VANGUARD VARIABLE INSURANCE FUND, 485APOS, 1998-10-14

VANGUARD VARIABLE INSURANCE FUND
485APOS, 1998-10-14

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT (NO. 33-32216) UNDER THE
SECURITIES ACT OF 1933
Pre-Effective Amendment No.

Post-Effective Amendment No. 14
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 17

VANGUARD VARIABLE INSURANCE FUND

(Exact Name of Registrant as Specified in Declaration of Trust)

P.O. Box 2600
Valley Forge, PA 19482
(Address of Principal Executive Office)

Registrant's Telephone Number (610) 669-1000

R. Gregory Barton, Esquire
P.O. Box 876
Valley Forge, PA 19482

It is proposed that this filing become effective December 29, 1998, pursuant
to paragraph (a) of Rule 485.

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

We have elected to register an indefinite number of shares pursuant to Regula-
tion 24f-2 under the Investment Company Act of 1940. We filed our Rule 24f-2
notice for the period ended September 30, 1998, on December ., 1998.

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<PAGE>

VANGUARD VARIABLE INSURANCE FUND

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Front and Back Cover Pages..... Front and Back Cover Pages
Item 2. Risk/Return Summary:
Investments, Risks, and
Performance.................... Fund Profile
Item 3. Risk/Return Summary: Fee Table. Fee Table
Item 4. Investment Objectives,
Principal Investment Strategies
and Related Risks.............. A Word About Risk; Who Should
Invest; Primary Investment
Strategies
Item 5. Management's Discussion of Fund
Performance.................... Herein incorporated by reference
to Registrant's Annual Report to
Shareholders dated September 30,
1998 filed with the Securities &
Exchange Commission's EDGAR
system on . .
Item 6. Management, Organization, and
Capital Structure.............. The Fund and Vanguard; Investment
Adviser
Item 7. Shareholder Information ....... Share Price; Dividends, Capital
Gains, and Taxes; Investing with
Vanguard
Item 8. Distribution Arrangements...... Not Applicable
Item 9. Financial Highlights
Information.................... Financial Highlights
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page and Table of
Contents....................... Cover Page; Table of Contents
Item 11. Fund History................... Description of the Fund
Item 12. Description of the Fund and its
Investments and Risks.......... Investment Policies; Fundamental
Investment Limitations;
Management of the Fund;
Description of the Fund
Item 13. Management of the Fund......... Management of the Fund
Item 14. Control Persons and Principal
Holders of Securities.......... Management of the Fund
Item 15. Investment Advisory and Other
Services....................... Investment Advisory Services
Brokerage Allocation and Other
Item 16. Practices...................... Portfolio Transactions
Item 17. Capital Stock and Other
Securities..................... Description of the Fund
Item 18. Purchase, Redemption and Purchase of Shares; Redemption of
Pricing of Shares.............. Shares; Share Price
Item 19. Taxation of the Fund........... Description of the Fund
Item 20. Underwriters................... Not Applicable
Item 21. Calculation of Performance Calculation of Yield; Yield and
Data........................... Total Return
Item 22. Financial Statements........... Financial Statements
</TABLE>

i
<PAGE>

VANGUARD VARIABLE INSURANCE FUND
--------------------------------
DIVERSIFIED VALUE PORTFOLIO
MID-CAP INDEX PORTFOLIO
REIT INDEX PORTFOLIO
SHORT-TERM CORPORATE PORTFOLIO

PROSPECTUS SUPPLEMENT
DECEMBER 29, 1998

The Diversified Value, Mid-Cap Index, REIT Index and Short-Term Corporate
Portfolios are scheduled to commence operations on February 9, 1998, and are not
accepting investments prior to that date. Existing contract holders of Vanguard
Variable Annuity Plan may request an exchange of all or part of their plan
assets into one or more of the new Portfolios--to be executed on February 9,
1998--by completing a special exchange form and returning it to Vanguard
Variable Annuity Center, PO Box 1103, Valley Forge, PA 19482-1103.
Please contact a Marketing Associate at 1-800-522-5555 for details.

<PAGE>

Subject to Completion Vanguard
Preliminary Prospectus Variable Insurance
Dated October 14, 1998 Fund

Prospectus
December 29, 1998

- ----------
Money Market
Portfolio

Short-Term Corporate
Portfolio

High-Grade Bond
Portfolio

High Yield Bond
Portfolio

Balanced Portfolio

Equity Income
Portfolio

Diversified Value
Portfolio

Equity Index Portfolio

Mid-Cap Index
Portfolio

Growth Portfolio

Small Company
Growth Portfolio

International Portfolio

REIT Index Portfolio

This prospectus contains financial data for the Portfolios through the fiscal
year ended September 30, 1998.

[ART APPEARS HERE]

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.

A member of
[LOGO OF THE VANGUARD GROUP APPEARS HERE]
<PAGE>

Vanguard Variable Insurance Fund

Contents

1 An Introduction to Vanguard Variable
Insurance Fund

Portfolio Profiles

2 Money Market Portfolio
4 Short-Term Corporate Portfolio
5 High-Grade Bond Portfolio
7 High Yield Bond Portfolio
9 Balanced Portfolio
11 Equity Income Portfolio
13 Diversified Value Portfolio
14 Equity Index Portfolio
16 Mid-Cap Index Portfolio
17 Growth Portfolio
19 Small Company Growth Portfolio
21 International Portfolio
23 REIT Index Portfolio

24 A Word About Risk

24 Investment Policies, Strategies, and Risks
25 Overview of the Money Market Portfolio
26 Overview of the Bond Portfolios
30 Overview of the Balanced Portfolio
31 Overview of the Stock Portfolios

39 Turnover Rate

39 The Portfolios and Vanguard

40 Investment Advisers

41 Year 2000 Challenge

41 Dividends, Capital Gains, and Taxes

42 Financial Highlights

Glossary (inside back cover)

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Why Reading This Prospectus Is Important

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

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

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

1
An Introduction to Vanguard Variable Insurance Fund

This prospectus explains the objectives, risks, costs, and strategies of the 13
Portfolios that make up Vanguard Variable Insurance Fund ("the Fund"). The
Portfolios are mutual funds used solely as investment options for variable
annuity or variable life insurance contracts offered by insurance companies.
This means that you cannot purchase shares of the Portfolios directly, but only
through such a contract as offered by an insurance company.
After this introductory page you'll find Portfolio Profiles. Each Profile
summarizes important facts about a Portfolio, including information about its
investment objective, strategies, risks, and past performance.
For information about the cost of investing in a Portfolio, you should examine
the accompanying separate account prospectus for the variable annuity or
variable insurance contract through which Portfolio shares are offered.
The Portfolios of Vanguard Variable Insurance Fund are entirely separate from
other Vanguard mutual funds, even when they have the same investment objectives
and advisers. The Portfolios' investment performance will differ from the
performance of other Vanguard funds because of differences in the securities
held and because of administrative and insurance costs associated with separate
accounts in variable annuity and variable insurance plans.
More detailed information about the Portfolios' investment policies and
strategies is provided after the Profiles, along with information about share
pricing and Financial Highlights for each Portfolio.

PLAIN TALK ABOUT

The Costs of Investing

Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs associated with the fund's buying and selling of
securities. These costs can erode a substantial portion of the gross income
or capital appreciation a fund achieves. Even seemingly small differences in
expenses can, over time, have a dramatic effect on a fund's performance.
<PAGE>

Portfolio Profile--Money Market Portfolio

The following profile summarizes key features of Vanguard Variable Insurance
Fund-Money Market Portfolio.

INVESTMENT OBJECTIVE
The Money Market Portfolio seeks to provide current income while maintaining
liquidity and a stable share price of $1.

INVESTMENT STRATEGIES
The Portfolio invests in high-quality, short-term money market instruments, such
as securities backed by the full faith and credit of the U.S. government,
securities issued by U.S. government agencies, or obligations issued by
corporations and financial institutions.

PRIMARY RISKS
The Portfolio's total return and yield will fluctuate, as short-term interest
rates fluctuate. Such fluctuations can be wide. Falling interest rates could
cause the Portfolio's income--and thus its total return--to decline. Rising
rates could cause the Portfolio's income and total return to rise. The Portfolio
is also subject to:

. Credit risk, which is the chance that the issuer of a security will fail to
pay interest and principal in a timely manner, reducing the Portfolio's
return. Credit risk should be low for the Portfolio.
. Manager risk, which is the chance that poor security selection will cause the
Portfolio to underperform other funds with similar investment objectives.

It is important to note that the Portfolio seeks to maintain, but does not
guarantee, a stable net asset value of $1 per share. In addition, an investment
in the Portfolio is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. It is possible to lose money by
investing in the Portfolio.

BAR CHART AND PERFORMANCE TABLE
The bar chart and table below provide an indication of the risk of investing in
the Money Market Portfolio. The bar chart shows the Portfolio's performance in
each calendar year since its inception. The table shows how the Portfolio's
average annual returns for one and five fiscal years and since inception compare
to those of a broad-based securities market index. The Portfolio's returns are
net of its expenses, but do not reflect additional fees and expenses that are
deducted by the variable annuity or variable insurance plan through which you
invest. Keep in mind that the Portfolio's past performance does not indicate
how it will perform in the future.
--------------------------------------------------------------------
Annual Total Returns
--------------------------------------------------------------------

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

During the period shown in the bar chart, the highest return for a calendar
quarter was *% (quarter ending _________) and the lowest return for a quarter
was -*% (quarter ending________ ).
<PAGE>

3
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Average Annual Total Returns For Years Ended September 30, 1998
----------------------------------------------------------------------------------------
1 Year 5 Years Since Inception(*)
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Portfolio * % * % * %
Lipper Non-Government Money Market * * *
----------------------------------------------------------------------------------------
(*)May 2, 1991.
----------------------------------------------------------------------------------------
</TABLE>

FEES

As an investor in the Portfolio, you would incur various operating costs,
including management, advisory, and distribution expenses. You also would incur
fees associated with the variable annuity or variable insurance plan in which
you invest. Details on the fees you would pay are presented in the "Fee Table"
section of the prospectus for your variable annuity or variable insurance plan.
Please read that prospectus and the "Investment Advisers" section in this
prospectus.

WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
. You wish to add a money market fund to your existing holdings, which might
also include stock and bond investments.
. You are seeking income and stability of principal. An investment in the
Portfolio is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
<PAGE>

Portfolio Profile--Short-Term Corporate Portfolio

The following profile summarizes key features of Vanguard Variable Insurance
Fund--Short-Term Corporate Portfolio.

INVESTMENT OBJECTIVE
The Short-Term Corporate Portfolio seeks to provide a high level of income.

INVESTMENT STRATEGIES
The Portfolio invests primarily in high-quality, short-term and
intermediate-term bonds issued by corporations. The average weighted maturity of
the Portfolio's bonds is expected to range between 1 and 3 years. The adviser
seeks to add value by adjusting the Portfolio's average maturity within the 1-
to 3-year range and by emphasizing sectors and individual securities that appear
to offer good value.

PRIMARY RISKS
The Portfolio's total return and yield, like the overall short-term bond market,
will fluctuate within a wide range, so an investor could lose money over short
or even long periods. The Portfolio is also subject to:

. Income risk, which is the chance that falling interest rates will cause the
Portfolio's income to decline. Income risk is generally high for short-term
bonds.

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

. Credit risk, which is the chance that a bond issuer will fail to repay
interest and principal in a timely manner, reducing the Portfolio's return.
Credit risk should be low for this Portfolio.

PERFORMANCE
The Portfolio began operations on December 29, 1998, so calendar-year
information (including annual total returns and average annual total returns) is
not yet available.

FEES
As an investor in the Portfolio, you would incur various operating costs,
including management, advisory, and distribution expenses. You also would incur
fees associated with the variable annuity or variable insurance plan through
which you invest. Details on the fees you would pay are presented in the "Fee
Table" section of the prospectus for your variable annuity or variable insurance
plan. Please read that prospectus and the "Investment Advisers" section in this
prospectus.

WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:

. You wish to add a bond fund to diversify your existing holdings, which might
also include other bond, stock, and money market investments.

. You are seeking a higher level of income than that generally provided by
money market instruments.

. You are willing to accept modest fluctuations in share price.
<PAGE>

Portfolio Profile--High-Grade Bond Portfolio

The following profile summarizes key features of Vanguard Variable Insurance
Fund-High-Grade Bond Portfolio.

INVESTMENT OBJECTIVE
The High-Grade Bond Portfolio seeks to provide current income by attempting to
match the performance of the Lehman Brothers Aggregate Bond Index, a broad
market benchmark for publicly traded, investment-grade bonds.

INVESTMENT STRATEGIES
The Portfolio invests in a sample of fixed-income and mortgage-backed securities
whose characteristics as a group are very similar to key characteristics of the
Index, such as market-sector weightings, average coupon interest rates,
maturity, effective duration, and credit-quality. To boost its income, the
Portfolio substitutes short-term (1- to 4-year maturities) corporate bonds equal
to about 15% of its assets for U.S. Treasury securities with similar maturities.
The Portfolio attempts to remain fully invested at all times.

PRIMARY RISKS
The Portfolio's share price and total return will fluctuate, along with returns
for the overall bond market, within a wide range, so an investor could lose
money over short or even long periods. The Portfolio is also subject to:

. Interest rate risk, which is the chance that bond prices overall will decline
over short or even long periods due to rising interest rates.
. Prepayment risk, which is the chance that during periods of falling interest
rates, a bond issuer will repay its high-yielding bond earlier than
scheduled. Forced to invest the unanticipated proceeds at lower rates, the
Portfolio would experience a decline in income--and incur the potential for
taxable capital gains.
. Credit risk, which is the chance that a bond issuer will fail to repay
interest and principal in a timely manner, reducing the Portfolio's return.
Credit risk should be low for the Portfolio.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally low for longer-term bonds.

BAR CHART AND PERFORMANCE TABLE
The bar chart and table below provide an indication of the risk of investing in
the High-Grade Bond Portfolio. The bar chart shows the Portfolio's performance
in each calendar year since its inception. The table shows how the Portfolio's
average annual returns for one and five fiscal years and since inception compare
to those of a broad-based bond market index. The Portfolio's returns are net of
its expenses, but do not reflect additional fees and expenses that are deducted
by the variable annuity or variable insurance plan through which you invest.
Keep in mind that the Portfolio's past performance does not indicate how it will
perform in the future.
--------------------------------------------------------------
Annual Total Returns
--------------------------------------------------------------

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

During the period shown in the bar chart, the highest return for a calendar
quarter was *% (quarter ending___________ ) and the lowest return for
a quarter was -*% (quarter ending____________ ).
<PAGE>

6
Portfolio Profile--High-Grade Bond Portfolio (continued)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Average Annual Total Returns For Years Ended September 30, 1998
----------------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
High-Grade Bond Portfolio * % * % * %
Lehman Aggregate Bond Index * * *
----------------------------------------------------------------------------------------
*April 29, 1991.
----------------------------------------------------------------------------------------
</TABLE>

FEES

As an investor in the Portfolio, you would incur various operating costs,
including management, advisory, and distribution expenses. You also would incur
fees associated with the variable annuity or variable insurance plan through
which you invest. Details on the fees you would pay are presented in the "Fee
Table" section of the prospectus for your variable annuity or variable insurance
plan. Please read that prospectus and the "Investment Advisers" section in this
prospectus.

WHO SHOULD INVEST

The Portfolio may be a suitable investment for you if:
. You wish to add a low-cost, widely diversified bond fund to your existing
holdings, which might also include other bond investments as well as stock
and money market investments.
. You are seeking a higher level of income than that generally provided by
money market instruments or short-term bonds.
. You are willing to accept moderate fluctuations in share price.
<PAGE>

7
Portfolio Profile--High Yield Bond Portfolio

The following profile summarizes key features of Vanguard Variable Insurance
Fund-High Yield Bond Portfolio.

INVESTMENT OBJECTIVE
The High Yield Bond Portfolio seeks to provide a high level of income.

INVESTMENT STRATEGIES
The Portfolio invests primarily in a diversified group of high-yielding,
higher-risk corporate bonds with medium- and lower-range credit-quality ratings,
commonly known as "junk bonds." The Portfolio emphasizes higher grades of credit
quality within the high-yield bond universe, and under normal circumstances will
invest at least 80% of its assets in issues that have received B or higher
credit ratings from rating agencies or in unrated securities of comparable
quality. The Portfolio assets may not invest more than 20% of assets in
securities with credit ratings lower than B. The adviser may consider a
security's potential for capital appreciation only when it is consistent with
the objective of high and sustainable current income.

PRIMARY RISKS
The Portfolio's share price and total return will fluctuate, along with returns
for the overall high-yield bond market, within a wide range, so an investor
could lose money over short or even long periods.
The Portfolio is also subject to:
. Credit risk, which is the chance that a bond issuer will fail to repay
interest and principal in a timely manner, reducing the Portfolio's return.
Credit risk is high for this Portfolio.
. Interest rate risk, which is the chance that bond prices overall will decline
over short or even long periods due to rising interest rates.
. Manager risk, which is the chance that poor security selection will cause the
Portfolio to underperform other funds with similar investment objectives.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally low for longer-term bonds.

BAR CHART AND PERFORMANCE TABLE
The bar chart and table below provide an indication of the risk of investing in
the High Yield Bond Portfolio. The bar chart shows the Portfolio's performance
in each calendar year since the Portfolio's inception. The table shows how the
Portfolio's average annual returns for the most recent fiscal year and since
inception compare to those of a broad-based bond market index. The Portfolio's
returns are net of its expenses, but do not reflect additional fees and expenses
that are deducted by the variable annuity or variable insurance plan through
which you invest. Keep in mind that the Portfolio's past performance does not
indicate how it will perform in the future.

----------------------------------------------------------------
Annual Total Returns
----------------------------------------------------------------

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

During the period shown in the bar chart, the highest return for a calendar
quarter was *% (quarter ending_____________ ) and the lowest return for
a quarter was -*% (quarter ending____________ ).
<PAGE>

8
Portfolio Profile--High Yield Bond Portfolio (continued)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Average Annual Total Returns For Years Ended September 30, 1998
---------------------------------------------------------------------------------------
1 Year Since Inception*
---------------------------------------------------------------------------------------
<S> <C> <C>
High Yield Bond Portfolio * % * %
Lehman Aggregate Bond Index * *
---------------------------------------------------------------------------------------
*June 3, 1996.
---------------------------------------------------------------------------------------
</TABLE>

WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
. You are seeking a high level of income and are willing to take substantial
risks in pursuit of higher returns.
. You have a long-term investment horizon--more than five years.
. You consider yourself an aggressive investor.
<PAGE>

Portfolio Profile--Balanced Portfolio

The following profile summarizes key features of Vanguard Variable Insurance
Fund-Balanced Portfolio.

INVESTMENT OBJECTIVE
The Balanced Portfolio seeks to conserve capital, while providing moderate
income and moderate long-term growth of capital and income.

INVESTMENT STRATEGIES
The Balanced Portfolio invests 60% to 70% of its assets in dividend-paying
stocks of established large and medium-sized companies that, in the adviser's
opinion, are undervalued but have improving prospects. The remaining 30% to 40%
of assets are invested primarily in high-quality, long-term corporate bonds,
with some exposure to U.S. Treasury, government agency, and mortgage-backed
bonds.

PRIMARY RISKS
The Portfolio's total return, like the prices of stocks and bonds generally,
will fluctuate within a wide range, so an investor could lose money over short
or even long periods. The Portfolio is also subject to:

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

. Investment style risk, which is the chance that returns from large-
capitalization value stocks will trail returns from other asset classes or
the overall stock market. Large-capitalization value stocks tend to go
through cycles of doing better--or worse--than the stock market in general.
These periods have, in the past, lasted for as long as several years.

. Interest rate risk, which is the chance that bond prices overall will decline
over short or even long periods due to rising interest rates.

. Credit risk, which is the chance that a bond issuer will fail to repay
interest and principal in a timely manner, reducing the Portfolio's return.
Credit risk is low for the Portfolio.

BAR CHART AND PERFORMANCE TABLE
The bar chart and table below provide an indication of the risk of investing in
the Balanced Portfolio. The bar chart shows the Portfolio's performance in each
calendar year since the Portfolio's inception. The table shows how the
Portfolio's average annual returns for one and five fiscal years and since
inception compare to those of both the Standard & Poor's 500 Index and a
composite index weighted 65% in the S&P 500 Index and 35% in a broad bond market
index. The Portfolio's returns are net of its expenses, but do not reflect
additional fees and expenses that are deducted by the variable annuity or
variable insurance plan through which you may invest in the Portfolio. Keep in
mind that the Portfolio's past performance does not indicate how it will perform
in the future.

-------------------------------------------------------------------
Annual Total Returns
-------------------------------------------------------------------

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

During the period shown in the bar chart, the highest return for a calendar
quarter was *% (quarter ending___________ ) and the lowest return for a quarter
was -*% (quarter ending______________ ).
<PAGE>

10
Portfolio Profile--Balanced Portfolio (continued)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Average Annual Total Returns For Years Ended September 30, 1998
--------------------------------------------------------------------------------------
1 Year 5 Years Since Inception+
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Portfolio * % * % * %
S&P 500 Index * % * % *
Composite Stock/Bond Index++ * * *
--------------------------------------------------------------------------------------
+May 23, 1991.
++Weighted 65% in the S&P 500 Index and 35% in the Lehman Long
Corporate AA or Better Bond Index.
--------------------------------------------------------------------------------------
</TABLE>

FEES

As an investor in the Portfolio, you would incur various operating costs,
including management, advisory, and distribution expenses. You also would incur
fees associated with the variable annuity or variable insurance plan through
which you invest. Details on the fees you would pay are presented in the "Fee
Table" section of the prospectus for your variable annuity or variable insurance
plan. Please read that prospectus and the "Investment Advisers" section in this
prospectus.

WHO SHOULD INVEST

The Portfolio may be a suitable investment for you if:
. You wish to add a balanced fund to your existing holdings, which might also
include other stock and bond or money market investments.
. You want a simple way to invest in a relatively fixed percentage of stocks
and bonds.
. You are seeking moderate growth of your capital over the long term--at least
five years--while at the same time conserving your capital.
. You are seeking a moderate level of income.
<PAGE>

Portfolio Profile--Equity Income Portfolio

The following profile summarizes key features of Vanguard Variable Insurance
Fund-Equity Income Portfolio.

INVESTMENT OBJECTIVE
The Equity Income Portfolio seeks to provide a relatively high level of current
income and the potential for long-term growth of capital and income.

INVESTMENT STRATEGIES
The Portfolio invests primarily in common stocks of well-established companies
that pay relatively high levels of dividend income and have the potential for
capital appreciation. The adviser selects stocks whose dividend yields relative
to the stock market are high in comparison with historical ranges. Such stocks
are often considered to be "value" stocks. In addition, the adviser looks for
companies committed to paying dividends consistently.

PRIMARY RISKS
The Portfolio's total return, like stock prices generally, will fluctuate within
a wide range, so an investor could lose money over short or even long periods.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices. The Portfolio is also subject to:

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

. Investment style risk, which is the chance that returns from high-yielding
value stocks will trail returns from other asset classes or the overall stock
market. Value stocks tend to go through cycles of doing better--or worse--
than the stock market in general. These periods have, in the past, lasted for
as long as several years.

BAR CHART AND PERFORMANCE TABLE
The bar chart and table below provide an indication of the risk of investing in
the Equity Income Portfolio. The bar chart shows the Portfolio's performance in
each calendar year since its inception. The table shows how the Portfolio's
average annual returns for one and five fiscal years and since inception compare
to those of a broad-based stock market index. The Portfolio's returns are net of
its expenses, but do not reflect additional fees and expenses that are deducted
by the variable annuity or variable insurance plan through which you invest.
Keep in mind that the Portfolio's past performance does not indicate how it will
perform in the future.

---------------------------------------------------------------------
Annual Total Returns
---------------------------------------------------------------------

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

During the period shown in the bar chart, the highest return for a calendar
quarter was *% (quarter ending___________ ) and the lowest return for a quarter
was -*% (quarter ending________________ ).
<PAGE>

12
Portfolio Profile--Equity Income Portfolio (continued)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Average Annual Total Returns For Years Ended September 30, 1998
----------------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Income Portfolio * % * % * %
S&P 500 Index * * *
----------------------------------------------------------------------------------------
*June 7, 1993.
----------------------------------------------------------------------------------------
</TABLE>
FEES

WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:

. You wish to add a value stock fund to your existing holdings, which could
include other stock investments as well as bond and money market investments.
. You want a relatively high level of dividend income and the potential for
long-term capital appreciation.
. You are seeking to invest in a category of stocks that historically has had
below-average price volatility.
<PAGE>

13
Portfolio Profile--Diversified Value Portfolio

The following profile summarizes key features of Vanguard Variable Insurance
Fund-Diversified Value Portfolio.

INVESTMENT OBJECTIVE
The Diversified Value Portfolio seeks to provide long-term growth of capital and
a moderate level of dividend income.

INVESTMENT STRATEGIES
The Portfolio invests primarily in common stocks of large and medium-sized
companies whose stocks are considered by the adviser to be undervalued and out
of favor with investors. Such "value" stocks typically have above-average
dividend yields and below-average prices in relation to such financial measures
as earnings, book value, and cash flow.

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

. Investment style risk, which is the chance that returns from value stocks
will trail returns from other asset classes or the overall stock market.
Value stocks tend to go through cycles of doing better--or worse--than the
stock market in general. These periods have, in the past, lasted for as long
as several years.

PERFORMANCE
The Portfolio began operations on December 29, 1998, so calendar-year
information (including annual total returns and average annual total returns) is
not yet available.

WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:

. You wish to add a stock fund to your existing holdings, which could include
other stock investments as well as bond and money market investments.

. You want a stock fund employing a value approach in seeking long-term growth
in capital as well as a moderate level of dividend income.
<PAGE>

Portfolio Profile--Equity Index Portfolio

The following profile summarizes key features of Vanguard Variable Insurance
Fund-Equity Index Portfolio.

INVESTMENT OBJECTIVE
The Equity Index Portfolio seeks to match the performance of the Standard &
Poor's 500 Composite Stock Price Index, which is made up primarily of stocks of
large U.S. companies.

INVESTMENT STRATEGIES
The Portfolio employs a "passively" managed--or index--approach, by holding all
of the stocks in the S&P 500 Index in roughly the same proportion to their
weighting in the Index. Stocks represented in the Index, and thus the
Portfolio's holdings, are weighted according to each stock's market
capitalization (shares outstanding x share price). For example, if a specific
stock represented 2% of the S&P 500 Index, the Portfolio would invest 2% of its
assets in that company.

. Investment style risk, which is the chance that returns from large-
capitalization stocks will trail returns from other asset classes or the
overall stock market. Although the S&P 500 Index represents about 75% of the
market value of the entire U.S. stock market, large-capitalization stocks
tend to go through cycles of doing better--or worse--than the stock market in
general. These periods have, in the past, lasted for as long as several
years.

Keep in mind that an index fund has operating expenses; a market index does
not. Therefore, an index fund--while expected to track its target index as
closely as possible--will not be able to match the performance of the index
exactly.

BAR CHART AND PERFORMANCE TABLE
The bar chart and table below provide an indication of the risk of investing in
the Equity Index Portfolio. The bar chart shows the Portfolio's performance in
each calendar year since its inception. The table shows how the Portfolio's
average annual returns for one and five fiscal years and since inception compare
to those of a broad-based stock market index. The Portfolio's returns are net of
its expenses, but do not reflect additional fees and expenses that are deducted
by the variable annuity or variable insurance plan through which you invest.
Keep in mind that the Portfolio's past performance does not indicate how it will
perform in the future.

----------------------------------------------------------------------
Annual Total Returns
----------------------------------------------------------------------

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

During the period shown in the bar chart, the highest return for a calendar
quarter was *% (quarter ending____________ ) and the lowest return for a
quarter was -*% (quarter ending_____________ ).
<PAGE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Average Annual Total Returns For Years Ended September 30, 1998
----------------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Index Portfolio * % * % * %
S&P 500 Index * * *
----------------------------------------------------------------------------------------
*April 29, 1991.
----------------------------------------------------------------------------------------
</TABLE>

WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
. You wish to add a low-cost, large-capitalization stock index fund to your
existing holdings, which could include other stock investments as well as
bond and money market investments.

. You want the potential for long-term capital appreciation, with a moderate
level of dividend income.
<PAGE>

Portfolio Profile--Mid-Cap Index Portfolio

The following profile summarizes key features of Vanguard Variable Insurance
Fund-Mid-Cap Index Portfolio.

INVESTMENT OBJECTIVE
The Mid-Cap Index Portfolio seeks to match the performance of the Standard &
Poor's MidCap 400 Index, which is made up of stocks of medium-size U.S.
companies.

INVESTMENT STRATEGIES
The Portfolio employs a "passively" managed--or index--approach, by holding the
stocks in the S&P MidCap 400 Index in roughly the same proportion to their
weighting in the Index. Stocks represented in the Index, and thus the
Portfolio's holdings, are weighted according to each stock's
market-capitalization (shares outstanding x share price). For example, if a
specific stock represented 5% of the S&P MidCap 400 Index, the Portfolio would
invest 5% of its assets in that company.

. Investment style risk, which is the chance that returns from mid-
capitalization stocks will trail returns from other asset classes or the
overall stock market. Mid-capitalization stocks tend to go through cycles of
doing better-or worse--than the stock market in general. These periods have,
in the past, lasted for as long as several years.

PERFORMANCE
The Portfolio began operations on December 29, 1998, so calendar-year
information (including annual total returns and average annual total returns) is
not yet available.

WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:

. You wish to add a low-cost, mid-capitalization stock index fund to your
existing holdings, which could include other stock investments as well as
bond and money market investments.

. You want the potential for long-term capital appreciation.
<PAGE>

17
Portfolio Profile--Growth Portfolio

The following profile summarizes key features of Vanguard Variable Insurance
Fund-Growth Portfolio.

INVESTMENT OBJECTIVE
The Growth Portfolio seeks to provide long-term growth of capital.

INVESTMENT STRATEGIES
The Portfolio invests in large-capitalization stocks of high-quality, seasoned
U.S. companies with records of superior growth. The Portfolio chooses companies
with strong positions in their markets, reasonable financial strength, and low
sensitivity to changing economic conditions.

. Investment style risk, which is the chance that returns from large-
capitalization growth stocks will trail returns from other asset classes or
the overall stock market. Large-cap growth stocks tend to go through cycles
of doing better--or worse--than the stock market in general. These periods
have, in the past, lasted for as long as several years.

. Concentration risk, which is the chance that the Portfolio's performance may
be hurt disproportionately by the poor performance of relatively few stocks.

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

BAR CHART AND PERFORMANCE TABLE
The bar chart and table below provide an indication of the risk of investing in
the Growth Portfolio. The bar chart shows the Portfolio's performance in each
calendar year since its inception. The table shows how the Portfolio's average
annual returns for one and five fiscal years and since inception compare to
those of a broad-based stock market index. The Portfolio's returns are net of
its expenses, but do not reflect additional fees and expenses that are deducted
by the variable annuity or variable insurance plan through which you invest.
Keep in mind that the Portfolio's past performance does not indicate how it will
perform in the future.

-----------------------------------------------------------------------
Annual Total Returns
-----------------------------------------------------------------------

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

During the period shown in the bar chart, the highest return for a calendar
quarter was *% (quarter ending___________ ) and the lowest return for a quarter
was -*% (quarter ending__________ ).
<PAGE>

18
Portfolio Profile--Growth Portfolio (continued)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Average Annual Total Returns For Years Ended September 30, 1998
----------------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Portfolio *% *% *%
S&P 500 Index * * *
----------------------------------------------------------------------------------------
*June 7, 1993.
----------------------------------------------------------------------------------------
</TABLE>

WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
. You wish to add a fund emphasizing large-capitalization growth stocks to your
existing holdings, which could include other stock investments as well as
bond and money market investments.
. You are seeking growth of capital over the long term--at least five years.
. You are not looking for current income.
. You are willing to assume the above-average risk associated with investing in
a concentrated portfolio of growth stocks.
<PAGE>

19
Portfolio Profile--Small Company Growth Portfolio
The following profile summarizes key features of Vanguard Variable Insurance
Fund-Small Company Growth Portfolio.

INVESTMENT OBJECTIVE
The Small Company Growth Portfolio seeks to provide long-term growth of capital.

INVESTMENT STRATEGIES
The Portfolio invests primarily in stocks of smaller companies that appear to
offer favorable prospects for growth and price appreciation. These stocks are
expected to provide only minimal dividend income. The Portfolio's investment
adviser places stocks in three categories: (1) "Core" growth stocks, generally
representing 50%-80% of assets, are companies with demonstrated records of
growth and strong market positions based on a proprietary product or service;
(2) "Pioneers," 10%-25% of assets, generally have unique technology or other
innovations that may lead to new products or new markets; and (3) "Special
values," 10%-25% of assets, are companies whose stock prices are undervalued
given the adviser's view of their prospects over the next several years.

PRIMARY RISKS
The Portfolio's total return, like stock prices generally, will fluctuate within
a wide range, so an investor could lose money over short or even extended
periods. Stock markets tend to move in cycles, with periods of rising prices and
periods of falling prices. The Portfolio is also subject to:
. Investment style risk, which is the chance that returns from small-
capitalization growth stocks will trail returns from other asset classes or
the overall stock market. Small-cap growth stocks tend to go through cycles
of doing better--or worse--than the stock market in general. These periods
have, in the past, lasted for as long as several years.
. Manager risk, which is the chance that poor security selection will cause the
Portfolio to underperform other funds with similar investment objectives.

BAR CHART AND PERFORMANCE TABLE
The bar chart and table below provide an indication of the risk of investing in
the Small Company Growth Portfolio. The bar chart shows the Portfolio's
performance in each calendar year since its inception. The table shows how the
Portfolio's average annual returns for one fiscal year and since inception
compare to those of a broad-based stock market index. The Portfolio's returns
are net of its expenses, but do not reflect additional fees and expenses that
are deducted by the variable annuity or variable insurance plan through which
you invest. Keep in mind that the Portfolio's past performance does not indicate
how it will perform in the future.

---------------------------------------------------------------------
Annual Total Returns
---------------------------------------------------------------------

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

During the period shown in the bar chart, the highest return for a calendar
quarter was *% (quarter ending__________ ) and the lowest return for a quarter
was -*% (quarter ending_________ ).
<PAGE>

Portfolio Profile--Small Company Growth Portfolio (continued)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Average Annual Total Returns For Years Ended September 30, 1998
----------------------------------------------------------------------------------------
1 Year Since Inception*
----------------------------------------------------------------------------------------
<S> <C> <C>
Small Company Growth Portfolio * % * %
S&P 500 Index * *
----------------------------------------------------------------------------------------
*June 3, 1996.
----------------------------------------------------------------------------------------
</TABLE>

WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
. You wish to add a small-capitalization growth stock fund to your existing
holdings, which could include other stock investments as well as bond and
money market investments.
. You are seeking growth of capital over the long term--at least five years.
. You are not looking for current income.
. You are willing to assume the above-average risk associated with investing
in small-cap growth stocks.
<PAGE>

21
Portfolio Profile--International Portfolio

The following profile summarizes key features of Vanguard Variable Insurance
Fund-International Portfolio.

INVESTMENT OBJECTIVE
The International Portfolio seeks to provide long-term growth of capital.

INVESTMENT STRATEGIES
The Portfolio invests in the stocks of seasoned companies located outside of the
United States. In selecting stocks, the investment adviser evaluates foreign
markets around the world. Within markets regarded as having favorable investment
climates, the adviser selects companies with above-average growth potential
whose stocks sell at reasonable prices.

PRIMARY RISKS
The Portfolio's total return, like stock prices generally, will fluctuate within
a wide range, so an investor could lose money over short or even long periods.
In addition to facing the same risks as U.S. stock funds, the Portfolio is
subject to the risks associated with foreign investing. Among these are:
. Currency risk, which is the chance that returns will be hurt by a rise in the
value of the U.S. dollar versus foreign currencies.
. Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
. Manager risk, which is the chance that poor security selection will cause the
Portfolio to underperform other funds with similar investment objectives.

BAR CHART AND PERFORMANCE TABLE
The bar chart and table below provide an indication of the risk of investing in
the International Portfolio. The bar chart shows the Portfolio's performance in
each calendar year since the Portfolio's inception. The table shows how the
Portfolio's average annual returns for one fiscal year and since inception
compare to those of a broad-based international stock market index. The
Portfolio's returns are net of its expenses, but do not reflect additional fees
and expenses that are deducted by the variable annuity or variable insurance
plan through which you invest. Keep in mind that the Portfolio's past
performance does not indicate how it will perform in the future.

-----------------------------------------------------
Annual Total Returns
-----------------------------------------------------

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

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

Portfolio Profile--International Portfolio (continued)

---------------------------------------------------------------------------
Average Annual Total Returns For Years Ended September 30, 1998
---------------------------------------------------------------------------
1 Year Since Inception*
---------------------------------------------------------------------------
International Portfolio . % . %
MSCI EAFE Index . .
---------------------------------------------------------------------------
*June 3, 1994.
---------------------------------------------------------------------------

WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
. You wish to add an international stock fund to your existing holdings, which
could include other stock investments as well as bond and money market
investments.
. You are seeking growth of capital over the long term--at least five years.
. You are not looking for current income.
. You are willing to assume the additional risks (including currency and country
risk) associated with international stocks.
<PAGE>

23
Portfolio Profile--REIT Index Portfolio

The following profile summarizes key features of Vanguard Variable Insurance
Fund-REIT Index Portfolio.

INVESTMENT OBJECTIVE
The REIT Index Portfolio seeks to provide a high level of income and moderate
long-term growth of capital.

INVESTMENT STRATEGIES
The Portfolio invests in the stocks of real estate investment trusts (REITs),
which own office buildings, hotels, shopping centers, and other properties. The
Portfolio employs a "passively" managed--or index--approach, by holding a mix of
securities that seeks to match the performance of the Morgan Stanley REIT Index,
a benchmark of U.S. property trusts. Holdings of the Index, and thus of the
Portfolio, are weighted according to each stock's market capitalization (shares
outstanding x share price). The Portfolio holds each stock found in the Index in
approximately the same proportion as represented in the Index itself. For
example, if a specific stock represented 2% of the Morgan Stanley REIT Index,
the Portfolio would invest 2% of its assets in that stock.

PRIMARY RISKS
The Portfolio's total return, like returns on REITs generally, will fluctuate
within a wide range, so an investor could lose money over short or even extended
periods. Stock markets tend to move in cycles, with periods of rising prices and
periods of falling prices. The Portfolio is also subject to:
. Real estate industry risk, which is the chance that REIT share prices or the
market value of underlying properties could fall.
. Interest rate risk, which is the chance that increases in interest rates could
hurt REIT performance.
. Income risk, which is the chance that dividends paid by REITs will decline.

PERFORMANCE
The Portfolio began operations on December 29, 1998, so calendar-year
information (including annual total returns and average annual total returns) is
not yet available.

WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
. You are looking for a simple way to gain indirect exposure to the real estate
market to further diversify your existing holdings, which could include other
stock, bond, and money market investments.
. You want a stock fund that offers the potential for above-average dividend
income. (Historically, the securities that make up the Index have provided
higher dividend income than those in the S&P 500 Index.)
. You are seeking modest growth of capital over the long term--at least five
years.
<PAGE>

24
================================================================================
A Word About Risk

This prospectus describes the risks you would face as an investor in any of the
Portfolios of Vanguard Variable Insurance 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 one or
more of the Portfolios, you should also take into account your personal
tolerance for the daily fluctuations of the stock market.
Look for this [GRAPHIC APPEARS HERE] 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.
================================================================================

PLAIN TALK ABOUT

Derivatives

A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.

PLAIN TALK ABOUT

Repurchase Agreements

A means of investing money for a short period, repurchase agreements are
contracts in which a U.S. commercial bank or securities dealer sells government
securities and agrees to repurchase them on a specific date (normally the next
business day) and at a specific price.

Investment Policies, Strategies, and Risks

Each of the Portfolios follows a distinct set of investment policies and
strategies. This section explains the policies and strategies used by the
investment advisers in pursuit of each Portfolio's objective, and how the
advisers implement these policies and strategies. In addition, this section
discusses important risks faced by investors in the Portfolios.
The section begins with policy information that applies to all the Portfolios.
Next is information specific to the Money Market Portfolio, the three bond
Portfolios, the Balanced Portfolio, and the eight Portfolios that invest in
stocks.
The Fund's Board of Trustees oversees the management of the Portfolios, and
may change the investment strategies in the interest of shareholders.
Note: The Portfolios' advisers do not consider tax consequences in deciding
whether to buy or sell securities.

Investing in Derivatives
Each of the Portfolios may invest in some form of derivatives. You will find
more detailed information about the Portfolios' investments in derivatives
throughout the following sections.
None of the Portfolios will use derivatives for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment.

Investing in Repurchase Agreements
The Portfolios may invest in repurchase agreements, which carry several risks.
For instance, if the seller is unable to repurchase the securities as promised,
a Portfolio may experience a loss when trying to sell the securities to another
party. Or, if the seller becomes insolvent, a bankruptcy court may determine
that the securities do not belong to the Portfolio and order that they be sold
to pay off the seller's debts. The Portfolios' advisers attempt to control these
risks through careful security selection and monitoring.

Temporary Defensive Measures
The Portfolios (except the Money Market Portfolio) may, from time to time, take
temporary defensive measures--such as holding cash reserves
<PAGE>

without limit--that are inconsistent with the Portfolios' investment strategies
in response to adverse market, economic, political, or other conditions. In
taking such measures, the Portfolios may not achieve their investment
objectives.

OVERVIEW OF THE MONEY MARKET PORTFOLIO
The Portfolio's primary policy is to invest in very high-quality money market
instruments--also known as cash reserves or cash equivalents. These instruments
are considered short-term (that is, they mature in 13 months or less). The
Portfolio will maintain an average maturity of 90 days or less.

[GRAPHIC APPEARS HERE] The Portfolio is subject to income risk, which is the
possibility that income will decline because of falling
interest rates. Because the Portfolio's income is based
on short-term interest rates--which can fluctuate
significantly over short periods--income risk is expected
to be high.

To illustrate how the yields of short-term securities can fluctuate as
interest rates rise and fall, the following chart shows month-end yields for
short-term securities (as represented by 3-month Treasury bills) and long-term
securities (as represented by 30-year U.S. Treasury bonds) over the past five
years.

PLAIN TALK ABOUT

Money Market
Instruments

The term "money market instruments" refers to a variety of short-term
investments, usually with a maturity of 13 months or less. Some common types are
Treasury bills and notes, which are securities issued by the U.S. government;
commercial paper, which is a promissory note issued by a large company or
financial firm; banker's acceptances, which are credit instruments guaranteed by
a bank; and negotiable certificates of deposit, which are issued by banks in
large denominations.

----------------------------------------------------------------------
Short-Term and Long-Term Month-End Yields (1994-1998)
----------------------------------------------------------------------

WORM CHART TO COME

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

Security Selection
Vanguard Fixed Income Group, adviser to the Money Market Portfolio, selects
high-quality money market instruments. The Portfolio invests in certificates of
deposit, banker's acceptances, commercial paper, and other money market
securities rated Prime-1 by Moody's Investors Service, Inc., or A-1 by Standard
& Poor's Corporation. Securities that are unrated must be issued by a
corporation with a debt rating of Aa3 or better by Moody's or AA- or better by
Standard & Poor's. The Portfolio also invests in short-term corporate, state,
and municipal obligations rated Aa3 or better by Moody's or AA- or better by
Standard & Poor's, and in securities issued by the U.S. Treasury and federal
government agencies, such as the Federal Home Loan Bank.

[GRAPHIC APPEARS HERE] The Portfolio is subject to manager risk, which is the
possibility that the adviser will do a poor job of
selecting securities.

The Money Market Portfolio may also invest in Eurodollar and Yankee
obligations, which are certificates of deposit issued in U.S. dollars by foreign
banks and foreign branches of U.S. banks. Eurodollar and Yankee obligations have
the same risks, such as income risk and credit risk, as U.S. money market
instruments. Other risks of Eurodollar and Yankee obligations include the
possibility that a foreign government will not let U.S. dollar-denominated
assets leave the country; the possibility that the banks that issue Eurodollar
obligations may not be subject to the same regulations as
<PAGE>

U.S. banks; and the possibility that adverse political or economic developments
will affect investments in a foreign country. Before the Portfolio's adviser
selects a Eurodollar or Yankee obligation, however, any foreign issuer undergoes
the same credit-quality analysis and tests of financial strength as the issuers
of domestic securities.

[GRAPHIC APPEARS HERE] The Portfolio is subject, to a limited extent, to credit
risk, which is the possibility that the issuer of a
security will fail to repay interest and principal in a
timely manner.

PLAIN TALK ABOUT

Types of Bonds

Bonds are issued (sold) by many sources: Corporations issue corporate bonds; the
federal government issues U.S. Treasury bonds; agencies of the federal
government issue agency bonds; and mortgage holders issue "mortgage-backed"
bonds such as those of the Government National Mortgage Association (GNMA). Each
issuer is responsible for paying back the bond's initial value as well as
periodic interest payments.

PLAIN TALK ABOUT

Bonds and Interest Rates

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

In addition, the Portfolio may invest up to 10% of its net assets in illiquid
securities. Illiquid securities are securities that cannot be resold or
converted into cash.
The Portfolio also may invest, to a limited extent, in floating-rate
securities, which are traditional types of derivatives. As the name implies, a
floating-rate security's interest rate fluctuates periodically. Generally, the
security's yield is based on a U.S. dollar-based interest rate benchmark such as
the Federal Funds Rate, the 90-day Treasury bill rate, or the London Interbank
Offered Rate (LIBOR). These securities reset their yields on a periodic basis
and are closely correlated to changes in money market interest rates.

OVERVIEW OF THE BOND PORTFOLIOS
The Short-Term Corporate, High-Grade Bond, and High Yield Bond Portfolios each
seek to provide a high level of income consistent with their respective
credit-quality and maturity guidelines. The Portfolios invest in various types
of fixed-income securities (or bonds).

[GRAPHIC APPEARS HERE] Each of the three Portfolios is subject to varying levels
of interest rate risk--the chance that bond prices will
fall when interest rates rise.

In general, interest rate fluctuations widen as a bond portfolio's average
maturity lengthens. The Short-Term Corporate Portfolio is expected to have a
comparatively low level of interest rate risk. The High-Grade Bond and High
Yield Bond Portfolios are expected to have a moderate level of interest rate
risk because their holdings have an intermediate-term average maturity.
Each of the Portfolios is also subject to credit risk--the chance that its
share price could decline if issuers of the bonds it holds experience financial
difficulties. Credit risk is expected to be low for the Short-Term Corporate and
High-Grade Bond Portfolios because they invest primarily in bonds with high
credit-quality ratings. Credit risk is expected to be high for the High Yield
Bond Portfolio because it invests primarily in bonds issued by corporations with
relatively low credit-quality ratings.
In addition, each of the bond Portfolios is subject to income risk--the chance
that dividends paid from net interest income will decline because of a decline
in overall interest rates. In general, income risk is highest for short-term
bond funds and lowest for long-term bond funds. Accordingly, the Short-Term
Corporate Portfolio is expected to have a relatively high level of income risk.
<PAGE>

PLAIN TALK ABOUT

Credit Quality

A bond's credit quality depends on the issuer's ability to pay interest on
the bond and, ultimately, to repay the debt. The lower the rating by one of
the independent bond-rating agencies (for example, Moody's or Standard &
Poor's), the greater the chance (in the rating agency's opinion) that the
bond issuer will default, or fail to meet its payment obligations. Bonds
rated in one of the four highest rating categories are considered "invest-
ment-grade." All things being equal, the lower a bond's credit rating, the
higher its yield should be to compensate investors for assuming additional
risk.

Short-Term Corporate Portfolio

The Portfolio invests primarily in a variety of high-quality--and, to a lesser
extent, medium-quality--fixed-income securities. The Portfolio maintains an
average maturity of between 1 and 3 years. Depending on the outlook for interest
rates, the adviser may adjust the average maturity of the Portfolio's holdings
within the target range. The adviser also may attempt to improve the Portfolio's
total return by emphasizing sectors and individual securities that appear to
offer good value.

[GRAPHIC APPEARS HERE]
The Portfolio is subject to manager risk, which is the possibility that the
adviser will do a poor job of selecting securities.

At least 70% of the Portfolio's assets will be invested in high-grade bonds,
which are listed in one of the top three rating categories by an independent
bond-rating agency. The remaining assets may be invested in fixed-income
securities listed in the fourth-highest rating category by an independent
agency. If the credit rating of a security owned by the Portfolio is lowered,
the Portfolio may continue to hold the security if the adviser considers it
advantageous to do so.

Although the Portfolio invests primarily in short- and intermediate-term bonds
issued by corporations, it also may invest in the following types of
investment-grade securities:

* Bonds issued by the U.S. Treasury and U.S. government agencies.

* Bonds issued by state and local governments and their agencies.

* Bonds of foreign issuers, so long as the securities are denominated in U.S.
dollars. To the extent that it owns foreign bonds, the Portfolio is subject to
(1) country risk, which is the possibility that political events (such as a
war), financial problems (such as government default), or natural disasters
(such as an earthquake) will weaken a country's economy and cause investments
in that country to lose money; and (2) currency risk, which is the possibility
that Americans investing abroad could lose money because of a rise in the
value of the U.S. dollar versus foreign currencies.

* Bank obligations, including certificates of deposit and banker's acceptances.

* Asset-backed securities--that is, bonds that represent partial ownership in
pools of consumer or commercial loans, such as mortgage loans, automobile
loans, or credit-card balances. The value of asset-backed securities
ultimately depends on repayments by the underlying borrowers. A primary risk
of asset-backed securities is that it is difficult to predict how prepayments
by borrowers will affect the maturity of such investments.

* Commercial paper, a type of IOU issued by corporations.

The Portfolio may also invest in bond futures and options contracts and other
types of traditional derivatives. Losses (or gains) involving futures and
options contracts 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. Similar risks exist for other types of derivatives.
The Portfolio will not use any derivatives for speculative purposes or to
magnify the gains or losses of an investment. The value of all derivatives in
which the Portfolio acquires an interest cannot exceed 20% of total assets. The
reasons for which the Portfolio will invest in futures, options, and other
derivatives are:

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

* To reduce the Portfolio's transaction costs or add value when these
instruments are favorably priced.
<PAGE>

High-Grade Bond Portfolio

The High-Grade Bond Portfolio invests in a statistically selected sample of
fixed-income and mortgage-backed securities in an attempt to parallel the
performance of the Lehman Brothers Aggregate Bond Index. This Index is a widely
recognized benchmark for the U.S. bond market, and consists of more than 5,500
government, corporate, and mortgage-backed securities. The statistical sampling
technique is used because it would be impractical and too costly to actually own
all of the securities that make up the Index.

The Lehman Aggregate Bond Index comprises four major types of taxable bonds in
the United States: U.S. Treasury and agency securities; corporate bonds; foreign
bonds denominated in U.S. dollars; and mortgage-backed securities. As of
September 30, 1998, these four types of bonds represented the following
proportions of the Portfolio's market value:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Proportion of Portfolio's
Type of Bond Market Value
--------------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and agency securities *%
Corporate bonds *
Foreign U.S.-dollar obligations *
Mortgage-backed securities *
--------------------------------------------------------------------------------------
</TABLE>

Since 1991, the effective average-weighted maturity of the Portfolio has
ranged from a high of 13.0 years to a low of 7.4 years; it was x.x years on
September 30, 1998. The Portfolio attempts to remain fully invested in bonds at
all times.

In attempting to parallel the Index's performance, the adviser selects
securities that as a group have characteristics similar to those of the Index.
These characteristics include market-sector weightings, average coupon interest
rates, maturity, effective duration, and credit quality.

To enhance the Portfolio's return, the adviser uses a "corporate substitution"
strategy. This means that the Portfolio invests about 15% more of its assets in
short-term, high-quality corporate bonds (1- to 4-year maturities) than does the
Index, while holding about 15% less of its assets in short-term Treasury
securities.

The corporate substitution policy increases the Portfolio's overall credit
risk, but the adviser attempts to mitigate the additional risk by widely
diversifying the corporate bond holdings. Overall, the Portfolio's credit risk
is expected to be low.

The Portfolio may also invest in bond futures and options contracts and other
types of traditional derivatives. Losses (or gains) involving futures and
options contracts 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. Similar risks exist for other types of derivatives.
The Portfolio will not use any derivatives for speculative purposes or to
magnify the gains or losses of an investment. The value of all derivatives
contracts in which the Portfolio acquires an interest cannot exceed 20% of total
assets. The reasons for which the Portfolio may invest in futures, options, and
other derivatives are:

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

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

Mortgage-backed Securities and Prepayment Risk

The Portfolio invests a substantial portion of its assets in mortgage-backed
securities, which represent partial ownership in pools of mortgage loans. Unlike
ordinary bonds, which usually repay principal upon maturity, mortgage-backed
securities pay some principal along with interest as part of their periodic
payments. Because it holds mortgage-backed securities, the Portfolio is subject
to prepayment risk--the chance that, when interest rates are falling, homeowners
and other mortgage borrowers will repay their loans earlier than scheduled by
refinancing at lower rates. Because of prepayment risk, mortgage-backed
securities generally do not enjoy as large a gain in market value as do other
bonds during periods of falling interest rates. Also, when prepayments occur the
Portfolio will have to reinvest the proceeds at generally lower rates, thereby
reducing its income. Conversely, when interest rates rise, borrowers are less
likely to prepay mortgage loans, so the market value of mortgage-backed
securities may decline more than the market values of ordinary bonds. To
compensate investors for these risks, mortgage-backed securities generally offer
higher yields than bonds of comparable credit quality and maturity. The credit
quality of mortgage-
<PAGE>

backed securities is high. The Portfolio may purchase mortgage-backed securities
issued by the Government National Mortgage Association (GNMA), the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association
(FNMA), and the Federal Housing Authority (FHA). The U.S. government guarantees
the timely payment of interest and principal on GNMA securities. Securities from
other government-sponsored entities are generally not secured by an explicit
pledge of the U.S. government. Guarantees by the U.S. government or its agencies
are limited to the timely payment of interest and principal; the market values
of such securities are not guaranteed and can fluctuate widely. The Portfolio
also may invest in conventional mortgage securities to the extent that these
securities are represented in the Index. Conventional mortgage securities are
packaged by private corporations and not guaranteed by the U.S. government.

To the extent that it holds dollar-denominated bonds issued by foreign
companies or governments, the Portfolio is subject to (1) country risk, which is
the possibility that political events (such as a war), financial problems (such
as government default), or natural disasters (such as an earthquake) will weaken
a country's economy and cause investments in that country to lose money; and (2)
currency risk, which is the possibility that Americans investing abroad could
lose money because of a rise in the value of the U.S. dollar versus foreign
currencies.

High Yield Bond Portfolio

The High Yield Bond Portfolio invests in a diversified group of high-yielding
corporate bonds, commonly known as "junk bonds." The Portfolio normally will
invest at least 80% of its assets in corporate bonds with credit-quality ratings
of at least B by Moody's or Standard & Poor's, or, if unrated, of comparable
quality as determined by the Portfolio's adviser. These bonds are considered to
be "below investment grade," meaning that they carry a high degree of risk and
are considered speculative. No more than 20% of the Portfolio's assets may be
invested in debt securities rated less than B or unrated, convertible
securities, or preferred stocks. The Portfolio will not invest in securities
that are rated less than Caa ("substantial risk, in poor standing") by Moody's
or CCC by Standard & Poor's or, if unrated, of comparable quality as determined
by the Portfolio's adviser. If the credit rating of a security held by the
Portfolio is later downgraded below Caa or CCC, the Portfolio may continue to
hold it, and it will be sold only if the adviser believes it would be
advantageous to do so.

[GRAPHIC APPEARS HERE]
Because it invests in high-yield bonds--whose prices and credit quality can
change suddenly and unexpectedly--the Portfolio is subject to a high degree
of credit risk, which is the chance that a bond issuer will fail to repay
interest and principal in a timely manner. Prices of high-yield securities
are likely to fluctuate more severely than prices of investment-grade
bonds, and may fluctuate independently of the broader bond market.

The Portfolio's adviser selects securities on an individual basis after
researching--among other things--the nature of a company's business, its
strategy, and the quality of its management. The adviser looks for bonds with
attractive yields issued by companies whose financial prospects are stable or
improving.

[GRAPHIC APPEARS HERE]
The Portfolio is subject to manager risk, which is the possibility that the
adviser may do a poor job of selecting securities.

PLAIN TALK ABOUT

High-Yield Bonds

High-yield bonds, or "junk bonds," are bonds issued by companies or other
entities whose ability to pay interest and principal on their debts in a timely
manner is considered questionable. Such bonds are rated "below investment grade"
by independent rating agencies. Because they are considered riskier than
investment-grade bonds, high-yield bonds must pay higher interest yields to
attract investors. Some high-yield bonds are issued by smaller, less-seasoned
companies, while others are issued as part of a corporate restructuring, such as
an acquisition, merger, or leveraged buyout. Some high-yield bonds were once
rated as investment-grade securities but have been downgraded to junk-bond
status because of financial difficulties experienced by their issuers.
Conversely, an issuer's improving financial condition may result in an upgrading
of its junk bonds to investment-grade status.
<PAGE>

The Portfolio may also invest in bond futures and options contracts. Losses
(or gains) involving futures and options contracts 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. The Portfolio
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 Portfolio acquires an interest cannot
exceed 20% of total assets. The reasons for which the Portfolio will invest in
futures and options are:

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

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

The share price of the High Yield Bond Portfolio is influenced not only by
changing interest rates and by market perceptions of credit quality, but also by
the outlook for economic growth. When the economy appears to be weakening or
shrinking, investors may fear that defaults on high-yield bonds will increase,
and that the market value of high-yield bonds may decline even if other bond
prices are rising due to a decline in prevailing interest rates. During such
periods, trading activity in the market for high-yield bonds may slow and it may
become more difficult to find buyers for the bonds. In such conditions, prices
of high-yield bonds could decline suddenly and substantially, and the Portfolio
could be forced to sell securities at a significant loss to meet shareholder
redemptions. Also, there may be significant disparities in the prices quoted for
high-yield securities by bond dealers, making it difficult for the Portfolio to
accurately put a value on its securities.

The Portfolio's adviser seeks to mitigate credit risk by diversifying holdings
across many issuers and a wide variety of industries. It also seeks to mitigate
risk by making its own independent and ongoing assessment of the credit quality
of the Portfolio's holdings rather than relying solely on the credit-quality
analyses of rating agencies.

The Portfolio may invest in asset-backed securities--that is, bonds that
represent partial ownership in pools of consumer or commercial loans, such as
mortgage loans, automobile loans, or credit-card balances. The value of as-
set-backed securities ultimately depends on repayments by the underlying
borrowers. A primary risk of asset-backed securities is that it is difficult to
predict how prepayments by borrowers will affect the maturity of such
investments.

The Portfolio 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
Portfolio to convert to cash if needed.

The Portfolio 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 Portfolio, it will be treated as a liquid security, in accordance with
procedures and guidelines approved by the Fund's Board of Trustees. While the
Portfolio'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.

The Portfolio may invest in dollar-denominated bonds issued by foreign
governments or companies. To the extent that it holds such bonds, the Portfolio
is subject to (1) country risk, which is the possibility that political events
(such as a war), financial problems (such as government default), or natural
disasters (such as an earthquake) will weaken a country's economy and cause
investments in that country to lose money; and (2) currency risk, which is the
possibility that Americans investing abroad could lose money because of a rise
in the value of the U.S. dollar versus foreign currencies.

OVERVIEW OF THE BALANCED PORTFOLIO

The Balanced Portfolio invests in both stocks and bonds. It invests 60% to 70%
of its assets in common stocks, with an emphasis on dividend-paying stocks of
well-established large or medium-size companies. The Portfolio invests 30% to
40% of its assets in high-quality, long-term

PLAIN TALK ABOUT

Balanced Funds

Balanced funds are generally "middle-of-the-road" investments that seek to
provide some combination of growth, income, and conservation of capital by
investing in a mix of stocks, bonds, and/or money market instruments. Because
the prices of stocks and bonds tend not to move in lockstep, balanced funds are
able to use rewards from one type of investment to help offset the risks from
another.

<PAGE>

bonds. The combination of stocks and bonds is intended to conserve capital,
provide a reasonable level of current income, and offer the potential for
long-term growth of capital and income.

In building the Portfolio's stock holdings, the adviser seeks to purchase
companies whose prospects are improving but whose share prices do not reflect
their value. By purchasing a diversified group of such "value" stocks, the
adviser hopes to assemble a portfolio that will produce increased income and
capital appreciation over time, with moderate risk in comparison with the stock
market as a whole.

In selecting the Portfolio's bond holdings, the adviser emphasizes corporate
bonds issued by high-quality companies. The Portfolio also invests in bonds
issued by the U.S. government and government agencies and mortgage-backed
securities. The average maturity of the bond holdings exceeds 15 years. To
generate a relatively stable stream of interest income, the adviser does not
generally make large adjustments in the average maturity of the Portfolio's bond
holdings in anticipation of changes in interest rates.

Although the Portfolio may hold any mix of stocks, bonds, and cash investments
it deems desirable, the adviser generally adjusts the allocation only gradually
and only within the target ranges of 60% to 70% for stocks and 30% to 40% for
bonds. Such allocation changes can occur for any of three reasons:

* To improve the Portfolio's income stream.

* Because one type of asset has significantly outperformed the other.

* Because the adviser sees greater value in one type of asset than another.

[GRAPHIC APPEARS HERE]
The Portfolio is subject to manager risk, which is the possibility that the
adviser may do a poor job of selecting securities.

The Portfolio may invest up to 20% of its total assets in foreign securities.
To the extent that it holds foreign securities, the Portfolio is subject to (1)
country risk, which is the possibility that political events (such as a war),
financial problems (such as government default), or natural disasters (such as
an earthquake) will weaken a country's economy and cause investments in that
country to lose money; and (2) currency risk, which is the possibility that
Americans investing abroad could lose money because of a rise in the value of
the U.S. dollar versus foreign currencies.

The Portfolio also may invest in stock and bond futures and options contracts,
which are traditional forms of derivatives. Losses (or gains) involving futures
and options contracts 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. The Portfolio will not use futures or 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 Portfolio acquires an interest cannot exceed 20% of its total assets.

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

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

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

OVERVIEW OF THE STOCK PORTFOLIOS

The Equity Income, Diversified Value, Equity Index, Mid-Cap Index, Growth, Small
Company Growth, International, and REIT Index Portfolios invest primarily in
common stocks, although each has its own strategies and types of holdings.

Common stocks represent partial ownership in companies, and entitle
stockholders to share proportionately in the companies' profits (or losses) and
in any dividends they distribute.

[GRAPHIC APPEARS HERE]
Each Portfolio is subject to market risk, which is the possibility that
stock prices overall will decline over short or even long periods. Stock
markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
<PAGE>

Except for the International Portfolio, which invests in stocks of companies
outside of the United States, the Portfolios invest primarily in stocks of U.S.
companies. To illustrate the volatility of stock prices, the following table
shows the best, worst, and average total returns for the U.S. stock market over
various periods as measured by the S&P 500 Index, a widely used barometer of
market activity. (Total returns consist of dividend income plus change in market
price.) Although this example is based on the U.S. stock market, international
stock prices and total returns fluctuate very widely, too. Note that the returns
shown in the table do not include the costs of buying and selling stocks or
other expenses that a real-world investment portfolio would incur. Note, also,
that the gap between best and worst tends to narrow over the long term. (You
will find a chart illustrating the volatility of the international stock market
on page 37.)

<TABLE>
<CAPTION>
U.S. Stock Market Returns (1926-1997)
1 Year 5 Years 10 Years 20 Years
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst -43.3 -12.5 -0.9 3.1
Average 13.0 10.5 10.9 10.9
</TABLE>

Passive versus Active Management

Three of the Portfolios--Equity Index, Mid-Cap Index, and REIT Index--are index
funds. Index funds are "passively" managed, meaning that their investment
advisers try to match, as closely as possible, the performance of an established
target index. Index funds do this by holding either all--or a representative
sample--of the securities in the target index. So, instead of trying to
outperform the market as a whole, index funds simply mirror what their target
indexes do, for better or worse.

Five of the Portfolios--Equity Income, Diversified Value, Growth, Small
Company Growth, and International--are actively managed, meaning that their
investment advisers buy and sell securities based on research and analysis in an
attempt to outperform the market as a whole.

[GRAPHIC APPEARS HERE]
These five Portfolios are subject to manager risk, which is the possibility
that the adviser may do a poor job of selecting stocks.

PLAIN TALK ABOUT

Value Funds and Growth Funds

Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically pay above-average dividend yields. Growth funds generally
focus on companies believed to have above-average potential for growth in
revenue and earnings. Reflecting the market's high expectations for superior
growth, the prices of such stocks are typically above-average in relation to
such measures as revenue, earnings, book value, and dividends. Value and growth
stocks have, in the past, produced similar long-term returns, though each has
periods when it outperforms the other. In general, value funds are appropriate
for investors who want some dividend income and the potential for capital gains,
but are less tolerant of share-price fluctuations. Growth funds, by contrast,
appeal to investors who will accept more volatility in hopes of a greater
increase in share price. Growth funds also may appeal to investors with taxable
accounts who want a higher proportion of returns to come as capital gains (which
may be taxed at lower rates than dividend income).
<PAGE>

33
Investment Styles

Mutual funds that invest in U.S. stocks can be classified according to the
average market capitalization (shares outstanding x market price) of their
holdings. The usual categories are small-cap, mid-cap, and large-cap. Stock
funds can also be categorized according to whether the stocks they hold are
value or growth stocks or a blend of those.

The following illustration shows how each of the seven Portfolios that invest
in U.S. stocks generally fits into these categories. (The International
Portfolio invests primarily in large-capitalization growth stocks of companies
outside the United States.)

<TABLE>
<CAPTION>
................................Style................................
Value Blend Growth Market Cap
---------------------------------------------------------------------
<S> <C> <C> <C>
Equity Income
Equity Index Growth Large
Diversified Value
---------------------------------------------------------------------

Mid-Cap Index Medium

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

REIT Index Small Company Growth Small

---------------------------------------------------------------------
</TABLE>

[GRAPHIC APPEARS HERE]
Each of the Portfolios is subject to investment style risk, which is the
possibility that returns from its segment of the stock market will trail
returns from other asset classes or the overall market. Various segments of
the stock market (for example, large-cap value stocks, or small-cap growth
stocks) tend to go through cycles of doing better--or worse--than common
stocks in general. These periods have, in the past, lasted for as long as
several years. Likewise, international stocks go through cycles of doing
better--or worse--than U.S. stocks.

Stock Futures and Options Contracts

Each of the stock Portfolios may invest in futures and options contracts, which
are traditional forms of derivatives. Losses (or gains) involving futures and
options contracts 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. The Portfolios will not use futures or 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
any Portfolio acquires an interest cannot exceed 20% of its total assets.

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

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

* To reduce transaction costs or add value when these instruments are
favorably priced.

Equity Income Portfolio

The Equity Income Portfolio invests primarily in dividend-paying stocks of
large, well-established U.S. companies. The Portfolio's adviser selects a
diversified group of stocks after evaluating companies that have dividend yields
(annualized dividends divided by stock price) at least 25% higher than the
average dividend yield of the Standard & Poor's Industrial Index; a corporate
commitment and the financial ability to pay dividends consistently; a market
capitalization of at least $2 billion; and the potential for long-term capital
appreciation.

The Portfolio's investment philosophy reflects a belief that dividend income
is an important component of long-term total returns and that dividend income is
a more stable source of returns than capital change, which can be positive or
negative. Because dividend income historically has tended to be relatively
stable in the short-term, while
<PAGE>

stock prices fluctuate widely, the total returns of stocks that pay relatively
high dividend yields have usually been less volatile than the returns of stocks
with low dividend yields.

Although the Portfolio generally invests primarily in common stocks or
securities that are convertible into common stocks, it may invest up to 20% of
its total assets in cash investments and investment-grade bonds (those that have
received one of the top four credit-quality ratings by Standard & Poor's
Corporation or Moody's Investor Service).

Although the Portfolio typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its total assets in foreign securities. To the extent
that it holds foreign securities, the Portfolio is subject to (1) country risk,
which is the possibility that political events (such as a war), financial
problems (such as government default), or natural disasters (such as an
earthquake) will weaken a country's economy and cause investments in that
country to lose money; and (2) currency risk, which is the possibility that
Americans investing abroad could lose money because of a rise in the value of
the U.S. dollar versus foreign currencies.

Diversified Value Portfolio

The Diversified Value Portfolio seeks to provide long-term growth of capital and
a moderate level of dividend income by investing primarily in common stocks of
mid- and large-capitalization companies. The adviser's method is to research
stocks on a company-by-company basis and to develop earnings forecasts for them.
From those companies that appear to have strong finances and good prospects for
growth in earnings and dividends, the adviser will select those whose stock
prices appear to be undervalued by the overall market. Such stocks (often called
value stocks) will typically have above-average current dividend yields and sell
at below-average prices in comparison to such fundamentals as their book value
and earnings.

To keep the Portfolio well-diversified, the adviser generally will invest no
more than 15% of the Portfolio's assets in a single industry group. The
Portfolio's overall makeup is expected to differ from the broad stock market in
terms of industry weightings and market capitalization. Therefore, the
Portfolio's performance is likely to differ from the performance of the overall
market or broad indexes such as the S&P 500 Index.

Equity Index Portfolio

The Portfolio is a stock index fund that seeks long-term growth of capital and
income by attempting to match the performance of the S&P 500 Index, which is
made up primarily of stocks of large U.S. companies. These stocks represent
approximately 70% of the market value of all U.S. common stocks. In seeking to
fully replicate the Index performance, the Portfolio intends to hold all of the
approximately 500 stocks in the Index in roughly the same proportions as they
are represented in the Index. For example, if 3% of the S&P 500 Index were made
up of the stock of a specific company, the Portfolio will invest about 3% of its
assets in that company.

The actual stocks that constitute the Index are chosen by Standard & Poor's
Corporation. The Index is weighted according to the market capitalization of the
stocks it holds, so that the stocks with the highest market values represent the
largest portion of the Index and have the heaviest influence on its performance.
The 50 largest stocks in the Index account for approximately half of its value.
As of September 30, 1998, the five largest companies in the Index were:
<PAGE>

35
-----------------------------------------------------------
Percentage
Company of Index Value
-----------------------------------------------------------

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

Mid-Cap Index Portfolio
The Mid-Cap Index Portfolio is a stock index fund that seeks long-term growth of
capital by attempting to match the performance of the S&P MidCap 400 Index,
which is made up of stocks of medium-size U.S. companies. In seeking to
replicate the Index performance, the Portfolio intends to hold all of the
approximately 400 stocks in the Index in roughly the same proportions as they
are represented in the Index. For example, if 3% of the S&P MidCap 400 Index
were made up of the stock of a specific company, the Portfolio will invest about
3% of its assets in that company.
The actual stocks that constitute the Index are chosen by Standard & Poor's
Corporation. The Index is weighted according to the market capitalization of the
stocks it holds, so that the stocks with the highest market values represent the
largest portion of the Index and have the heaviest influence on its performance.
The 50 largest stocks in the Index account for approximately 35% of its value.
As of September 30, 1998, the five largest companies in the Index were:

-----------------------------------------------------------
Percentage
Company of Index Value
-----------------------------------------------------------

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

Fluctuations in the total returns of mid-capitalization stocks historically
have been somewhat greater than those for large-cap stocks and somewhat lower
than those for small-cap stocks. There is no certainty, however, that this
pattern will continue in the future.

Growth Portfolio

The Portfolio seeks long-term growth of capital by investing in
large-capitalization stocks of high-quality, seasoned U.S. companies with
records of superior growth. The Portfolio's adviser researches more than 200
large companies with superior records and good prospects for growth. Stocks
purchased for the Portfolio typically have strong positions in their markets,
reasonable financial strength, and relatively low sensitivity to changing
economic conditions, and they usually sell at attractive prices in relation to
their growth potential. The Portfolio will take relatively large positions in
the stocks whose prospects seem most favorable, and its ten largest holdings may
account for 35% to 40% of total assets. In addition, the Portfolio's overall
makeup may differ substantially from that of the broad stock market in terms of
industry weightings and market capitalization.

[GRAPHIC APPEARS HERE]
Because the Portfolio invests a higher percentage of assets in its ten
largest holdings than the average stock fund does, the Portfolio is subject
to concentration risk, which is the possibility that its performance may be
hurt disproportionately by the poor performance of relatively few stocks.

PLAIN TALK ABOUT

Fund Diversification and
Concentration

In general, the more diversified a fund's stock or bond holdings, the less
likely it is that a specific security's poor performance will hurt the fund.
One measure of a fund's diversification is the percentage of its assets
represented by its ten largest holdings. The average U.S. equity mutual fund
has about 30% of its assets concentrated in its ten largest holdings, while
some less-diversified mutual funds have more than 50% of their assets invested
in the stocks of just ten companies.

holds foreign securities, the Portfolio is subject to (1) country risk, which is
the possibility that political events (such as a war), financial problems (such
as government default), or natural disasters (such as an earthquake) will weaken
a country's economy and cause investments in that country to lose money; and (2)
currency risk, which is the possibility that Americans investing abroad could
lose money because of a rise in the value of the U.S. dollar versus foreign
currencies.

Small Company Growth Portfolio

The Portfolio seeks long-term growth of capital by investing primarily in
small-capitalization stocks of companies that appear to offer favorable
prospects for growth and price appreciation. The Portfolio's stocks are expected
to provide only minimal dividend income.

The median market capitalization of the stocks held in the Portfolio is
expected to be below $1 billion. By way of comparison, the median market cap of
stocks in the S&P 500 Index, which is dominated by large stocks, exceeds $40
billion.

The Portfolio's investment adviser categorizes stocks into three
categories: (1) "Core" growth stocks, representing 50%-80% of assets, are
companies with demonstrated records of growth and a strong market position based
on a proprietary product or service; (2) "Pioneers," 10%-25% of assets,
generally have unique technology or other innovations that may lead to new
products or expansion into new markets; and (3) "Special values," 10%-25% of
assets, are companies whose stock prices are undervalued given the adviser's
view of their prospects over the next several years.

Besides common stocks, the Portfolio may invest in securities that are
convertible into common stocks. The Portfolio's holdings may include securities
issued by small or unseasoned companies with speculative risk characteristics.
Small company stocks have historically been subject to wider fluctuations in
share prices and total returns than mid- or large-cap stocks. Among the reasons
for this high degree of price volatility: Markets for small-capitalization
stocks are less liquid than markets for larger stocks, meaning that during
periods of market turbulence it may be difficult to sell small company stocks;
small companies generally may be less able than larger ones to ride out economic
downturns; and small company stocks often pay no dividends.

Although the Portfolio typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 10% of its total assets in foreign securities. To the extent
that it holds foreign securities, the Portfolio is subject to (1) country risk,
which is the possibility that political events (such as a war), financial
problems (such as government default), or natural disasters (such as an
earthquake) will weaken a country's economy and cause investments in that
country to lose money; and (2) currency risk, which is the possibility that
Americans investing abroad could lose money because of a rise in the value of
the U.S. dollar versus foreign currencies.

International Portfolio

The Portfolio seeks long-term growth of capital by investing in a broadly
diversified group of stocks of seasoned companies located outside of the United
States. In selecting stocks, the Portfolio's adviser evaluates foreign markets
around the world. Depending on its assessment of the business and investment
climates in the various markets, the adviser determines the proportion of the
Portfolio's assets to allocate to individual countries. Within the chosen
markets, the adviser selects companies believed to have above-average growth
potential and whose stocks sell at reasonable prices. The adviser's assessments
are based on extensive research by a team of analysts at 12 regional offices
around the world.

The core of the Portfolio--normally constituting 60% to 70% of its total
assets--consists of stocks of companies that possess what the adviser believes
are sustainable competitive advantages and strong prospects for growth. These
core holdings may include small- and mid-cap stocks along with large-cap stocks.
The remainder of the Portfolio's assets consist of "noncore" stocks selected to
increase the Portfolio's presence in markets where the near-term
<PAGE>

outlook is particularly favorable. These noncore holdings typically are
large-cap stocks that have historically moved in accordance with their local
markets.

The adviser's investment approach results in a Portfolio whose overall
characteristics will often differ substantially from those of broad
international stock indexes, such as the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. As a result of its different makeup,
the Portfolio's performance is apt to differ substantially from time to time
from the performance of broad international stock indexes.

[GRAPHIC APPEARS HERE]
Because it invests in international stocks, the Portfolio is subject to:

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

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

[GRAPHIC APPEARS HERE]
Country risk, which is the possibility that political events (such as a
war), financial problems (such as government default), or natural disasters
(such as an earthquake) will weaken a country's economy and cause
investments in that country to lose money.

International investing involves other risks and considerations, including:
differences in accounting, auditing, and financial reporting standards;
generally higher costs for trading securities; foreign withholding taxes payable
on the Portfolio's securities, which can reduce dividend income available to
distribute to shareholders; and adverse changes in regulatory or legal climates.

Returns on international stocks can be as volatile--or more volatile--than
returns on U.S. stocks. To illustrate the volatility of international stock
market returns for the U.S. dollar-based investor, the following table shows the
best, worst, and average total returns for international stocks over various
periods as measured by the EAFE Index, a widely used barometer of international
stock market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown in the table do not include the costs
of buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, that the gap between best and worst tends to
narrow over the long term. Also, keep in mind that past returns are not
indicative of future returns and that volatility in the future could be greater
or less than past volatility.

------------------------------------------------------------
International Stock Market Returns (1969-1997)
------------------------------------------------------------
1 Year 5 Years 10 Years 20 Years
------------------------------------------------------------
Best * * * *
Worst * * * *
Average * * * *
------------------------------------------------------------

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969 through
1997. Keep in mind that this was a particularly favorable period for foreign
markets. For instance, over 10-year periods, foreign stocks provided an average
return of *%, compared to *% for U.S. stocks (as measured by the S&P 500 Index)
during the same time frame. These average returns reflect past performance on
international stocks; you should not regard them as an indication of future
returns from either foreign markets as a whole or this Portfolio in particular.

The Portfolio may enter into forward foreign currency contracts, which can
help protect its holdings against unfavorable short-term changes in exchange
rates. A forward foreign currency contract is an agreement to buy or sell a
country's currency at a specific price on a specific date, usually 30, 60, or 90
days in the future. In other words, the contract guarantees an exchange rate on
a given date. Managers of international stock funds use these contracts to guard
against sudden, unfavorable changes in U.S. dollar/foreign currency exchange
rates. The contracts will not prevent the fund's securities from falling in
value during foreign market downswings. The adviser will use these contracts to
elim-
<PAGE>

PLAIN TALK ABOUT

REITs

Rather than directly owning properties--which can be costly and difficult to
convert into cash when needed--some investors buy shares in a company that owns
and manages real estate. Such a company is known as a real estate investment
trust, or REIT. Unlike corporations, REITs do not have to pay income taxes if
they meet certain Internal Revenue Code requirements. To qualify, a REIT must
distribute at least 95% of its taxable income to its shareholders and receive at
least 75% of that income from rents, mortgages, and sales of property. REITs
offer investors greater liquidity and diversification than direct ownership of a
handful of properties, as well as greater income potential than an investment in
common stocks. As with any investment in real estate, however, a REIT's
performance depends on several factors, such as its ability to find tenants for
its properties, to renew leases, and to finance property purchases and
renovations.

PLAIN TALK ABOUT

Types of REITs

An equity REIT, which owns properties, generates income (from rental and lease
payments) and offers the potential for growth (from property appreciation) as
well as occasional capital gains from the sale of property. A mortgage REIT
makes loans to commercial real estate developers. Mortgage REITs earn interest
income and are subject to credit risk (that is, the chance that a developer will
fail to repay a loan). A hybrid REIT holds properties and mortgages.

inate some of the uncertainty of foreign exchange rates--but will not speculate
on changes in the market.

REIT Index Portfolio

The Portfolio uses an index approach in seeking to provide a high level of
income and moderate long-term growth of capital, by attempting to match the
performance of the Morgan Stanley REIT Index, a benchmark of U.S.
real estate investment trusts (REITs).

The Portfolio invests in stocks of REITs, which own office buildings, hotels,
shopping centers, and other properties. The Portfolio uses a "passively"
managed--or index--approach to create a mix of securities that will track as
closely as possible the performance of the REIT Index. Holdings of the Index,
and thus of the Portfolio, are weighted according to each stock's
market-capitalization. The Portfolio will hold each stock found in the Index in
approximately the same proportion as represented in the Index itself. For
example, if a specific stock represented 2% of the Morgan Stanley REIT Index,
the Portfolio would invest 2% of its assets in that stock.

[GRAPHIC APPEARS HERE]
Because it invests in stocks of REITs, the Portfolio is subject to several
risks in addition to the risk of a general decline in the stock market.
These risks include:

Real estate industry risk, which is the possibility that a general decline
in property values could cause the prices of REIT stocks to fall.

Interest rate risk, which is the possibility that higher interest rates
could hurt REIT performance. Higher interest rates could make yields on
competing investments, including bonds, more attractive than owning REIT
shares. Also, higher rates make it more difficult and costly for REITs to
borrow to finance property purchases and improvements.

The Portfolio's returns will be strongly linked to the ups and downs of the
commercial real estate market. Real estate goes through up and down market
cycles that can be extreme and long-lasting. In general, many factors affect
real estate values, including: the supply of and demand for properties; the
economic health of the nation or of specific geographic regions; and the
strength of specific industries renting properties. Ultimately, an individual
REIT's performance depends on the types and locations of the properties it owns
and on how well the REIT manages its properties. For instance, rental income
could decline because of extensive vacancies, increased competition from nearby
properties, tenants' failure to pay rent, or incompetent management. Property
values could decrease because of overbuilding, environmental liabilities,
uninsured damages caused by natural disasters, loss of IRS status as a qualified
REIT, increases in property taxes, or changes in zoning laws.

The Morgan Stanley REIT Index(*) comprises the stocks of all publicly traded
equity REITs (except health-care REITs) that meet certain criteria. For example,
to be included in the Index, a REIT must have a total market
<PAGE>

capitalization of at least $100 million and have enough shares and trading
volume to be considered liquid. The REIT Index Portfolio invests in equity REITs
only.

As of September 30, 1998, the Index included * REITs. The Index is rebalanced
every calendar quarter and whenever a REIT is removed from the Index. A REIT can
be removed from the Index because its market capitalization falls below $75
million, or because of corporate activity such as a merger, acquisition,
bankruptcy, IRS removal of REIT status, a fundamental change in the REIT's
business, or a change in shares outstanding. REITs in the Morgan Stanley REIT
Index tend to be mid- and small-capitalization stocks, with market
capitalizations generally below $4 billion. Like small-capitalization stocks in
general, REIT stocks can be more volatile than the overall stock market.

Stocks in the Morgan Stanley REIT Index represent a broadly diversified range
of property types and geographical regions. The Index's makeup, as of September
30, 1998, follows.

-------------------------------------------
Percentage
Type of REIT of Index Value
-------------------------------------------
Retail 24%
Residential Apartments 24
Office 24
Industrial 15
Hotels 9
Diversified 4
-------------------------------------------

The Index's ten largest stocks make up about 30% of its market value. The
Index's largest stocks, as of September 30, 1998, are listed below.

1. Equity Office Properties Trust REIT
2. Equity Residential Properties Trust REIT
3. Crescent Real Estate, Inc. REIT
4. Public Storage, Inc. REIT
5. Simon DeBartolo Group, Inc. REIT
6. Vornado Realty Trust REIT
7. Security Capital Industrial Trust REIT
8. Starwood Lodging Trust REIT
9. Spieker Properties, Inc. REIT
10. Security Capital Pacific, Inc. REIT

The Portfolio intends to remain at least 98% invested in the stocks of REITs;
the remaining assets will be invested in cash reserves to maintain liquidity for
shareholder redemptions.

*The REIT Index Portfolio is not sponsored, sold, promoted, or endorsed by
Morgan Stanley. The Morgan Stanley REIT Index is the exclusive property of
Morgan Stanley and is a service mark of Morgan Stanley Group Inc. It has been
licensed for use by The Vanguard Group.

Turnover Rate

A mutual fund's turnover rate is a measure of its trading activity. (A turnover
rate of 100% would occur, for example, if a Portfolio sold and replaced
securities valued at 100% of its net assets within a one-year period.) The
Portfolios retain the right to sell securities regardless of how long they have
been held. The turnover rates for the Portfolios can be found in the Financial
Highlights section of this prospectus, except for the Money Market Portfolio,
whose turnover rate is not meaningful because of the very short-term nature of
its holdings.

The Portfolios and Vanguard

Vanguard Variable Insurance Fund is a member of The Vanguard Group, a family of
more than * investment companies with more than * distinct investment portfolios
and total net assets of more than $* billion. All of the Vanguard
<PAGE>

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.

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 costs.

Investment Advisers

The Vanguard Group

The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482, provides investment
advisory services on an at-cost basis to six of the Portfolios of Vanguard
Variable Insurance Fund.

Vanguard Fixed Income Group provides advisory services to the Money Market,
Short-Term Corporate, and High-Grade Bond Portfolios. The individuals
responsible for overseeing the Portfolios' investments are:

* Ian A. MacKinnon, Managing Director of Vanguard; has worked in investment
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.

* David R. Glocke, Principal and (since 1997) Portfolio Manager of the Money
Market Portfolio, has worked in investment management since 1991; B.S.,
University of Wisconsin.

* Robert F. Auwaerter, Principal and (since its inception) Portfolio Manager of
the Short-Term Corporate Portfolio, has worked in investment management since
1978; B.S., University of Pennsylvania; M.B.A., Northwestern University.

* Kenneth E. Volpert, Principal and (since its inception) Portfolio Manager of
the High-Grade Bond Portfolio, has worked in investment management since 1981;
B.S., University of Illinois; M.B.A., University of Chicago.

Vanguard Core Management Group provides advisory services for the Equity
Index, Mid-Cap Index, and REIT Index Portfolios. The individual responsible for
overseeing each Portfolio's investments is:

* George U. Sauter, Managing Director of Vanguard; has worked in investment
management since 1985; with Vanguard since 1987; A.B., Dartmouth College;
M.B.A., University of Chicago.

Vanguard employs six independent investment advisers to manage the remaining
seven Portfolios.

Wellington Management Company, LLP

Wellington Management Company, LLP ("WMC"), 75 State Street, Boston, MA 02109,
provides advisory services for the High-Yield Bond and Balanced Portfolios.

The individual responsible for overseeing the High-Yield Bond Portfolio's
investments is:

* Earl E. McEvoy, Senior Vice President of WMC; has worked in investment
management since 1972; with WMC since 1978; has managed the Portfolio since
its inception; B.A., Dartmouth College; M.B.A., Columbia University School
of Business.
<PAGE>

The individuals responsible for overseeing the Balanced Portfolio's
investments are:

* Ernst H. von Metzsch, CFA, Senior Vice President of WMC; has worked in
investment management since 1970; with WMC since 1973; has managed the
Portfolio since 1995; M.Sc., University of Leiden, the Netherlands; Ph.D.,
Harvard University.

* Paul D. Kaplan, Senior Vice President of WMC; has worked in investment
management since 1974; with WMC since 1978; has assisted in the management
of the Portfolio since 1994; B.A., Dickinson College; M.S., The Sloan
School of Management, Massachusetts Institute of Technology.

Newell Associates

Newell Associates, 525 University Avenue, Palo Alto, CA 94301, provides
advisory services for the Equity Income Portfolio.

The individual responsible for overseeing the Equity Income Portfolio's
investments is:

* Roger D. Newell, Chairman of Newell Associates; has worked in investment
management since 1958; with Newell Associates since 1986; has managed the
Portfolio since its inception; B.A., University of Minnesota; J.D., Harvard
Law School; M.A., University of Minnesota.

Barrow, Hanley, Mewhinney & Strauss, Inc.

Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S"), One McKinney Plaza, 3232
McKinney Avenue, 15th Floor, Dallas, TX 75204, provides advisory services for
the Diversified Value Portfolio.

The individual responsible for overseeing the Diversified Value Portfolio's
investments is:

* James P. Barrow, Partner and Vice President of BHM&S; has worked in investment
management since 1965; with BHM&S since 1980; has managed the Portfolio since
its inception; B.S., University of South Carolina.

Lincoln Capital Management Company

Lincoln Capital Management Company ("Lincoln"), 200 South Wacker Drive, Chicago,
IL 60606, provides advisory services for the Growth Portfolio.

The individuals responsible for overseeing the Growth Portfolio's investments
are:

* J. Parker Hall III, Chief Executive Officer and Managing Director of
Lincoln; has worked in investment management since 1957; with Lincoln since
1971; has managed the Portfolio since its inception; B.A., Swarthmore
College; M.B.A., Harvard Business School.

* David M. Fowler, Executive Vice President and Managing Director of Lincoln;
has worked in investment management since 1972; with Lincoln since 1984;
has managed the Portfolio since its inception. B.S., Loyola University;
M.B.A., Northwestern University.

Granahan Investment Management, Inc.

Granahan Investment Management, Inc., 275 Wyman Street, Waltham, MA 02154,
provides investment advisory services for the Small Company Growth Portfolio.

The individual responsible for overseeing the Small Company Growth
Portfolio's investments is:

* John J. Granahan, CFA, Founder and President of Granahan Investment
Management; has worked in investment management since 1963; founded
Granahan Investment Management in 1985; has managed the Portfolio since its
inception; B.S., St. Joseph's University; Graduate Fellow, Catholic
University of America.

Schroder Capital Management International, Inc.

Schroder Capital Management International, Inc. ("Schroder Capital"), 787
Seventh Avenue, New York, N.Y. 10019, provides investment advisory services
for the International Portfolio.

The individual responsible for overseeing the International Portfolio's
investments is:

* Richard Foulkes, Executive Vice President and Deputy Chairman of Schroder
Capital; has worked in investment management since 1968; with Schroder
Capital since 1968; has managed the Portfolio since its inception; educated
at the Sorbonne, France; M.A., Cambridge University, England.
<PAGE>

For the fiscal year ended December 31, 1997, the advisory and administrative
fees represented an effective annual rate of ___.
The advisers are authorized to choose brokers or dealers to handle the
purchase and sale of the Portfolios' securities, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions. The Fund may direct an adviser to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Fund or its Portfolios. However, the advisers 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 our internal systems and
external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Portfolios' operations. Vanguard intends to monitor these processes through
the rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on a Portfolio's business,
operations, or financial condition. Additionally, a Portfolio's performance
could be hurt if a computer system failure at a company or governmental unit
affects the price of securities the Portfolio owns.

Dividends, Capital Gains, and Taxes

The Portfolios distribute income dividends and net realized capital gains
according to the schedule outlined below:

-----------------------------------------------------------------------
Portfolio Dividend Distributions Capital Gains
-----------------------------------------------------------------------

Money Market Monthly (declared daily) None
Short-Term Corporate Monthly (declared daily) Annually
High-Grade Bond Monthly (declared daily) Annually
High Yield Bond Monthly (declared daily) Annually
Balanced Annually (October) Annually
Equity Income Annually (October) Annually
Diversified Value Annually (October) Annually
Equity Index Annually (October) Annually
Mid-Cap Index Annually (October) Annually
Growth Annually (October) Annually
Small Company Growth Annually (October) Annually
International Annually (October) Annually
REIT Index Annually (October) Annually
-----------------------------------------------------------------------

The tax consequences of your investment in a Portfolio depend on the
provisions of the variable annuity or variable life insurance plan through which
you invest. For more information on taxes, please refer to the accompanying
prospectus of the insurance company separate account that offers your annuity or
life insurance contract.
<PAGE>

Financial Highlights

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

FINANCIAL HIGHLIGHTS TABLE TO COME

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
How to Read the Financial
Highlights Table

This explanation uses the Money Market Portfolio as an example. The Portfolio
began fiscal 1998 with a net asset value (price) of $1 per share. During the
year, the Portfolio earned $ * per share from investment income (interest and
dividends).

All of these earnings were returned to shareholders in the form of dividend
distributions.

The earnings ($ * per share) minus the distributions ($ * per share) resulted
in a share price of $1 at the end of the year. For a shareholder who reinvested
the distributions in the purchase of more shares, the total return from the
Portfolio was * % for the year.

As of September 30, 1998, the Portfolio had $ * billion in net assets; an
expense ratio of * % ($ * per $1,000 of net assets); and net investment income
amounting to * % of its average net assets.
- --------------------------------------------------------------------------------

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.

Yields and total returns presented for the Portfolios are net of the
Portfolios' operating expenses, but do not take into account charges and
expenses attributable to the variable annuity or variable insurance plan through
which you invest. The expenses of the annuity or insurance plan reduce the
returns and yields you ultimately receive, so you should bear those expenses in
mind when evaluating the performance of the Portfolios and when comparing the
yields and returns of the Portfolios with those of other mutual funds.

/+/Because the Short-Term Corporate, Diversified Value, Mid-Cap Index, and REIT
Index Portfolios did not begin operations until December 29, 1998, tables are
not included for these Portfolios.
<PAGE>

FINANCIAL HIGHLIGHTS TABLE TO COME

FINANCIAL HIGHLIGHTS TABLE TO COME
<PAGE>

FINANCIAL HIGHLIGHTS TABLE TO COME

FINANCIAL HIGHLIGHTS TABLE TO COME
<PAGE>

FINANCIAL HIGHLIGHTS TABLE TO COME

FINANCIAL HIGHLIGHTS TABLE TO COME
<PAGE>

FINANCIAL HIGHLIGHTS TABLE TO COME

"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," "500,"
and "S&P MidCap 400," are trademarks of The McGraw-Hill Companies, Inc., and
have been licensed for use by Vanguard Variable Insurance Fund and The Vanguard
Group. These mutual funds are not sponsored, endorsed, sold, or promoted by
Standard & Poor's, and Standard & Poor's makes no representation regarding the
advisability of investing in the funds.
<PAGE>

48
<PAGE>

Glossary of Investment Terms

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

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

Country Risk
The possibility that events such as political or financial troubles or natural
disasters will weaken a country's economy.

Credit Quality
A measure of a bond issuer's ability to repay interest and principal in a timely
manner.

Currency Risk
The possibility that a foreign investment will lose money because of unfavorable
changes in exchange rates.

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

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

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

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

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

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

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

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

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

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

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>

[LOGO OF THE VANGUARD GROUP(R) APPEARS HERE]
Post Office Box 2600
Valley Forge, PA 19482

For More Information
If you'd like more information about Vanguard Variable Insurance Fund, the
following documents are available free upon request:

Annual/Semiannual Report to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during 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 and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.

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

Vanguard Variable
Insurance Fund
P.O. Box 2600
Valley Forge, PA 19482-1110

Telephone:
1-800-522-5555

World Wide Web:
www.vanguard.com

E-mail:
[email protected]

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

Fund's Investment Company Act
File Number: 811-5962

P064N-12/29/1998
<PAGE>

PART B

VANGUARD VARIABLE INSURANCE FUND

STATEMENT OF ADDITIONAL INFORMATION

DECEMBER 29, 1998

This Statement is not a prospectus, but should be read in conjunction with
the Fund's current Prospectus (dated December 29, 1998). To obtain the Pro-
spectus please write to the Fund or contact the insurance company sponsoring
the accompanying variable life insurance or variable annuity contract.

<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----------------- ----
<S> <C>
Description of the Fund.................................................. B-1
Investment Policies...................................................... B-3
Fundamental Investment Limitations....................................... B-9
Share Price.............................................................. B-10
Purchase of Shares....................................................... B-11
Redemption of Shares..................................................... B-11
Calculation of Yield..................................................... B-12
Yield and Total Return................................................... B-13
Management of the Fund................................................... B-13
Investment Advisory Services............................................. B-17
Portfolio Transactions................................................... B-26
Performance Measures..................................................... B-27
Financial Statements..................................................... B-30
Appendix--Description of Securities and Ratings.......................... B-31
</TABLE>

DESCRIPTION OF THE FUND

ORGANIZATION

Vanguard Variable Insurance Fund (the "Fund") was organized as a Maryland
corporation in 1989 before becoming a Pennsylvania business trust later in
1989, and was reorganized as a Delaware business trust on June 30, 1998. Prior
to its reorganization as a Delaware business trust, the Fund was known by the
same name as is currently used. The Fund is registered with the United States
Securities and Exchange Commission under the Investment Company Act of 1940
(the "1940 Act") as an open-end diversified management investment company. It
currently offers the following series of shares (all Investor Share Class):

Money Market Portfolio High-Grade Bond Portfolio
High Yield Bond Portfolio Balanced Portfolio
Equity Income Portfolio Equity Index Portfolio
Growth Portfolio Small Company Growth Portfolio
International Portfolio Mid-Cap Index Portfolio
Diversified Portfolio REIT Index Portfolio

Short-Term Corporate Portfolio

The Fund 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 Fund
may issue for a single series or class of shares.

B-1
<PAGE>

SERVICE PROVIDERS

CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 (for Equity Income and Growth Portfolios); Morgan Stanley
Trust Company, One Pierrepont Plaza, Brooklyn, New York 11201 (for Interna-
tional Portfolio); First Union National Bank, PA 4943, 530 Walnut Street,
Philadelphia, Pennsylvania 19106, (for Money Market, High-Grade Bond, Equity
Index, Balanced, High Yield Bond and Small Company Growth Portfolios) serve as
the Fund's custodians. The custodians are responsible for maintaining the
Fund's assets and keeping all necessary accounts and records.

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

CHARACTERISTICS OF THE FUND'S SHARES

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

SHAREHOLDER LIABILITY. The Fund is organized under Delaware law, which pro-
vides that shareholders of a business trust are entitled to the same limita-
tions of personal liability as shareholders of a corporation organized under
Delaware law. Effectively, this means that a shareholder of the Fund will not
be personally liable for payment of the Fund'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 Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.

DIVIDEND RIGHTS. The shareholders of a series are entitled to receive any
dividends or other distributions declared for such series. No shares have pri-
ority 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
the 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 sepa-
rate 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 share-
holder vote is required under the 1940 Act; (ii) the matter concerns an amend-
ment to the Declaration of Trust that would adversely affect to a material de-
gree 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 share-
holder vote. The 1940 Act requires a shareholder vote under various circum-
stances, including to elect or remove Trustees upon the written request of
shareholders representing 10% or more of the Fund's net assets, and to change
any fundamental policy of the Fund. Shareholders of the Fund 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 enti-
tled 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 enti-
tled to receive a pro rata share of the net assets of the applicable series of
the Fund.

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

B-2
<PAGE>

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

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

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

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

TAX STATUS OF THE FUND

Each series of the Fund qualifies as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. This special tax status means that
a series will not be liable for federal tax on income and capital gains dis-
tributed to shareholders. In order to preserve its tax status, each series of
the Fund 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 tax-
able income at corporate rates, and all distributions from earnings and prof-
its, including any distributions of net tax-exempt income and net long-term
capital gains, will be taxable to shareholders as ordinary income. In addi-
tion, the series could be required to recognize unrealized gains, pay substan-
tial taxes and interest, and make substantial distributions before regaining
its tax status as a regulated investment company.

INVESTMENT POLICIES

REPURCHASE AGREEMENTS

Each Portfolio of 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. The 13 Portfolios of the Fund, along with other
Vanguard Funds, may deposit their daily cash reserves into a joint account
which invests such reserves in repurchase agreements and other short-term in-
struments. First Union National Bank is the custodian for the joint account. A
repurchase agreement is an agreement under which a Portfolio 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 Fed-
eral Reserve member bank with minimum assets of at least $2 billion or a reg-
istered securities 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 a Portfolio and is unrelated to the interest rate on the underlying instru-
ment. In these transactions, the securities acquired by a Portfolio (including
accrued interest earned thereon) must have a total value in excess of the
value of the repurchase agreement and are held by the custodian bank for the
joint account until repurchased. In addition, the Fund's Board of Trustees
will monitor each Portfolio's repurchase agreement transactions generally and
will establish guidelines and standards for review of the creditworthiness of
any bank, broker or dealer party to a repurchase agreement with a Portfolio of
the Fund. No more than an aggregate of 15% (10% for the Money Market Portfo-
lio) of a Portfolio's net assets, at the time of investment, will be invested
in repurchase agreements having maturities longer than seven days and securi-
ties subject to legal or contractual restrictions on resale, or for which
there are no readily available market quotations. See "Illiquid Securities" on
page B-4.

The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the un-
derlying security at a time when the value of the security has declined, a
Portfolio may incur a loss upon disposition of the security. If the other
party to the agreement becomes insolvent and subject to liquidation or reorga-
nization under the Bankruptcy Code or other laws, a court may determine that
the underlying security is collateral for a loan by the Portfolio not within
the control of the Portfolio and therefore the Portfolio may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Fund's man-
agement acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.

B-3
<PAGE>

LENDING OF SECURITIES

Each Portfolio of the Fund (except for the Money Market Portfolio) may lend
its securities to qualified institutional investors who need to borrow securi-
ties in order to complete certain transactions, such as covering short sales,
avoiding failures to deliver securities or completing arbitrage operations. By
lending its portfolio securities, a Portfolio attempts to increase its net in-
vestment income through the receipt of interest on the loan. Any gain or loss
in the market price of the securities loaned that might occur during the term
of the loan would be for the account of the Portfolio. The Portfolio may lend
its portfolio securities to qualified brokers, dealers, banks or other finan-
cial institutions, so long as the terms, the structure and the aggregate
amount of such loans are not inconsistent with the Investment Company Act of
1940, or the Rules and Regulations or interpretations of the Securities and
Exchange Commission (the "Commission") thereunder, which currently require
that (a) the borrower pledge and maintain with the Portfolio collateral con-
sisting of cash, a letter of credit issued by a domestic U.S. bank, or securi-
ties issued or guaranteed by the United States Government having at all times
not less than 100% of the value of the securities loaned, (b) the borrower add
to such collateral whenever the price of the securities loaned rises (i.e.,
the borrower "marks to the market" on a daily basis), (c) the loan be made
subject to termination by the Portfolio at any time and (d) the Portfolio re-
ceive reasonable interest on the loan, which may include the Portfolio's in-
vesting any cash collateral in interest bearing short-term investments, any
distribution on the loaned securities and any increase in their market value.
A Portfolio will not lend its portfolio securities if, as a result, the aggre-
gate value of such loan exceeds 33 1/3% of the Portfolio's net assets. Loan
arrangements made by a Portfolio will comply with all other applicable regula-
tory requirements, including the rules of the New York Stock Exchange, which
presently require the borrower, after notice, to redeliver the securities
within the normal settlement time of three business days. All relevant facts
and circumstances, including the creditworthiness of the broker, dealer or in-
stitution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Fund's Board of Trustees.

At the present time, the Staff of the Commission does not object if an in-
vestment company pays reasonable negotiated fees in connection with loaned se-
curities, so long as such fees are set forth in a written contract and ap-
proved by the investment company's trustees. In addition, voting rights pass
with loaned securities; but if a material event will occur affecting an in-
vestment on loan, the loan must be called and the securities voted.

ILLIQUID SECURITIES

Each Portfolio of the Fund may invest up to 15% of its net assets (10% with
respect to the Money Market Portfolio) in illiquid securities. Illiquid secu-
rities are securities that may not be sold or disposed of in the ordinary
course of business within seven business days at approximately the value at
which they are being carried on a Portfolio's books. An illiquid security in-
cludes repurchase agreements which have a maturity of longer than seven days,
securities which are illiquid by virtue of the absence of a readily available
market, and demand instruments with a demand notice exceeding seven days.

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 these
Portfolios to convert to cash if needed.

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

FOREIGN INVESTMENTS

As indicated in the Prospectus, the International, Equity Index, Growth, Eq-
uity Income, Small Company Growth, and Balanced Portfolios may include foreign
securities to a certain extent. Investors should recognize

B-4
<PAGE>

that investing in foreign companies involves certain special considerations
which are not typically associated with investing in U.S. companies.

Country Risk. As foreign companies are not generally subject to uniform ac-
counting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly avail-
able information about certain foreign companies than about domestic compa-
nies. Securities of some foreign companies are generally less liquid and more
volatile than securities of comparable domestic companies. There is generally
less government supervision and regulation of stock exchanges, brokers and
listed companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.

Although each Portfolio will endeavor to achieve most favorable execution
costs in its portfolio transactions, fixed commissions on many foreign stock
exchanges are generally higher than negotiated commissions on U.S. exchanges.
In addition, it is expected that the expenses for custodial arrangements of
the Portfolios' foreign securities will be somewhat greater than the expenses
for the custodial arrangements for handling U.S. securities of equal value.

Certain foreign governments levy withholding taxes against dividend and in-
terest income. Although in some countries a portion of these taxes is recover-
able, the non-recovered portion of foreign withholding taxes will reduce the
income a Portfolio receives from its foreign investments.

Currency Risk. Since the stocks of foreign companies are frequently denomi-
nated in foreign currencies, and since the Portfolios may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Portfolios
will be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, and may incur costs in connection with conver-
sions between various currencies. The investment policies of the Portfolios
permit them to enter into forward foreign currency exchange contracts in order
to hedge holdings and commitments against changes in the level of future cur-
rency rates. Such contracts involve an obligation to purchase or sell a spe-
cific currency at a future date at a price set at the time of the contract.

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

B-5
<PAGE>

COLLATERALIZED MORTGAGE OBLIGATIONS

The High-Grade Bond Portfolio may invest in a relatively conservative class
of collateralized mortgage obligations (CMOs) which feature a high degree of
cash flow predictability and less vulnerability to mortgage prepayment risk.
To reduce credit risk, Vanguard purchases these less risky classes of collat-
eralized mortgage obligations issued only by agencies of the U.S. Government
or privately-issued collateralized mortgage obligations that carry high-qual-
ity investment-grade ratings.

The Short-Term Corporate Portfolio may invest in CMOs that are collateralized
by whole loan mortgages or mortgage pass-through securities.

The Short-Term Corporate Portfolio may also purchase privately-issued CMOs
carrying investment grade ratings. The bonds issued under a CMO structure are
divided into groups with varying maturities, and the cash flows generated by
the mortgages or mortgage pass-through securities in the collateral pool are
used to first pay interest and then pay principal to the CMO bondholders. Un-
der the CMO structure, the repayment of principal among the different groups
is prioritized in accordance with the terms of the particular CMO issuance.
The "fastest-pay" group of bonds, as specified in the prospectus for the issu-
ance, would initially receive all principal payments. When that group of bonds
is retired, the next group or groups, in the sequence, as specified in the
prospectus, receive all of the principal payments until all of the groups are
retired. Aside from market risk, the primary risk involved in any mortgage se-
curity, such as a CMO issuance, is its exposure to prepayment risk. To the ex-
tent a particular group of bonds is exposed to this risk, the bondholder is
generally compensated in the form of higher yield. In order to provide securi-
ty, in addition to the underlying collateral, many CMO issues also include
minimum reinvestment rate and minimum sinking-fund guarantees. Typically, the
Portfolio will invest in those CMOs that most appropriately reflect its aver-
age maturity and market risks profile. Consequently, the Short-Term Corporate
Portfolio invests only in CMOs with highly predictable short-term average ma-
turities.

The maturity of some classes of CMOs may be very difficult to predict because
any such predictions are highly dependent upon assumptions regarding the pre-
payments which CMOs may experience. Deviations in the actual prepayments expe-
rienced may significantly affect the ultimate maturity of CMOs, and in such an
event, the maturity and risk characteristics of CMOs purchased by the Portfo-
lio may be significantly greater or less than intended. The possibility that
rising interest rates may cause prepayments to occur at a slower than expected
rate is known as extension risk. This particular risk may effectively change a
CMO which was considered short- or intermediate-term at the time of purchase
into a long-term security. Alternatively, there are certain classes of CMOs
that are by design constructed to have highly predictable average maturities.
Such CMOs will retain their relative predictability over a broad range of pre-
payment experience. The Portfolio expects to control extension risk by pur-
chasing these specific classes of CMOs which, in the advisers' opinion, are
reasonably predictable.

FUTURES CONTRACTS AND OPTIONS

Each Portfolio of the Fund (except the Money Market Portfolio) may enter into
futures contracts, options, and options on futures contracts to maintain cash
reserves while remaining fully invested, to facilitate trading or to reduce
transaction costs. Futures contracts provide for the future sale by one party
and purchase by another party of a specified amount of a specific security at
a specified future time and at a specified price. Futures contracts which are
standardized as to maturity date and underlying financial instrument are
traded on national futures exchanges. Futures exchanges and trading are regu-
lated under the Commodity Exchange Act by the Commodity Futures Trading Com-
mission ("CFTC"), a U.S. Government agency. Assets committed to futures con-
tracts will be segregated to the extent required by law.

Although futures contracts by their terms call for actual delivery or accept-
ance of the underlying securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying"
a contract which has previously been "sold," or "selling" a contract previ-
ously purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.

B-6
<PAGE>

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 comple-
tion 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. Bro-
kers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin which
may range upward from less than 5% of the value of the contract being traded.

After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the con-
tract value may reduce the required margin, resulting in a repayment of excess
margin to the contract holder. Variation margin payments are made to and from
the futures broker for as long as the contract remains open. The Fund may earn
interest income on its margin deposits.

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

Regulations of the CFTC applicable to the Portfolios of the Fund require that
all of its futures transactions constitute bona fide hedging transactions ex-
cept to the extent that the aggregate initial margins and premiums required to
establish any non-hedging positions do not exceed five percent of the value of
the Fund's portfolio. The Portfolios of the Fund will only sell futures con-
tracts to protect securities they own against price declines or purchase con-
tracts to protect against an increase in the price of securities they intend
to purchase. As evidence of this hedging interest, the Portfolios of the Fund
expect that approximately 75% of their futures contract purchases will be
"completed," that is, equivalent amounts of related securities will have been
purchased or are being purchased by the Portfolios upon sale of open futures
contracts.

Although techniques other than the sale and purchase of futures contracts
could be used to control a Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this expo-
sure. While a Portfolio 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 the underlying securities.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS

A Portfolio of the Fund will not enter into futures contracts transactions to
the extent that, immediately thereafter, the sum of its initial margin depos-
its on open contracts exceeds 5% of the Portfolio's total assets. In addition,
each Portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts would ex-
ceed 20% of the Portfolio's total assets.

RISK FACTORS IN FUTURES TRANSACTIONS

Positions in futures contracts may be closed out only on an exchange which
provides a secondary market for such futures. However, there can be no assur-
ance that a liquid secondary market will exist for any particular futures con-
tract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, a Portfolio would continue
to be required to make daily cash payments to maintain its required margin. In
such situations, if a Portfolio has insufficient cash it may have to sell
portfolio securities to meet daily margin requirements at a time when it may
be disadvantageous to do so. In addition, a Portfolio may be required to make
delivery of the instruments underlying future contracts it holds. The inabil-
ity to close options and futures positions also could have an adverse impact
on the ability to effectively hedge.

B-7
<PAGE>

The Portfolios will minimize the risk that they 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 second-
ary market.

The risk of loss in trading futures contracts in some strategies can be sub-
stantial, 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 sub-
stantial 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 Portfolios are engaged in only for hedging purposes, the Ad-
visers do not believe that the Portfolios are subject to the risks of loss
frequently associated with futures transactions. A Portfolio would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.

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

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

FEDERAL TAX TREATMENT OF FUTURES CONTRACTS

A Portfolio is required for Federal income tax purposes to recognize as in-
come for each taxable year its net unrealized gains and losses on certain
futures contracts as of the end of the year as well as those actually realized
during the year. In most cases, any gain or loss recognized with respect to a
futures contract is considered to be 60% long-term capital gain or loss and
40% short-term capital gain or loss, without regard to the holding period of
the contract. Furthermore, sales of futures contracts which are intended to
hedge against a change in the value of securities held by a Portfolio may af-
fect the holding period of such securities and, consequently, the nature of
the gain or loss on such securities upon disposition. A Portfolio may be re-
quired to defer the recognition of losses on futures contracts to the extent
of any unrecognized gains on related positions held by the Portfolio.

In order for a Portfolio to continue to qualify for Federal income tax treat-
ment 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, inter-
est, income derived from loans of securities, gains from the sale of securi-
ties or foreign currencies, or other income derived with respect to its busi-
ness of investing in such securities or currencies. It is anticipated that any
net gain realized from the closing out of futures contracts will be considered
gain from the sale of securities and therefore be qualifying income for pur-
poses of the 90% requirement.

Each Portfolio of the Fund will distribute to shareholders annually any net
capital gains which have been recognized for Federal income tax purposes in-
cluding unrealized gains at the end of a Portfolio's fiscal year on futures
transactions. Such distributions will be combined with distributions of capi-
tal gains realized on a Portfolio's other investments and shareholders will be
advised on the nature of the payments.

B-8
<PAGE>

FUNDAMENTAL INVESTMENT LIMITATIONS

Each Portfolio of 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 affected series' shares. For these purpos-
es, a "majority" of shares means shares representing the lesser of: (i) 67% or
more of the series' net asset value, so long as shares representing more than
50% of the series' net assets value are present or represented by proxy; or
(ii) more than 50% of the series' net asset value.

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

COMMODITIES. Each Portfolio may not invest in commodities, except that the
Portfolios (except for the Money Market Portfolio) may invest in futures con-
tracts and options transactions. No more than 5% of a Portfolio's assets may
be used as initial margin deposit for futures contracts, and no more than 20%
of the Portfolio's assets may be invested in futures contracts or options at
any time.

DIVERSIFICATION. With respect to 75% of its total assets, each Portfolio may
not: (i) purchase more than 10% of the outstanding voting securities of any
one issuer, or (ii) purchase securities of any issuer if, as a result, more
than 5% of the Portfolio's total assets would be invested in that issuer's se-
curities. This limitation does not apply to obligations of the United States
Government, its agencies, or instrumentalities.

ILLIQUID SECURITIES.* Each Portfolio may not acquire any security if, as a
result, more than 15% (10% with respect to the Money Market Portfolio) of its
net assets would be invested in securities that are illiquid.

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

INVESTING FOR CONTROL.* Each Portfolio may not invest in a company for the
purpose of controlling its management.

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

LOANS. Each Portfolio 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.

MARGIN.* Each Portfolio may not purchase securities on margin or sell securi-
ties short, except as permitted by the Portfolio's investment policies relat-
ing to commodities.

OIL, GAS, MINERALS.* Each Portfolio may not invest in interests in oil, gas
or other mineral exploration or development programs.

PLEDGING ASSETS.* Each Portfolio may not pledge, mortgage or hypothecate more
than 15% of its net assets.

PUT, CALL, STRADDLE, SPREAD OPTIONS.* Each Portfolio may not invest in put,
call, straddle or spread options, except as permitted by the Portfolio's in-
vestment policies relating to commodities.

REAL ESTATE. Each Portfolio 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. Each Portfolio may not issue senior securities.

B-9
<PAGE>

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

The investment limitations set forth above are considered at the time invest-
ment 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.

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

- --------

* The above asterisked items are operational, rather than fundamental, poli-
cies for the Mid-Cap Index, Diversified Value, REIT Index, and Short-Term Cor-
porate Portfolios of Vanguard Variable Insurance Fund. Accordingly, share-
holder approval is not required in order to change these stated policies for
the Mid-Cap Index, Diversified Value, REIT Index, and Short-Term Corporate
Portfolios.

SHARE PRICE

Each Portfolio's share price, or "net asset value" per share, is calculated
by dividing the total assets of the Portfolio, 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 that the exchange is open for trading.

It is the policy of the Money Market Portfolio to attempt to maintain a net
asset value of $1.00 per share for sales and redemptions. The instruments held
by the Portfolio are valued on the basis of amortized cost, which does not
take into account unrealized capital gains or losses. This involves valuing an
instrument at its cost and thereafter assuming a constant amortization to ma-
turity of any discount or premium, regardless of the impact of fluctuating in-
terest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as deter-
mined by amortized cost, is higher or lower than the price which the Portfolio
would receive if it sold the instrument.

The use of amortized cost and the maintenance of the Portfolio's net asset
value at $1.00 is based on its election to operate under Rule 2a-7 under the
Investment Company Act of 1940. As a condition of operating under the rule,
the Portfolio must maintain a dollar-weighted average portfolio maturity of 90
days or less, purchase only instruments having remaining maturities of 397
days or less, and invest only in securities that are determined by methods ap-
proved by the Trustees to present minimal credit risks and that are of high
quality as determined by the requisite rating services, or in the case of an
instrument not so rated, determined by methods approved by the Trustees to be
of comparable quality.

For the other Portfolios of the Fund, 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 securi-
ties is taken from the exchange where the security is primarily traded. Secu-
rities 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 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

B-10
<PAGE>

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 securi-
ties.

Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the Portfo-
lio is valued. If events which materially affect the value of a Portfolio's
investments occur after the close of the securities markets on which such se-
curities are primarily traded, those investments may be valued by such methods
as the Board of Trustees deems in good faith to reflect fair value.

In determining a Portfolio's net asset value per share, all assets and lia-
bilities initially expressed in foreign currencies will be converted into U.S.
dollars using the officially quoted daily exchange rates used by Morgan Stan-
ley Capital International in calculating various benchmarking indices. This
officially quoted exchange rate may be determined prior to or after the close
of a particular securities market. If such quotations are not available, the
rate of exchange will be determined in accordance with policies established in
good faith by the Board of Trustees.

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

PURCHASE OF SHARES

Each Portfolio of the Fund reserves the right in its sole discretion (i) to
suspend the offerings of its shares, (ii) to reject purchase orders when in
the judgment of management such rejection is in the best interest of the Port-
folio, and (iii) to reduce or waive the minimum investment for or any other
restrictions on initial and subsequent investments for certain fiduciary ac-
counts or under circumstances where certain economies can be achieved in sales
of the Portfolio's shares.

REDEMPTION OF SHARES

The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading
on the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not rea-
sonably 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.

The Fund has made an election with the Commission to pay in cash all redemp-
tions requested by any shareholder of record limited in amount during any 90-
day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Trustees
may deem advisable; however, payment will be made wholly in cash unless the
Trustees believe that economic or market conditions exist which would make
such a practice detrimental to the best interests of the Fund. If redemptions
are paid in investment securities, such securities will be valued as set forth
in the Prospectus and a redeeming shareholder would normally incur brokerage
expenses if he converted these securities to cash.

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 securi-
ties held by the Fund.

B-11
<PAGE>

CALCULATION OF YIELD (MONEY MARKET PORTFOLIO)

The current yield of the Fund's Money Market Portfolio is calculated daily on
a base period return of a hypothetical account having a beginning balance of
one share for a particular period of time (generally 7 days). The return is
determined by dividing the net change (exclusive of any capital changes) in
such account by its average net asset value for the period, and then multiply-
ing it by 365/7 to get the annualized current yield. The calculation of net
change reflects the value of additional shares purchased with the dividends by
the Portfolio, including dividends on both the original share and on such ad-
ditional shares. An effective yield, which reflects the effects of compounding
and represents an annualization of the current yield with all dividends rein-
vested, may also be calculated for the Portfolio by adding 1 to the net
change, raising the sum to the 365/7 power, and subtracting 1 from the result.

Set forth below is an example, for purposes of illustration only, of the cur-
rent and effective yield calculations for the Money Market Portfolio for the
7-day base period ending September 30, 1998.

<TABLE>
<CAPTION>
MONEY MARKET
PORTFOLIO
------------
9/30/1998
------------
<S> <C>
Value of account at beginning of period......................... $1.00000
Value of same account at end of period*......................... .
--------
Net Change in account value..................................... $ .
========
</TABLE>
- --------
* Exclusive of any capital changes.

<TABLE>
<CAPTION>
MONEY MARKET
PORTFOLIO
------------
9/30/1998
------------
<S> <C>
Annualized Current Net Yield
(Net Change X /365/7/) / average net asset value................ . %
========
Effective Yield
[(Net Change) + 1]/365/7/ -1.................................... . %
========
Average Weighted Maturity of investments........................ . days
========
</TABLE>

The net asset value of a share of the Money Market Portfolio is $1.00 and it
is not expected to fluctuate. However, the yield of the Portfolio will fluctu-
ate. The Fund has obtained private insurance that partially protects the Money
Market Portfolio against default of principal or interest payments on the in-
struments it holds and against bankruptcy by issuers and credit enhancers of
these instruments. Treasury and other U.S. Government securities held by the
Portfolio are excluded from this coverage. The annualization of a week's divi-
dend is not a representation by the Portfolio as to what an investment in the
Portfolio will actually yield in the future. Actual yields will depend on such
variables as investment quality, average maturity, the type of instruments the
Portfolio invests in, changes in interest rates on instruments, changes in the
expenses of the Portfolio and other factors. Yields are one basis investors
may use to analyze the Portfolio and other investment vehicles; however,
yields of other investment vehicles may not be comparable because of the fac-
tors set forth in the preceding sentence, differences in the time periods com-
pared, and differences in the methods used in valuing portfolio instruments,
computing net asset value and calculating yield.

B-12
<PAGE>

YIELD AND TOTAL RETURN

The yield of each Portfolio of the Fund (except the Money Market Portfolio)
for the 30-day period ended September 30, 1998, is set forth below*. Yields
are calculated daily for each Portfolio. Premiums and discounts on asset-
backed securities are not amortized.

<TABLE>
<S> <C>
High-Grade Bond Portfolio............................................... . %
Balanced Portfolio...................................................... . %
Equity Index Portfolio.................................................. . %
Equity Income Portfolio................................................. . %
Growth Portfolio........................................................ . %
International Portfolio................................................. N/A
High Yield Bond Portfolio............................................... . %
Small Company Growth Portfolio.......................................... . %
</TABLE>
- --------

* Please note: The Mid-Cap Index, Diversified Value, REIT Index, and Short-
Term Corporate Portfolios did not commence operation until December 29, 1998.

The average annual total return of each Portfolio of the Fund (except the
Money Market Portfolio) for one year and the period since inception, is set
forth below+:

<TABLE>
<CAPTION>
YEAR ENDED SINCE
9/30/1998 INCEPTION*
---------- ----------
<S> <C> <C>
High-Grade Bond Portfolio.............................. . % . %
Balanced Portfolio..................................... . % . %
Equity Index Portfolio................................. . % . %
Equity Income Portfolio................................ . % . %
Growth Portfolio....................................... . % . %
International Portfolio................................ . % . %
High Yield Bond Portfolio.............................. . % . %
Small Company Growth Portfolio......................... . % . %
</TABLE>
- --------
* Since Inception:
Equity Index Portfolio and High-Grade Bond Portfolio--April 29, 1991
Balanced Portfolio--May 23, 1991
Equity Income Portfolio and Growth Portfolio--June 7, 1993
International Portfolio--June 3, 1994
High Yield Bond Portfolio and Small Company Growth Portfolio--April 29,
1996

+ Please note: The Mid-Cap Index, Diversified Value, REIT Index and Short-Term
Corporate Portfolio did not commence operations until December 29, 1998.

Total return is computed by finding the average compounded rates of return
over the periods set forth above that would equate an initial amount invested
at the beginning of the periods to the ending redeemable value of the invest-
ment.

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

The Officers of the Fund manage its day-to-day operations and are responsible
to the Fund's Board of Trustees. The Trustees set broad policies for the Fund
and choose its Officers. The following is a list of Trustees and Officers of
the Fund and a statement of their present positions and principal occupations
during the past five years. As a group, the Fund's Trustees and Officers own
less than 1% of the outstanding shares of each Portfolio of the Fund. Each
Trustee also serves as a Director of The Vanguard Group, Inc., and as a
Trustee of each of the

B-13
<PAGE>

35 investment companies administered by Vanguard (34 in the case of Mr.
Malkiel and 28 in the case of Mr. MacLaury. The mailing address of the Trust-
ees and Officers of the Fund is Post Office Box 876, Valley Forge, PA 19482.

JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Trustee*

Senior Chairman and Director of The Vanguard Group, Inc., and Trustee of each
of the investment companies in The Vanguard Group. Director of The Mead Corp.
(Paper Products), General Accident Insurance, and Chris-Craft Industries, Inc.
(Broadcasting & Plastics Manufacturer).

JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*

Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc.,
and Trustee of each of the investment companies in The Vanguard Group.

BARBARA BARNES HAUPTFUHRER, (DOB: 10/11/1928) Trustee

Director of The Great Atlantic and Pacific Tea Co. (Retail Stores), IKON Of-
fice 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 Col-
lege.

JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee

Vice President, Chief Information Officer, and member of the Executive Commit-
tee of Johnson and Johnson (Pharmaceuticals/Consumer Products), Director of
Johnson & Johnson*MERCK Consumer Pharmaceuticals Co., Women First HealthCare,
Inc. (Research and Education Institution), Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.

BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee

President Emeritus of The Brookings Institution (Independent Non-Partisan Re-
search Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.

BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee

Chemical Bank Chairman's Professor of Economics, Princeton University; Direc-
tor 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 Prod-
ucts 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 Chair-
man and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.

J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee

Chairman and Chief Executive Officer of Rohm & Haas Co. (Chemicals); Director
of Cummins Engine Co. (Diesel Engine Company), and The Mead Corp. (Paper Prod-
ucts); and Trustee of Vanderbilt University.

B-14
<PAGE>

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 Variable Insurance Fund is a member of The Vanguard Group of Invest-
ment Companies. Through their jointly-owned subsidiary, The Vanguard Group,
Inc. ("Vanguard"), the Fund and the other Funds 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 certain Vanguard Funds.

Vanguard employs a supporting staff of management and administrative person-
nel needed to provide the requisite services to the Funds and also furnishes
the Funds with necessary office space, furnishings and equipment. Each Fund
pays its share of Vanguard's total expenses which are allocated among the
Funds under methods approved by the Board of Trustees of each Fund. In addi-
tion, each Fund bears its own direct expenses such as legal, auditing and cus-
todian fees.

The Fund's Officers are also Officers and employees of Vanguard. No Officer
or employee owns, or is permitted to own, any securities of any external ad-
viser for the Funds.

Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1 under
the Investment Company Act of 1940. The Code is designed to prevent unlawful
practices in connection with the purchase or sale of securities by persons as-
sociated with Vanguard. Under Vanguard's Code of Ethics certain Officers and
employees of Vanguard who are considered access persons are permitted to en-
gage in personal securities transactions. However, such transactions are sub-
ject to procedures and guidelines similar to, and in many cases more restric-
tive than, those recommended by a blue ribbon panel of mutual fund industry
executives.

Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the Funds.
The amounts which each of the Funds has invested are adjusted from time to
time in order to maintain the proportionate relationship between each Fund's
relative net assets and its contribution to Vanguard's capital. At September
30, 1998, the Fund had contributed capital of $ . to Vanguard (included in
other assets) representing . % of Vanguard's capitalization. The Amended and
Restated Funds' Service Agreement provides as follows: (a) each Vanguard Fund
may invest up to .40% of its current net assets in Vanguard, and (b) there is
no other limitation on the dollar amount that each Vanguard Fund may contrib-
ute to Vanguard's capitalization.

MANAGEMENT. Corporate management and administrative services include: (1) ex-
ecutive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian rela-
tionships; (6) shareholder reporting; and (7) review and evaluation of advi-
sory and other services provided to the Funds by third parties. During the
fiscal year ended September 30, 1998, the Fund's allocated share of Vanguard's
actual net costs of operation relating to management and administrative serv-
ices (including transfer agency) totaled approximately . .

B-15
<PAGE>

DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities
for the Funds in Vanguard. The principal distribution expenses are for adver-
tising, 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
Directors and Officers of Vanguard determine the amount to be spent annually
on distribution activities, the manner and amount to be spent on each Fund,
and whether to organize new investment companies.

One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as
a Group; provided, however, that no Fund's aggregate quarterly rate of contri-
bution for distribution expenses of a marketing and promotional nature shall
exceed 125% of average distribution expense rate for Vanguard, and that no
Fund shall incur annual distribution expenses in excess of 20/100 of 1% of its
average month-end net assets. During the fiscal year ended September 30, 1998,
the Fund paid approximately $ . of Vanguard's distribution and marketing ex-
penses, which represented an effective annual rate of .. of 1% of the Fund's
average month-end net assets.

INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to several Vanguard Funds. These services are provided on an at-cost
basis from a money management staff employed directly by Vanguard. The compen-
sation and other expenses of this staff are paid by the Funds utilizing these
services. During the fiscal years ended September 30, 1996, September 30,
1997, and September 30, 1998, the Fund paid approximately $60,000, $89,000 and
$ . of Vanguard's expenses relating to investment advisory services.

TRUSTEE COMPENSATION

The individuals in the following table serve as Trustees of all Vanguard
Funds, and each Fund pays a proportionate share of the Trustees' compensation.
The Funds employ their officers on a shared basis, as well. However, officers
are compensated by The Vanguard Group, Inc., not the Funds.

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

. 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.

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

. Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of serv-
ice. This annual fee is paid for ten years following retirement, or until
each Trustee's death.

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

COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. For the Fund, we list the amounts paid as compensation
and accrued as retirement benefits by the Fund for each Trustee. In addition,
the table shows the total amount of benefits that we expect each Trustee to
receive from all Vanguard Funds upon retirement, and the total amount of com-
pensation paid to each Trustee by all Vanguard Funds. All information shown is
for the fiscal year ended September 30, 1998:

B-16
<PAGE>

VANGUARD VARIABLE INSURANCE FUND
COMPENSATION TABLE

<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF TRUSTEES FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO TRUSTEES(/1/)
- ----------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle -- -- -- --
John J. Brennan -- -- -- --
Barbara Barnes
Hauptfuhrer $ . $ . $ . $ .
JoAnn Heffernan Heisen $ . $ . $ . $ .
Robert E. Cawthorn(/2/) $ . $ . $ . $ .
Bruce K. MacLaury $ . $ . $ . $ .
Burton G. Malkiel $ . $ . $ . $ .
Alfred M. Rankin, Jr. $ . $ . $ . $ .
John C. Sawhill $ . $ . $ . $ .
James O. Welch, Jr. $ . $ . $ . $ .
J. Lawrence Wilson $ . $ . $ . $ .
</TABLE>

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

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

INVESTMENT ADVISORY SERVICES

The Money Market, High-Grade Bond, Equity Index, REIT Index, Mid-Cap Index,
and Short-Term Corporate Portfolios of the Fund receive investment advisory
services on an "internalized," at-cost basis from an experienced investment
management staff employed directly by Vanguard. The investment management
staff is supervised by the senior Officers of the Fund. Vanguard's Fixed In-
come Group provides advisory services for the Money Market, High-Grade Bond
and Short-Term Corporate Portfolios and Vanguard's Core Management Group pro-
vides advisory services to the Equity Index, REIT Index, and Mid-Cap Index,
Portfolios.

Vanguard's investment management staff is also responsible for the allocation
of principal business and portfolio brokerage and the negotiation of commis-
sions. For the Money Market Portfolio, the purchase and sale of investment se-
curities will ordinarily be principal transactions. Portfolio securities will
normally be purchased directly from the issuer or from an underwriter or mar-
ket maker for the securities. There will usually be no brokerage commissions
paid by the Money Market Portfolio for such purchases. Purchases from under-
writers of securities will include a commission or concession paid by the is-
suer to the underwriter, and purchases from dealers serving as market makers
will include a dealer's mark-up.

In placing portfolio transactions, Vanguard's advisory staff uses its best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain the best available price and most favorable execution at
the lowest commission rate. The full range and quality of brokerage services
available are considered in making these determinations. In selecting broker-
dealers to execute securities transactions for the Portfolios, consideration
will be given to such factors as: the price of the security; the rate of the
commission; the size and difficulty of the order; the reliability, integrity,
financial condition, general execution, and operational capabilities of com-
peting broker-dealers; and the brokerage and research services provided to the
Fund.

The investment policies of each of the Portfolios may lead to frequent
changes in investments, particularly in periods of rapidly fluctuating inter-
est rates. A change in securities held by a Portfolio is known as "portfolio
turnover" and may involve the payment by the Portfolio of dealer mark-ups, un-
derwriting 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 Portfolios is set forth under the heading "Fi-
nancial Highlights" in the Vanguard Variable Insurance Fund Prospectus. The
portfolio turnover rate is not a limiting factor when management deems it de-
sirable to sell or purchase securities. It is impossible to predict whether or
not the portfolio turnover rates in future years will vary significantly from
the rates in recent years.

B-17
<PAGE>

THE BALANCED AND HIGH YIELD BOND PORTFOLIOS' INVESTMENT ADVISORY AGREEMENTS

The Fund employs Wellington Management Company, LLP ("WMC") to manage the in-
vestment and reinvestment of the assets included in the Fund's Balanced Port-
folio and to continuously review, supervise and administer the Balanced Port-
folio's investment program. WMC discharges its responsibilities subject to the
control of the Officers and Trustees of the Fund.

The Fund pays WMC a Basic Fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates,
to the Portfolio's average month-end net assets for the quarter:

<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $500 million.................................................... .100%
Next $500 million..................................................... .050%
Over $1 billion....................................................... .040%
</TABLE>

Effective with the quarter ending June 30, 1997, the quarterly payment to the
Adviser may be increased or decreased by applying an incentive/penalty adjust-
ment reflecting the investment performance of the Portfolio relative to the
investment performance of a "Composite Index", 65% of which shall be comprised
of the Standard & Poor's 500 Composite Stock Price Index (the "Stock Index")
and 35% of which shall be comprised of the Lehman Long-Term Corporate AA or
Better Bond Index (the "Bond Index").

The following table sets forth the adjustment factors to the base advisory
fee payable by the Fund to the Adviser under this investment advisory agree-
ment.

<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH
PERFORMANCE VS. THE PERFORMANCE FEE
COMPOSITE INDEX ADJUSTMENT*
------------------- -----------------
<S> <C>
Less than -6%........................ -0.20 X Basic Fee
Between -6% and -3%.................. -0.10 X Basic Fee
Between -3% and +3%.................. 0 X Basic Fee
Between +3% and +6%.................. +0.10 X Basic Fee
More than +6%........................ +0.20 X Basic Fee
</TABLE>
--------
*For purposes of this calculation, the Basic Fee
is calculated by applying the quarterly rate
against average assets over the same time period
which the performance is measured.

Under the rules of the Securities and Exchange Commission, the new
incentive/penalty fee will not be fully operable until the quarter ending June
30, 1999. Until that date, a "blended" fee rate consisting of varying percent-
ages of (i) the performance adjustment based on the schedule set forth above
(the "new rate"/1/), and (ii) the performance adjustment based on the schedule
set forth in the Fund's previous investment advisory agreement with the advis-
er/2/ (the "previous rate") shall be used as follows:

1. QUARTER ENDING SEPTEMBER 30, 1996. The incentive/penalty fee was cal-
culated as the sum of 8.3% (e.g., one of 12 quarters) of the fee payable
under the new rate plus 91.7% (e.g., 11 of 12 quarters) of the fee payable
under the previous rate.
- --------
/1/ The benchmark used for the new rate calculation will consist of linking the
return of the "new" benchmark (Lehman Long-Term Corporate AA or Better Bond
Index) to the return of the "previous" benchmark (Salomon Brothers High-
Grade Corporate Bond Index) in the same varying percentages that are listed
below.
/2/ The previous incentive/penalty fee structure provided that the Basic Fee be
increased or decreased by an amount equal to .015% per annum (.00375% per
quarter) of the first $500 million of the average month-end assets of the
Fund and .010% per annum (.0025% per quarter) of the average month-end as-
sets of the Fund over $500 million if the Fund's investment performance for
the thirty-six months preceding the end of the quarter was six percentage
points or more above or below, respectively, the investment record of a
"Combined Index" which included the Salomon Brothers High-Grade Corporate
Bond Index for the debt portion of the Combined Index.

B-18
<PAGE>

2. QUARTER ENDING DECEMBER 31, 1996. The incentive/penalty fee was calcu-
lated as the sum of 16.6% of the fee payable under the new rate plus 83.4%
of the fee payable under the previous rate.

3. QUARTER ENDING MARCH 31, 1997. The incentive/penalty was calculated as
the sum of 25% of the fee payable under the new rate plus 75% of the fee
payable under the previous rate.

4. QUARTER ENDING JUNE 30, 1997. The incentive/penalty fee was calculated
as the sum of 33% of the fee payable under the new rate plus 67% of the fee
payable under the previous rate.

5. QUARTER ENDING SEPTEMBER 30, 1997. The incentive/penalty fee was cal-
culated as the sum of 41.6% of the fee payable under the new rate plus
58.4% of the fee payable under the previous rate.

6. QUARTER ENDING DECEMBER 31, 1997. The incentive/penalty fee was calcu-
lated as the sum of 50% of the fee payable under the new rate plus 50% of
the fee payable under the previous rate.

7. QUARTER ENDING MARCH 31, 1998. The incentive/penalty fee was calcu-
lated as the sum of 58.4% of the fee payable under the new rate plus 41.6%
of the fee payable under the previous rate.

8. QUARTER ENDING JUNE 30, 1998. The incentive/penalty fee was calculated
as the sum of 67% of the fee payable under the new rate plus 33% of the fee
payable under the previous rate.

9. QUARTER ENDING SEPTEMBER 30, 1998. The incentive/penalty fee was cal-
culated as the sum of 75% of the fee payable under the new rate plus 25% of
the fee payable under the previous rate.

10. QUARTER ENDING DECEMBER 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 83.4% of the fee payable under the new rate plus
16.6% of the fee payable under the previous rate.

11. QUARTER ENDING MARCH 31, 1999. The incentive/penalty fee shall be
calculated as the sum of 91.7% of the fee payable under the new rate plus
8.3% of the fee payable under the previous rate.

12. QUARTER ENDING JUNE 30, 1999. New rate fully operable.

For the purpose of determining the fee adjustment for investment performance,
as described above, the net assets of the Portfolio shall be averaged over the
same period as the investment performance of the Portfolio and the investment
record of the Composite Index are computed. The "investment performance" of
the Portfolio for the period, expressed as a percentage of the Portfolio's net
asset value per share at the beginning of the period shall be the sum of: (i)
the change in the Portfolio's net asset value per share during such period;
(ii) the value of the Portfolio's cash distributions per share having an ex-
dividend date occurring within the period; and (iii) the per share amount of
capital gains taxes paid or accrued during such period by the Portfolio for
undistributed realized long-term capital gains.

The "investment record" of the Stock Index for the period, expressed as a
percentage of the Stock Index level at the beginning of the period, shall be
the sum of (i) the change in the level of the Stock Index during the period
and (ii) the value, computed consistently with the Stock Index, of cash dis-
tributions having an ex-dividend date occurring within the period made by com-
panies whose securities comprise the Stock Index. The "investment record" of
the Bond Index for the period, expressed as a percentage of the Bond Index
level at the beginning of such period shall be the sum of (i) the change in
the level of the Bond Index during the period and (ii) the value of the inter-
est accrued or paid on the bonds included in the Bond Index, assuming the re-
investment of such interest on a monthly basis. Computation of these two com-
ponents as the Composite Index shall be made on the basis of 65% in the Stock
Index and 35% in the Bond Index at the beginning of each quarter.

In April, 1972, the Securities and Exchange Commission ("SEC") issued Release
No. 7113 under the Investment Company Act of 1940 to call the attention of
trustees and investment advisers to certain factors which must be considered
in connection with investment company incentive fee arrangements. One of these
factors is to "avoid basing significant fee adjustments upon random or insig-
nificant differences" between the investment performance of a fund and that of
the particular index with which it is being compared. The Release provides
that "preliminary studies (of the SEC staff) indicate that as a "rule of
thumb' the performance difference should be at least ^ 10 percentage points"
annually before the maximum performance adjustment may be made. However, the
Release also states that "because of the preliminary nature of these studies,
the Commission is not

B-19
<PAGE>

recommending, at this time, that any particular performance difference exist
before the maximum fee adjustment may be made." The Release concludes that the
directors of a fund "should satisfy themselves that the maximum performance
adjustment will be made only for performance differences that can reasonably
be considered "significant'." The Board of Trustees of Vanguard Variable In-
surance Fund has fully considered the SEC Release and believes that the per-
formance adjustments as included in the above mentioned agreement are appro-
priate, although not within the +/- 10 percentage point per year range suggested
in the Release. Under the investment advisory agreement between Vanguard Vari-
able Insurance Fund and WMC, the maximum performance adjustment is made at a
difference of +/- 6 percentage points from the performance of the index over a
thirty-six month period, which would effectively be the equivalent of approxi-
mately +/- 2 percentage points difference per year.

The present agreement is renewable for successive one-year periods, only if
each renewal is specifically approved by a vote of the Fund's Board of Trust-
ees, including the affirmative votes of a majority of the Trustees who are not
parties to the contract or "interested persons" (as defined in the Investment
Company Act of 1940) of any such party, cast in person at a meeting called for
the purpose of considering such approval. The agreement is automatically ter-
minated if assigned, and may be terminated without penalty at any time (1) ei-
ther by vote of the Board of Trustees of the Fund on 60 days' written notice
to WMC, or (2) by WMC upon 90 days' written notice to the Fund.

During the fiscal years ended September 30, 1996, September 30, 1997, and
September 30, 1998, the Fund paid investment advisory fees of approximately
$311,000 (including an increase of $1,000 based on performance), $431,000 (be-
fore decrease of $6,000 based on performance), and $ . respectively, to WMC.

The Fund also employs WMC to manage the investment and reinvestment of the
assets of the Fund's High Yield Bond Portfolio and to continuously review, su-
pervise and administer the investment program for such Portfolio. WMC dis-
charges its responsibilities subject to the control of the Officers and Trust-
ees of the Fund.

The Fund pays WMC a basic advisory fee at the end of each fiscal quarter cal-
culated by applying a quarterly rate, based on an annual percentage rate of
.06% to the average month-end net assets of the High Yield Bond Portfolio for
the quarter.

The present agreement continues for successive one-year periods, as long as
such continuance is specifically approved at least annually (a) by a vote of a
majority of those members of the Board of Trustees of the Fund who are not
parties to the agreement or interested persons of any such party, cast in per-
son at a meeting called for the purpose of voting such approval, and (b) by
the Board of Trustees of the Fund. The agreement may be terminated by the Fund
at any time, without penalty, by vote of the Board of Trustees of the Fund on
60 days' written notice to WMC, or by WMC on 90 days' written notice to the
Fund. The agreement will automatically terminate in the event of its assign-
ment.

DESCRIPTION OF WMC. WMC is a Massachusetts limited liability partnership of
which the following persons are managing partners: Robert W. Doran, Duncan M.
McFarland and John R. Ryan.

THE GROWTH PORTFOLIO INVESTMENT ADVISORY AGREEMENT

The Fund entered into an investment advisory agreement with Lincoln Capital
Management Company (Lincoln) under which Lincoln manages the investment and
reinvestment of the assets included in the Fund's Growth Portfolio and contin-
uously reviews, supervises and administers the Fund's Growth Portfolio. Lin-
coln will invest or reinvest such assets predominantly in U.S. securities.
Lincoln discharges its responsibilities subject to the control of the Officers
and Trustees of the Fund. Under this agreement the Fund pays Lincoln an advi-
sory fee at the end of each fiscal quarter, calculated by applying a quarterly
rate, based on an annual rate of .15% to the Portfolio's average month-end net
assets for the quarter.

B-20
<PAGE>

The agreement with Lincoln is renewable for successive one-year periods, only
if each renewal is specifically approved by a vote of the Fund's Board of
Trustees, including the affirmative votes of a majority of the trustees who
are not parties to the agreement or "interested persons" (as defined in the
Investment Company Act of 1940) of any such party, cast in person at a meeting
called for the purpose of considering such approval. . The agreement is auto-
matically terminated if assigned, and may be terminated without penalty at any
time (1) either by vote of the Board of Trustees on sixty (60) days' written
notice to Lincoln, or (2) by Lincoln upon ninety (90) days' written notice to
the Fund. During the fiscal years ended September 30, 1996, September 30,
1997, and September 30, 1998, the Fund paid investment advisory fees of ap-
proximately $333,000, $575,000, and $ . respectively to Lincoln.

DESCRIPTION OF LINCOLN

Lincoln is an Illinois corporation in which a controlling interest is held by
the following persons: John W. Croghan, Chairman; J. Parker Hall III, Presi-
dent; Kenneth R. Meyer, Executive Vice President; and Timothy H. Ubben, Execu-
tive Vice President.

THE EQUITY INCOME PORTFOLIO INVESTMENT ADVISORY AGREEMENT

The Fund employs Newell Associates, 525 University Avenue, Palo Alto, Cali-
fornia 94301 ("Newell"), to manage the investment and reinvestment of the as-
sets of the Equity Income Portfolio and to continuously review, supervise and
administer the Portfolio's investment program. Newell discharges its responsi-
bilities subject to the control of the Officers and Trustees of the Fund.

The Fund pays Newell an advisory fee at the end of each fiscal quarter, cal-
culated by applying a quarterly rate, based on an annual percentage rate of
.10%, to the average month-end net assets of the Portfolio for the quarter.

The agreement is renewable for successive one-year periods, only if each re-
newal is specifically approved by a vote of the Fund's Board of Trustees, in-
cluding the affirmative votes of a majority of the Trustees who are not par-
ties to the contract or "interested persons" (as defined in the Investment
Company Act of 1940) of any such party, cast in person at a meeting called for
the purpose of considering such approval. The agreement is automatically ter-
minated if assigned, and may be terminated without penalty at any time (1) ei-
ther by vote of the Board of Trustees of the Fund on 60 days' written notice
to the Adviser, or (2) by the Adviser upon 90 days' written notice to the
Fund. During the fiscal years ended September 30, 1996, September 30, 1997,
and September 30, 1998, the Fund paid investment advisory fees of approxi-
mately $123,000, $203,000, and $ . respectively to Newell.

DESCRIPTION OF THE ADVISER

Newell is a California corporation of which 90% of its outstanding shares are
owned by its directors and officers. The directors of the corporation and the
offices they currently hold are: Roger D. Newell, Chairman & President, Robert
A. Huret, Vice Chairman and Alan E. Rothenberg, Director.

THE INTERNATIONAL PORTFOLIO INVESTMENT ADVISORY AGREEMENT

The Fund has entered into an investment advisory agreement with Schroder Cap-
ital Management International, Inc. ("Schroder Capital") under which Schroder
Capital, through its Schroder Capital Management International, London, En-
gland, branch, supervises and administers the International Portfolio's in-
vestment program. In this regard, it is the responsibility of Schroder Capital
to make decisions relating to the International Portfolio's

B-21
<PAGE>

investment in foreign securities and to place the International Portfolio's
purchase and sale orders for such securities. Schroder Capital will invest or
reinvest the assets of the International Portfolio predominantly in foreign
(non-U.S.) securities. Schroder Capital discharges its responsibilities sub-
ject to the control of the Officers and Trustees of the Fund.

As compensation for the services rendered by Schroder Capital under the
agreement, the Fund pays Schroder Capital at the end of each of the Fund's
fiscal quarters, a Basic Fee calculated by applying an annual percentage rate
of 0.125% to the average value of the month-end net assets of the Interna-
tional Portfolio for the quarter.

The Basic Fee, as provided above, shall be increased or decreased by applying
an adjustment formula based on the investment performance of the International
Portfolio relative to that of the Morgan Stanley Capital International Europe,
Australasia, Far East Index ("EAFE") as follows:

<TABLE>
<CAPTION>
THREE YEAR PERFORMANCE ANNUAL INCENTIVE (+)/
DIFFERENTIAL VS. EAFE PENALTY (-) FEE RATE
---------------------- ---------------------
<S> <C>
+12% or above.................... +0.0500%
Between +6% and +12%............. +0.0250%
Between +6% and -6%.............. -0-
Between -6% and -12%............. -0.0250%
-12% or below.................... -0.0500%
</TABLE>

The incentive/penalty fee adjustment was not fully operable until the quarter
ending June 30, 1997, and, until that date, was calculated according to cer-
tain transition rules. For quarters ending after March 31, 1995 and prior to
June 30, 1997, the incentive/penalty fee adjustment was computed based on a
comparison of the investment performance of the Portfolio and that of the EAFE
Index over the number of months that have elapsed between July 1, 1994 and the
end of the quarter for which the fee is computed. Since June 30, 1997, the
number of months used to calculate the incentive/penalty fee adjustments has
been 36.

For the purpose of determining the fee adjustment for investment performance,
as described above, the net assets of the International Portfolio are averaged
over the same period as the investment performance of the International Port-
folio and the investment record of the EAFE Index are computed.

The investment performance of the International Portfolio for such period,
expressed as a percentage of the net asset value per share of the Interna-
tional Portfolio at the beginning of such period, shall be the sum of: (i) the
change in the net asset value per share of the International Portfolio during
such period; (ii) the value of the cash distributions per share of the Inter-
national Portfolio accumulated to the end of such period; and (iii) the value
of capital gains taxes per share paid or payable by the International Portfo-
lio on undistributed realized long-term capital gains accumulated to the end
of such period. For this purpose, the value of distributions per share of re-
alized capital gains, of dividends per share paid from investment income and
of capital gains taxes per share paid or payable on undistributed realized
long-term capital gains shall be treated as reinvested in shares of the Inter-
national Portfolio at the net asset value per share in effect at the close of
business on the record date for the payment of such distributions and divi-
dends and the date on which provision is made for such taxes, after giving ef-
fect to such distributions, dividends and taxes. The investment record of the
EAFE Index for any period, expressed as a percentage of the EAFE Index level
at the beginning of such period, shall be the sum of (i) the change in the
level of the EAFE Index during such period and (ii) the value, computed con-
sistently with the EAFE Index, of cash distributions made by companies whose
securities comprise the EAFE Index accumulated to the end of such period. For
this purpose cash distributions on the securities which comprise the EAFE In-
dex shall be treated as reinvested in the EAFE Index at least as frequently as
the end of each calendar quarter following the payment of the dividend. The
foregoing notwithstanding, any computation of the investment performance of
the International Portfolio and the investment record of the EAFE index shall
be in accordance with any then applicable rules of the Securities and Exchange
Commission.

The Directors believe that the EAFE Index is an appropriate standard against
which the investment performance of the Fund's International Portfolio can be
measured. The EAFE Index is the only index available which

B-22
<PAGE>

covers the major international markets outside North America. The weighting of
securities in the EAFE Index is based on each stock's relative total market
value, that is, its market price per share times the number of shares out-
standing.

The agreement with Schroder Capital may be continued in accordance with the
same provisions applicable to the Fund's agreement with Lincoln. During the
fiscal years ended September 30, 1996, September 30, 1997, and September 30,
1998, the Fund paid investment advisory fees of approximately $204,000 (in-
cluding an increase of $42,000 based on performance), $315,000 (including an
increase of $60,000 based on performance), and $ . , respectively, to Schroder
Capital.

DESCRIPTION OF SCHRODER CAPITAL

Schroder Capital Management International ("Schroder Capital"), is the London
branch office of Schroder Capital. Schroder Capital is a wholly-owned subsidi-
ary of Schroders Incorporated, One State Street, New York, New York.

Schroders PLC is the holding company parent of a large world-wide group of
banks and financial service companies (referred to as "The Schroder Group")
with associated companies and branch and representative offices located in
eighteen countries.

The Schroder Group specializes in providing investment management services,
with Group funds under management currently in excess of $ . billion. Schro-
der Capital Management International was established in London in 1979 to man-
age international portfolios for U.S. institutions.

THE SMALL COMPANY GROWTH PORTFOLIO INVESTMENT ADVISORY AGREEMENT

The Fund entered into an investment advisory agreement with Granahan Invest-
ment Management, Inc. ("Granahan") under which Granahan manages the investment
and reinvestment of the Small Company Growth Portfolio and continuously re-
views, supervises and administers the Portfolio's investment program with re-
spect to those assets. Granahan discharges its responsibilities subject to the
control of the Officers and Trustees of the Fund.

The Fund pays Granahan a Basic fee at the end of each fiscal quarter, calcu-
lated by applying a quarterly rate based on an annual percentage rate of 0.15%
to the average month-end net assets of the Portfolio for the quarter.

The basic advisory fee may be increased or decreased by applying an
incentive/penalty adjustment to the basic fee reflecting the investment per-
formance of the Portfolio relative to the investment record of the Small Com-
pany Growth Fund Stock Index (the "Index") over the same period as follows:

<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VS. THE INDEX ADJUSTMENT*
------------------------- -----------------
<S> <C>
Trails by -12% or more -0.50 x Basic Fee
Trails by more than -6% up to -12% -0.25 x Basic Fee
Trails/exceeds from -6% through 6% 0.00 x Basic Fee
Exceeds by more than 6% but less than 12% +0.25 x Basic Fee
Exceeds by 12% or more +0.50 x Basic Fee
</TABLE>
- --------
*For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the same time period for which the
performance is measured.

B-23
<PAGE>

Until the quarter ending December 31, 2000, the performance adjustment for
Granahan will be calculated according to the following transition rules:

1. Quarter Ending March 31, 1998. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for the
eleven quarters ending December 31, 1997 with that of the Index for the quar-
ter ending March 31, 1998.

2. Quarter Ending June 30, 1998. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for the
ten quarters ending December 31, 1997 with that of the Index for the two
quarters ending June 30, 1998.

3. Quarter Ending September 30, 1998. Granahan's performance fee adjustment
was determined by linking the investment performance of the Russell 2000 for
the nine quarters ending December 31, 1997 with that of the Index for the
three quarters ending September 30, 1998.

4. Quarter Ending December 31, 1998. Granahan's performance fee adjustment
shall be determined by linking the investment performance of the Russell 2000
for the eight quarters ending December 31, 1997 with that of the Index for
the four quarters ending December 31, 1998.

5. Quarter Ending March 31, 1999. Granahan's performance fee adjustment
shall be determined by linking the investment performance of the Russell 2000
for the seven quarters ending December 31, 1997 with that of the Index for
the five quarters ending March 31, 1999.

6. Quarter Ending June 30, 1999. Granahan's performance fee adjustment shall
be determined by linking the investment performance of the Russell 2000 for
the six quarters ending December 31, 1997 with that of the Index for the six
quarters ending June 30, 1999.

7. Quarter Ending September 30, 1999. Granahan's performance fee adjustment
shall be determined by linking the investment performance of the Russell 2000
for the five quarters ending December 31, 1997 with that of the Index for the
seven quarters ending September 30, 1999.

8. Quarter Ending December 31, 1999. Granahan's performance fee adjustment
shall be determined by linking the investment performance of the Russell 2000
for the four quarters ending December 31, 1997 with that of the Index for the
eight quarters ending December 31, 1999.

9. Quarter Ending March 31, 2000. Granahan's performance fee adjustment
shall be determined by linking the investment performance of the Russell 2000
for the three quarters ending December 31, 1997 with that of the Index for
the nine quarters ending March 31, 2000.

10. Quarter Ending June 30, 2000. Granahan's performance fee adjustment
shall be determined by linking the investment performance of the Russell 2000
for the two quarters ending December 31, 1997 with that of the Index for the
ten quarters ending June 30, 2000.

11. Quarter Ending September 30, 2000. Granahan's performance fee adjustment
shall be determined by linking the investment performance of the Russell 2000
for the quarter ending December 31, 1997 with that of the Index for the
eleven quarters ending September 30, 2000.

12. Quarter Ending December 31, 2000. The Index shall be fully operable.

The agreement is renewable thereafter for successive one-year periods, only
if each renewal is specifically approved by a vote of the Fund's Board of
Trustees, including the affirmative votes of a majority of the Trustees who
are not parties to the contract or "interested persons" (as defined in the In-
vestment Company Act of 1940) of any such party, cast in person at a meeting
called for the purpose of considering such approval. The agreement is automat-
ically terminated if assigned, and may be terminated without penalty at any
time (1) either by vote of the Board of Trustees of the Fund on 60 days' writ-
ten notice to Granahan, or (2) by Granahan upon 90 days' written notice to the
Fund. During the fiscal years ended September 30, 1997 and September 30, 1998,
the Fund paid investment advisory fees of approximately $107,000 (before a de-
crease of $22,000 based on performance), and $ . , respectively, to Granahan.

B-24
<PAGE>

DESCRIPTION OF GRANAHAN INVESTMENT MANAGEMENT, INC.

Granahan is a professional investment advisory firm founded in 1985. As of
September 30, 1998, Granahan held discretionary management authority with re-
spect to approximately $ . billion in assets. John J. Granahan is portfolio
manager of the assets of the Small Company Growth Portfolio. Mr. Granahan has
been serving as portfolio manager of the Vanguard Explorer Fund since February
1990.

THE DIVERSIFIED VALUE PORTFOLIO INVESTMENT ADVISORY AGREEMENT

The Fund has entered into an investment advisory agreement with Barrow, Han-
ley, Mewhinney & Strauss, Inc. ("BHM&S") to manage the Diversified Value Port-
folio. Under this agreement, BHM&S manages the investment and reinvestment of
the Portfolio and continuously reviews, supervises and administers the invest-
ment program of the Portfolio with respect to those assets. BHM&S discharges
its responsibilities subject to the control of the Officers and Trustees of
the Company.

The Portfolio pays BHM&S a basic fee at the end of each fiscal quarter, cal-
culated by applying a quarterly rate, based on the following annual percentage
rates, to the average month-end net assets of the Portfolio for the quarter:

<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------- -----------
<S> <C>
First $200 Million............................................... 0.300%
Next $300 million................................................ 0.200%
Next $500 million................................................ 0.150%
Over $1 billion.................................................. 0.125%
</TABLE>

The payments to BHM&S under the above schedule are subject to an
incentive/penalty fee arrangement which compares the investment performance of
the Portfolio with the performance of the Standard & Poor's/BARRA Value Index.
This arrangement provides for the following adjustments to BHM&S's basic fee:

<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT
---------------------------- -----------------
<S> <C>
Less than or equal to -9%.................................. -0.25 X Basic Fee
Between -9% and -6%........................................ -0.15 X Basic Fee
Between -6% and 6%......................................... 0 X Basic Fee
Between 6% and 9%.......................................... +0.15 X Basic Fee
More than 9%............................................... +0.25 X Basic Fee
</TABLE>
- --------

* For purposes of this calculation, the basic fee is calculated by applying
the quarterly rate against average assets over the 36-month period.

The BARRA Value Index includes stocks in the Standard and Poor's 500 Compos-
ite Stock Price Index with lower than average rates of market price to book
value. These types of stocks are often referred to as "value" stocks.

The investment performance of the Portfolio for any period is expressed as a
percentage of the net asset value per share of the Portfolio at the beginning
of such period. This percentage is equal to the sum of: (i) the change in the
net asset value per share during such period; (ii) the value of the cash dis-
tributions per share of the Portfolio occurring within such period; and (iii)
the value of capital gains taxes per share paid or payable by the Portfolio on
undistributed realized long-term capital gains accumulated to the end of such
period.

The investment record of the BARRA Value Index is calculated quarterly by (i)
multiplying the total return for the quarter (change in market price plus div-
idends) of each stock included in the BARRA Value Index by its weighting in
the BARRA Value Index at the beginning of the quarter, and (ii) adding the
values discussed in (i).

B-25
<PAGE>

For any period, therefore, the investment record of the BARRA Value Index will
be the compounded quarterly returns of the BARRA Value Index.

The Diversified Value Portfolio did not commence operations until . , 1998.

DESCRIPTION OF BARROW, HANLEY, MEWHINNEY & STRAUSS

BHM&S is a Texas corporation controlled by the following officers of BHM&S:
James Purdy Barrow, Principal; Bryant Miller Hanley, Jr., President, Secretary
and Treasurer; Michael Christopher Mewhinney, Principal; and John Luke
Strauss, Principal.

Pursuant to an order of the Securities and Exchange Commission granting
exemptive relief from the Investment Company Act of 1940, the Fund's Board of
Trustees may, without the approval of shareholders, provide for:

A. The employment of a new investment adviser pursuant to the terms of a new
advisory agreement, either as a replacement for an existing adviser or as an
additional adviser.

B. A change in the terms of an advisory agreement.

C. The continued employment of an existing adviser on the same advisory con-
tract terms where a contract has been assigned because of a change in control
of the adviser.

Any such change will be communicated to shareholders in writing.

PORTFOLIO TRANSACTIONS

The investment advisory agreements authorize WMC, Lincoln, Newell, Granahan,
Schroder Capital and BHM&S (the "Advisers") (with the approval of the Fund's
Board of Trustees) to select the brokers or dealers that will execute the pur-
chases and sales of portfolio securities for the Balanced, Growth, Equity In-
come, High Yield Bond, Small Company Growth, International, Mid-Cap Index, Di-
versified Value, REIT Index and Short-Term Corporate Portfolios of the Fund
and directs the Advisers to use their best efforts to obtain the best avail-
able price and most favorable execution as to all transactions for the Bal-
anced, Growth, Equity Income, High Yield Bond, Small Company Growth, Interna-
tional, Mid-Cap Index, Diversified Value, REIT Index and Short-Term Corporate
Portfolios. The Advisers have undertaken to execute each investment transac-
tion at a price and commission which provides the most favorable total cost or
proceeds reasonably obtainable under the circumstances.

In placing portfolio transactions for their respective Portfolios, the Advis-
ers will use their best judgment to choose the broker most capable of provid-
ing the brokerage services necessary to obtain best available price and most
favorable execution. The full range and quality of brokerage services avail-
able will be considered in making these determinations. In those instances
where it is reasonably determined that more than one broker can offer the bro-
kerage services needed to obtain the best available price and most favorable
execution, consideration may be given to those brokers which supply investment
research and statistical information and provide other services in addition to
execution services to the Balanced, Growth, Equity Income, International, Mid-
Cap Index, Diversified Value, REIT Index and Short-Term Corporate Portfolios
of the Fund and/or the Advisers. The Advisers consider such information useful
in the performance of their obligations under the agreement but are unable to
determine the amount by which such services may reduce their expenses.

The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Trustees, the Advisers may cause the Balanced,
Growth, Equity Income, High Yield Bond, Small Company, Diversified Value, and
REIT Index Portfolios of the Fund to pay a broker-dealer which furnishes bro-
kerage and research services a higher commission than that which might be
charged by another broker-dealer for effecting the same transaction; provided
that such commission is deemed reasonable in terms of either that particular
transaction or the overall responsibilities of the Advisers to their respec-
tive Portfolios and the other Funds in the Group.

B-26
<PAGE>

Currently, it is the Fund's policy that the Advisers may at times pay higher
commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that other-
wise might not be available. The Advisers will only pay such higher commis-
sions if they believe this to be in the best interest of the Balanced, Growth,
Equity Income, Small Company Growth, High Yield Bond, International, Diversi-
fied Value and REIT Index Portfolios of the Fund. Some brokers or dealers who
may receive such higher commissions in recognition of brokerage services re-
lated to execution of securities transactions are also providers of research
information to the Advisers and/or the Balanced, Growth, Equity Income, Inter-
national, Diversified Value, and REIT Index Portfolios of the Fund. However,
the Advisers have informed the Fund that they will not pay higher commission
rates specifically for the purpose of obtaining research services.

Some securities considered for investment by the Balanced, Growth, Equity In-
come, Small Company Growth, High Yield Bond, International, Diversified Value
and REIT Index Portfolios of the Fund may also be appropriate for other Funds
and/or clients served by the Advisers. If purchase or sale of securities con-
sistent with the investment policies of the Balanced, Growth, Equity Income,
Small Company Growth, High Yield Bond, International, Diversified Value and
REIT Index Portfolios of the Fund and one or more of these other Funds or cli-
ents served by the Advisers are considered at or about the same time, transac-
tions in such securities will be allocated among the several Funds and clients
in a manner deemed equitable by the Advisers.

During the fiscal years ended September 30, 1996, September 30, 1997, and
September 30, 1998, the Fund paid approximately $727,657, $988,459 , and $ .
in brokerage commissions.

B-27
<PAGE>

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 Van-
guard Variable Insurance 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.

STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.

STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.

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

WILSHIRE 5000 EQUITY INDEX--consists of nearly 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 & Poor's 500 Index.

RUSSELL 3000 STOCK INDEX--a diversified portfolio of over 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 mar-
ket capitalization.

RUSSELL 2000 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 val-
ue-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 convert-
ible 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 Mort-
gage 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 BROTHERS AGGREGATE BOND INDEX--is a market-weighted index that contains
over 5,500 individually priced investment-grade corporate bonds and foreign
dollar-denominated bonds rated BBB or better, U.S. Treasury/agency issues and
mortgage passthrough securities with market value of over $4.5 trillion.

B-28
<PAGE>

LEHMAN LONG-TERM TREASURY BOND INDEX--is composed of all U.S. Treasury bonds
with maturities of 10 years or greater.

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

LEHMAN BROTHERS CORPORATE BOND INDEX--all publicly offered fixed-rate, noncon-
vertible domestic corporate bonds rated Baa by Moody's, with a maturity longer
than 1 year and with more than $100 million outstanding. This index includes
over 3,000 issues.

LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman Cor-
porate Bond Index covering all corporate, publicly issued, fixed-rate, noncon-
vertible U.S. debt issues rated at least Baa, with at least $100 million prin-
cipal outstanding and maturity greater than 10 years.

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

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

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

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

COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Long-Term Cor-
porate 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.

LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper de-
fines 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 perfor-
mance 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 Analyt-
ical Services, Inc.

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

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

LIPPER VARIABLE INVESTMENT PRODUCT PERFORMANCE ANALYSIS--a monthly publication
that lists variable annuity and variable life separate accounts, and provides
information on assets, asset rankings, unit values (month-end), performance
and performance rankings.

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

B-29
<PAGE>

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

VARDS AVERAGE CONTRACT EXPENSE--tables that list the average total expenses of
variable annuity contracts sold in the United States. The average is based
upon a hypothetical $25,000 investment in each variable annuity contract cov-
ered by the study.

MORNINGSTAR'S BENCHMARK-VARIABLE ANNUITY--average total expenses of variable
annuity contracts sold in the United States. With respect to the contract
charges, Morningstar lists a dollar amount which Vanguard converts to basis
points for comparison. This conversion is based on a $25,000 investment in a
variable annuity.

FINANCIAL STATEMENTS

The Fund's Financial Statements and financial highlights, for the year ended
September 30, 1998, appearing in the Vanguard Variable Insurance Fund Annual
Report to Shareholders and the report thereon of PricewaterhouseCoopers LLP,
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information. The Fund's 1998 Annual Report to
Shareholders is enclosed with this Statement of Additional Information. Please
note, the REIT Index, Mid-Cap Index, Short-Term Corporate, and Diversified
Value Portfolios did not begin operations until . , 1998.

B-30
<PAGE>

APPENDIX -- DESCRIPTION OF SECURITIES AND RATINGS

A-1 AND PRIME-1 COMMERCIAL PAPER RATINGS

Commercial paper rated A-1 by Standard & Poor's has the following character-
istics: (1) liquidity ratios are adequate to meet cash requirements; (2) long-
term senior debt is rated "A" or better; (3) the issuer has access to at least
two additional channels of borrowing; (4) basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances; (5) typically, the
issuer's industry is well established and the issuer has a strong position
within the industry; and (6) the reliability and quality of management are un-
questioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is A-1, A-2, or A-3. The rating Prime-1
is the highest commercial paper rating assigned by Moody's. Among the factors
considered by Moody's in assigning ratings are the following: (1) evaluation
of the management of the issuer; (2) economic evaluation of the issuer's in-
dustry or industries and the appraisal of speculative-type risks which may be
inherent in certain areas; (3) evaluation of the issuer's products in relation
to competition and customer acceptance; (4) liquidity; (5) amount and quality
of long-term debt; (6) trend of earnings over a period of ten years; (7) fi-
nancial strength of a parent company and the relationships which exist with
the issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparations
to meet such obligations.

VARIABLE AMOUNT MASTER DEMAND NOTES

Variable amount master demand notes are demand obligations that permit the
investment of fluctuating amounts at varying market rates of interest pursuant
to an arrangement between the issuer and a commercial bank acting as agent for
the payees of such notes, whereby both parties have the right to vary the
amount of the outstanding indebtedness on the notes. Because variable amount
master demand notes are direct lending arrangements between a lender and a
borrower, it is not generally contemplated that such instruments will be trad-
ed, and there is no secondary market for these notes, although they are re-
deemable (and thus immediately repayable by the borrower) at face value, plus
accrued interest, at any time. In connection with a Portfolio's investment in
variable amount master demand notes, Vanguard's investment management staff
will monitor, on an ongoing basis, the earning power, cash flow and other li-
quidity ratios of the issuer, and the borrower's ability to pay principal and
interest on demand.

BOND RATINGS

Excerpts from Moody's Investors Service, Inc. description of its four highest
preferred bond ratings:

AAA--judged to be of the best quality. AA--judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. A--possess many favorable investment attributes and
are to be considered as "upper-medium-grade obligations". 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 characteris-
tically unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.

Moody's applies numerical modifiers 1, 2 and 3 in each generic rating classi-
fication from AA through B. The modifier 1 indicates that the obligation ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and 3 indicates a ranking in the lower end of that generic
rating category.

Excerpts from Standard & Poor's Corporation description of its four highest
bond ratings:

AAA--highest rating assigned. Capacity to pay interest and repay principal is
extremely strong. AA--a very strong capacity to pay interest and repay princi-
pal and differs from the highest rated issues only in small degree. A--has a
strong capacity to pay interest and repay principal although it is somewhat
more susceptible to the

B-31
<PAGE>

adverse effects of changes in circumstances and economic conditions than debt
in higher rated categories. BBB--regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate pro-
tection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.

Standard & Poor's may apply indicators "+", no character and "-" to its rat-
ing categories from AA to CCC. The indicators show relative standing within
the major rating categories.

B-32
<PAGE>

PART C

VANGUARD VARIABLE INSURANCE FUND

OTHER INFORMATION

ITEM 23. EXHIBITS
<TABLE>
<C> <S>
(a) Declaration of Trust*
(b) By-Laws*
(c) Not Applicable
(d) Investment Advisory Contracts**
(e) Not Applicable
(f) Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information
(g) Custodian Agreement**
(h) Amended and Restated Funds' Service Agreement*
(i) Legal Opinion*
(j) Consent of Independent Accountants+
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Financial Data Schedule+
(o) Not Applicable
</TABLE>
- --------

+Filed herewith

*Filed previously

**Filed previously for existing Portfolios; filed herewith for newly effective
Portfolios

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 Regis-
trant 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 gener-
ally provides that the Registrant shall indemnify its Trustees and Officers
from any liability arising out of their past or present service in that capac-
ity. Among other things, this provision excluded any liability arising by rea-
son of willful misfeasance, bad faith, gross negligence, or the reckless dis-
regard of the duties involved in the conduct of the Trustee's or Officer's
office with the Registrant.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Investment advisory services are provided to six Portfolios of the Registrant
on an at cost basis by The Vanguard Group, Inc., a jointly-owned subsidiary of
the Registrant and the other Funds in the Group. See the information concern-
ing The Vanguard Group set forth in Parts A and B.

Investment advisory services are provided to the HIGH YIELD BOND PORTFOLIO
and the BALANCED PORTFOLIO by Wellington Management Company, LLP ("Wellington
Management"). Wellington Man-
<PAGE>

agement is an investment adviser registered under the Investment Advisers Act
of 1940, as amended (the "Advisers Act"). The list required by this Item 26 of
officers and partners of Wellington Management, together with any information
as to any business profession, vocation or employment of a substantial nature
engaged in by such officers and partners during the past two years, is incor-
porated herein by reference from Schedules B and D of Form ADV filed by Wel-
lington Management pursuant to the Advisers Act (SEC File No. 801-159089).

Investment advisory services are provided to the EQUITY INCOME PORTFOLIO by
Newell Associates. Newell Associates 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 Newell Associates, to-
gether with any information as to any business profession, vocation or employ-
ment of a substantial nature engaged in by such officers and directors during
the past two years, is incorporated herein by reference from Schedules B and D
of Form ADV filed by Newell Associates pursuant to the Advisers Act (SEC File
No. 801-26949).

Investment advisory services are provided to the GROWTH PORTFOLIO by Lincoln
Capital Management Company ("Lincoln"). Lincoln is an investment adviser reg-
istered under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"). The list required by this Item 26 of officers and directors of Lincoln,
together with any information as to any business profession, vocation or em-
ployment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated herein by reference from Schedules
B and D of Form ADV filed by Lincoln pursuant to the Advisers Act (SEC File
No. 801-11417).

Investment advisory services are provided to the SMALL COMPANY GROWTH PORTFO-
LIO by Granahan Investment Management, Inc. ("Granahan"). Granahan is an in-
vestment 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 Granahan, 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 from Schedules B and D of Form ADV filed by Granahan pursuant to the
Advisers Act (SEC File No. 801-23705).

Investment advisory services are provided to the INTERNATIONAL PORTFOLIO by
Schroder Capital Management International, Inc. ("Schroder Capital"). Schroder
Capital 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 Schroder Capital, together with any information as
to any business profession, vocation or employment of a substantial nature en-
gaged in by such officers and directors during the past two years, is incorpo-
rated herein by reference from Schedules B and D of Form ADV filed by Schroder
Capital pursuant to the Advisers Act (SEC File No. 801-15834).

Investment advisory services are provided to the DIVERSIFIED VALUE PORTFOLIO
by Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S"). BHM&S 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 BHM&S, together with any information as to any business profession, voca-
tion or employment of a substantial nature engaged in by such officers and di-
rectors during the past two years, is incorporated herein by reference from
Schedules B and D of Form ADV filed by BHM&S pursuant to the Advisers Act (SEC
File No. . ).

ITEM 27. PRINCIPAL UNDERWRITERS

(a) Not Applicable
(b) Not Applicable

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., Valley Forge, Pennsylvania 19482; and the Registrant's
Custodians, First Union National Bank, Philadelphia, Pa., Morgan Stanley Trust
Co., Brooklyn, N.Y., and State Street Bank and Trust Company, Boston, MA.

ITEM 29. MANAGEMENT SERVICES

Other than the Amended and Restated Funds' Service Agreement with The Van-
guard Group, Inc. which was previously filed and described in Part B hereof
under "Management of the Fund;" the Registrant is not a party to any manage-
ment-related service contract.

ITEM 30. UNDERTAKING

Not Applicable
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVEST-
MENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES IT HAS DULY CAUSED THIS
POST-EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN OF VALLEY
FORGE AND THE COMMONWEALTH OF PENNSYLVANIA, ON THE 14TH DAY OF OCTOBER, 1998.

Vanguard Variable Insurance Fund

(Signature)
BY: ______________________________

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

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

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
(signature)
BY: _______________________________ John C. Bogle*, Senior October 14, 1998
(HEIDI STAM) Chairman of the Board
and Trustee

(signature)
BY: _______________________________ John J. Brennan*, October 14, 1998
(HEIDI STAM) President, Chief
Executive Officer,
Chairman and Trustee

(signature)
BY: _______________________________ Barbara B. Hauptfuhrer*, October 14, 1998
(HEIDI STAM) Trustee

(signature)
BY: _______________________________ JoAnn Heffernan Heisen*, October 14, 1998
(HEIDI STAM) Trustee

(signature)
BY: _______________________________ Bruce K. MacLaury*, October 14, 1998
(HEIDI STAM) Trustee

(signature)
BY: _______________________________ Burton G. Malkiel*, October 14, 1988
(HEIDI STAM) Trustee

(signature)
BY: _______________________________ Alfred M. Rankin, Jr.,* October 14, 1998
(HEIDI STAM) Trustee

(signature)
BY: _______________________________ John C. Sawhill,* October 14, 1998
(HEIDI STAM) Trustee
</TABLE>

<PAGE>

SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
(signature)
BY: _________________________________ James O. Welch, Jr.,* October 14, 1998
(HEIDI STAM) Trustee

(signature)
BY: _________________________________ J. Lawrence Wilson*, October 14, 1998
(HEIDI STAM) Trustee

(signature)
BY: _________________________________ Thomas J. Higgins*, October 14, 1998
(HEIDI STAM) Treasurer, Principal
Financial Officer and
Accounting Officer
</TABLE>

* By Power of Attorney. See File Number . , . . Incorporated by Refer-
ence.
<PAGE>

VANGUARD VARIABLE INSURANCE FUND

EXHIBIT INDEX

<TABLE>
<S> <C>
Financial Data Schedule................................................... EX-27
</TABLE>

<PAGE>
<ARTICLE> 6
<RESTATED>
<CIK> 0000857490
<NAME> VANGUARD VARIABLE INSURANCE FUND
<SERIES>
<NUMBER> 001
<NAME> MONEY MARKET PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 451,014
<INVESTMENTS-AT-VALUE> 451,014
<RECEIVABLES> 6,365
<ASSETS-OTHER> 25
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 457,404
<PAYABLE-FOR-SECURITIES> 5,657
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,374
<TOTAL-LIABILITIES> 12,031
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 445,381
<SHARES-COMMON-STOCK> 445,382
<SHARES-COMMON-PRIOR> 392,602
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 445,373
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,508
<OTHER-INCOME> 0
<EXPENSES-NET> 384
<NET-INVESTMENT-INCOME> 11,124
<REALIZED-GAINS-CURRENT> (5)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 11,119
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 11,124
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 434,394
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<PAGE>
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<PAGE>
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<PAGE>
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