VANGUARD MASSACHUSETTS TAX EXEMPT FUNDS, N-1A/A, 1998-10-27

VANGUARD MASSACHUSETTS TAX EXEMPT FUNDS
N-1A/A, 1998-10-27

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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. 1

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 3, 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

Item 7. 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 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.

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[INSIDE FRONT COVER]

Vanguard Massachusetts Tax-Exempt Fund

A Federal and Massachusetts State Tax-Exempt Income Mutual Fund

Contents

Introduction to Tax-Exempt Investing

1 Fund Profile 10 Share Price

3 Additional Information 11 Investing with Vanguard

4. A Word About Risk 11 Services and Account Features

4 Who Should Invest 12 Types of Accounts

4 Primary Investment Strategies 12 Buying Shares

8 The Fund and Vanguard 15 Redeeming Shares

8. Investment Adviser 15 Transferring Registration

8 Year 2000 Challenge 16 Fund and Account Updates

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

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Why Reading This Prospectus Is Important

This prospectus explains the objective, risks, and strategies of Vanguard
Massachusetts Tax-Exempt 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.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.

<PAGE>

AN INTRODUCTION TO TAX-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 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
Tax-Exempt Fund. More detailed information about these features can be found
later in the prospectus.

INVESTMENT OBJECTIVE
The Massachusetts Tax-Exempt 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 ____.

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

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 Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk is generally high for longer-term bonds.
o Income risk, which is the chance that falling interest rates will cause
the Fund's income- and thus its total return - to decline. Income risk
is generally low for longer-term bonds.
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. Call risk is generally high for
longer-term bonds.
o Credit risk, which is the chance that bond issuers will fail to repay
interest and principal in a timely manner. Credit risk should be low for
the Fund.
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.

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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.
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<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
MATxEX
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Vanguard Fund Number
Pennsylvania, since inception 168

Inception Date
December 3, 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 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 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.
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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 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--income risk, 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.
- -------------------------------------------------------------------------------

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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.

[FLAG] The Fund is subject to income risk, which is the possibility that the
Fund's dividends (income) will decline due to falling interest rates. Income
risk is generally greatest for short-term bonds and least for long-term bonds.

Changes in interest rates can affect bond prices as well as bond income.

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

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
the advisor will do a poor job of selecting securities.

<PAGE>

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 highest 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.

Under 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, such as short-term municipal
securities issued outside of Massachusetts or certain taxable fixed-income
securities, that generate income subject to Massachusetts state or federal
personal income taxes.

As a tax-advantaged investment, the Fund is particularly vulnerable to
federal and Massachusetts 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).

[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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The Fund is allowed to invest in bonds of any maturity. However, the
Fund is expected to maintain an 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.
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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 high-quality municipal 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 and options can sometimes be substantial--in part because a relatively
small price movement in a 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 and options contracts in which
the Fund acquires an interest cannot exceed 20% of total assets.
The reasons for which the Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in bonds.
o To reduce the Fund's transaction costs or add value when these
instruments are favorably priced.
In addition, the Fund may purchase tax-exempt securities on a
"when-issued" basis. With "when-issued" securities, 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 may, from time to time, take temporary defensive measures-such as
holding cash reserves without limit-that are inconsistent with the Fund's
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, the Fund may not
achieve its investment objective.

The Fund and Vanguard

The Fund is a member of The Vanguard Group, a family of more than o investment
companies with more than o distinct investment portfolios holding assets worth
more than $___ 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.
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<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 Tax-Exempt Fund.

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Plain Talk
About The Fund's Adviser
Vanguard Fixed Income Group provides investment advisory services to many
Vanguard funds as of __, 1998, the Group managed more than $__.

The managers responsible for overseeing the implementation of
the Fund's investment strategy are:
Ian A. MacKinnon, Managing Director of Vanguard; has worked in
ivestment management since 1974; primary responsibility for Vanguard's internal
fixed-income policy and strategy since 1981; B.A. Lafayette College; M.B.A.,
Pennsylvania State University.
o [Other adviser to be determined]
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The Fund has authorized the Group to choose brokers or dealers to
handle the purchase and sale of securities for the Fund, and to get the best
available price and most favorable execution from these brokers with respect to
all transactions. 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.

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 quickly implement 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 can 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 (to the extent relevant) municipal personal
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 are usually
taxable to you as long-term capital gains, no matter how long you've
owned shares in the Fund.
o 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 Fund shares will become fully taxable.
The tax information in this prospectus is provided as general
information. You should consult your tax adviser about the tax consequences
of an investment in the Fund.

- -------------------------------------------------------------------------------
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 MATxEX.
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, you will buy your shares at the day's net asset value.

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

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

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

By Telephone to . . .
open a new account
Call Vanguard Tele-Account* 24 hours a day or Client Services during business
hours to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer 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:
FRB ABA 021001088
Marine Midland Bank, New York

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
Vanguard Massachusetts Tax-Exempt Fund--168
[Account number, or temporary number for a new account]
[Registered account owner]
[Registered address]

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

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

For clients of Vanguard's Institutional Divsion:

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

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 U.S. Stock Index Funds, Vanguard Balanced Index Fund,
Vanguard International Stock Index Fund, Vanguard REIT Index Fund, Vanguard
Total International Stock Index Fund, and Vanguard Growth and Income Fund. If
you sell shares of these funds online, you will receive a redemption check at
your address of record. These funds do, however, permit online and telephone
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 19482-2900 Wayne, PA 19087-1815

Fund and Account Updates

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

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

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

Fund Financial Reports
Mailed in January and July 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.

Duration
A measure of the sensitivity of bond--and bond fund--prices to interest rate
movements. For example, if a bond has a duration of two years, its price would
fall by about 2% when interest rates rose 1 percentage point. On the other hand,
the bond's price would rise by about 2% when interest rates fell by 1 percentage
point.

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.

Face Value
The amount to be paid at maturity of a bond; the par value or principal.

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

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, and that principal will be repaid when the
bond reaches maturity.

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

Investment Grade
Bonds whose credit quality is considered by independent bond-rating agencies to
be among the highest.

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. Interest income from municipal
bonds, and therefore interest income from municipal bond funds, is generally
free from federal income taxes, as well as taxes in the state in which the bonds
were 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 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 annual and semiannual reports (when they become available) and the
SAI are incorporated by reference into (and are thus legally a part of) this
prospectus.

To receive a free copy of the latest annual or semiannual report (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 19482-2600

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

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

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

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

Information provided by the Securities and Exchange Commission (SEC) You can
review and copy information about the Fund (including the SAI) at the SEC's
Public Reference Room in Washington, 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 is 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 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

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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.

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<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

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<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.

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<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.

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<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.

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<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.

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<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.

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<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 27th day of October, 1998.

VANGUARD MASSACHUSETTS TAX-EXEMPT FUNDS

BY: Heidi Stam
-----------------------------------
(Heidi Stam)
John J. Brennan*,
Chairman and Chief Executive Officer

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: Heidi Stam Senior Chairman of the October 27, 1998
------------------------ Board and Trustee
(Heidi Stam)
John C. Bogle*

BY: Heidi Stam Chairman, Chief Executive October 27, 1998
------------------------ Officer and Trustee
(Heidi Stam)
John J. Brennan*

BY: Heidi Stam Trustee October 27, 1998
------------------------
(Heidi Stam)
Barbara B. Hauptfuhrer*

BY: Heidi Stam Trustee October 27, 1998
------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*

BY: Heidi Stam Trustee October 27, 1998
------------------------
(Heidi Stam)
Burton G. Malkiel*

BY: Heidi Stam Trustee October 27, 1998
------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*

BY: Heidi Stam Trustee October 27, 1998
------------------------
(Heidi Stam)
John C. Sawhill*

BY: Heidi Stam Trustee October 27, 1998
------------------------
(Heidi Stam)
James O. Welch, Jr.*

BY: Heidi Stam Trustee October 27, 1998
------------------------
(Heidi Stam)
J. Lawrence Wilson*

BY: Heidi Stam Treasurer and Principal October 27, 1998
------------------------ Financial Officer and
(Heidi Stam) Accounting Officer
Thomas J. Higgins*

* By Power of Attorney. See 1933 Act File No. __, __, Incorporated by Reference.