not be issued except as the Board of Trustees may otherwise determine from time
to time. Any such certificate issued shall be signed by facsimile signature or
otherwise by the Chairman or President or a Vice-President and counter-signed by
the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer.

Section 2. Signature. In case any officer who has signed any
certificate ceases to be an officer of the Trust before the certificate is
issued, the certificate may nevertheless be issued by the Trust with the same
effect as if the officer had not ceased to be such officer as of the date of its
issue.

Section 3. Recording and Transfer Without Certificates. The
Trust shall have the full power to participate in any program approved by the
Board of Trustees providing for the recording and transfer of ownership of the
Trust's shares by electronic or other means without the issuance of
certificates.

Section 4. Lost Certificates. The Board of Trustees may direct
a new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Trust alleged to have been stolen, lost
or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to have been stolen, lost or destroyed, or
upon other

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<PAGE>

satisfactory evidence of such theft, loss or destruction and may in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such stolen, lost or destroyed certificate or certificates, or his
legal representative, to give the Trust a bond with sufficient surety, to the
Trust to indemnify it against any loss or claim that may be made by reason of
the issuance of a new certificate.

Section 5. Transfer of Shares. Transfers of shares of
beneficial interest of the Trust shall be made on the books of the Trust by the
holder of record thereof (in person or by his attorney thereunto duly authorized
by a power of attorney duly executed in writing and filed with the Secretary of
the Trust) (i) if a certificate or certificates have been issued, upon the
surrender of the certificate or certificates, properly endorsed or accompanied
by proper instruments of transfer, representing such shares, or (ii) as
otherwise prescribed by the Board of Trustees. Every certificate exchanged,
surrendered for redemption or otherwise returned to the Trust shall be marked
"Canceled" with the date of cancellation.

Section 6. Registered Shareholders. The Trust shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by applicable law or the Declaration of Trust.

Section 7. Transfer Agents and Registrars. The Board of
Trustees may, from time to time, appoint or remove transfer agents and or
registrars of the Trust, and they may appoint the same person as both transfer
agent and registrar. Upon any such appointment being made, all certificates
representing shares of beneficial interest thereafter issued shall be
countersigned by such transfer agent and shall not be valid unless so
countersigned.

Section 8. Stock Ledger. The Trust shall maintain an original
stock ledger containing the names and addresses of all shareholders and the
number and class of shares held by each shareholder. Such stock ledger may be in
written form or any other form capable of being converted into written form
within reasonable time for visual inspection.

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ARTICLE VIII

General Provisions

Section 1. Custodianship. Except as otherwise provided by
resolution of the Board of Trustees, the Trust shall place and at all times
maintain in the custody of a custodian (including any sub-custodian for the
custodian) all funds, securities and similar investments owned by the Trust.
Subject to the approval of the Board of Trustees, the custodian may enter into
arrangements with securities depositories, provided such arrangements comply
with the provisions of the Investment Company Act of 1940 and the rules and
regulations promulgated thereunder.

Section 2. Execution of Instruments. All deeds, documents,
transfers, contracts, agreements and other instruments requiring execution by
the Trust shall be signed by the Chairman or President or a Vice President.

Section 3. Net Asset Value. The net asset value per share
shall be determined separately as to each class of the Trust's shares, by
dividing the sum of the total market value of the class's investments and other
assets, less any liabilities, by the total outstanding shares of such class,
subject to the Investment Company Act of 1940 and any other applicable Federal
securities law or rule or regulation currently in effect.

ARTICLE IX

Amendments

The Board of Trustees shall have the power to make, alter and
repeal the Bylaws of the Trust.

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