VANGUARD VARIABLE INSURANCE FUND
485BPOS, 2000-12-27
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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. 18
                                      AND


        REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940


                                AMENDMENT NO. 21


                        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


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

               IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
          ON DECEMBER 29, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.


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<PAGE>


                                        VANGUARD(R) VARIABLE
                                        INSURANCE FUND

                                        December 29, 2000






This prospectus contains
financial data for the
Portfolios through the
fiscal year ended
September 30, 2000


Prospectus


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

          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.


                                        [A MEMBER OF
                                         THE VANGUARD GROUP(R) LOGO]

<PAGE>

VANGUARD VARIABLE INSURANCE FUND
Prospectus

December 29, 2000


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
  CONTENTS
  <S>                                  <C>                                   <C>
------------------------------------------------------------------------------------------------------------
  1  AN INTRODUCTION TO VANGUARD          10 GROWTH PORTFOLIO                   20 OVERVIEW OF THE BALANCED
     VARIABLE INSURANCE FUND                                                       PORTFOLIO
                                          11 SMALL COMPANY GROWTH
  1  PORTFOLIO PROFILES                      PORTFOLIO                          20 OVERVIEW OF THE STOCK
                                                                                   PORTFOLIOS
     1  MONEY MARKET PORTFOLIO            12 INTERNATIONAL PORTFOLIO
                                                                             27 TURNOVER RATE
     2  SHORT-TERM CORPORATE
        PORTFOLIO                         13 REIT INDEX PORTFOLIO            28 THE PORTFOLIOS AND
                                                                                VANGUARD
     3  HIGH-GRADE BOND                14 MORE ON THE PORTFOLIOS
        PORTFOLIO                                                            28 INVESTMENT ADVISERS
                                          14 MARKET RISK
     4  HIGH YIELD BOND PORTFOLIO                                            31 TAXES
                                          14 MANAGER RISK
     5  BALANCED PORTFOLIO                                                   31 SHARE PRICE
                                          15 FUTURES AND OPTIONS
     6  EQUITY INCOME PORTFOLIO              CONTRACTS                       32 FINANCIAL HIGHLIGHTS

     7  DIVERSIFIED VALUE PORTFOLIO       15 OVERVIEW OF THE MONEY           39 GENERAL INFORMATION
                                             MARKET PORTFOLIO
     8  EQUITY INDEX PORTFOLIO                                               40 GLOSSARY
                                          16 OVERVIEW OF THE BOND
     9  MID-CAP INDEX PORTFOLIO              PORTFOLIOS
------------------------------------------------------------------------------------------------------------
</TABLE>

--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT

This  prospectus  explains the  objective,  risks,  and  strategies  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 decide  which  portfolio,  if any, is the
right investment for you. We suggest that you keep it for future reference.
--------------------------------------------------------------------------------

<PAGE>

1

AN INTRODUCTION TO VANGUARD VARIABLE INSURANCE FUND

This prospectus explains the investment objectives,  policies,  strategies,  and
risks,  associated  with  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  section  you'll  find  Portfolio  Profiles.  Each
Profile  summarizes  important  facts about a Portfolio,  including  information
about  its  investment  objective,   policies,   strategies,   risks,  and  past
performance.

     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.

A NOTE ON FEES

As an  investor in any of the  Portfolios,  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.  Detailed information about the cost of investing in a
Portfolio is presented in the "Fee Table" section of the accompanying prospectus
for the variable  annuity or variable  insurance  plan through  which  Portfolio
shares are offered.

--------------------------------------------------------------------------------
                               PLAIN TALK ABOUT
                              COSTS OF INVESTING

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

--------------------------------------------------------------------------------
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 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 very 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.

     AN  INVESTMENT IN THE PORTFOLIO IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT  INSURANCE  CORPORATION  OR ANY OTHER  GOVERNMENT  AGENCY.  ALTHOUGH THE
PORTFOLIO  SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS
POSSIBLE TO LOSE MONEY BY INVESTING IN THE PORTFOLIO.

<PAGE>

2

BAR CHART AND PERFORMANCE TABLE

The  following  bar  chart  and  table  provide  an  indication  of the risks of
investing in the Money  Market  Portfolio.  The bar chart shows the  Portfolio's
performance  in each  calendar  year since  inception.  The table  shows how the
Portfolio's  average  annual total returns for one and five  calendar  years and
since inception compare with 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.  If such fees and expenses  were included in the
calculation of the  Portfolio's  returns,  such returns would be lower.  Keep in
mind that the Portfolio's past performance does not indicate how it will perform
in the future.

      ------------------------------------------------------------------
                              ANNUAL TOTAL RETURNS*
      ------------------------------------------------------------------
                               1992         3.66%
                               1993         3.03%
                               1994         4.19%
                               1995         5.88%
                               1996         5.42%
                               1997         5.55%
                               1998         5.50%
                               1999         5.18%
      ------------------------------------------------------------------
      *The Portfolio's year-to-date return as of the most recent calendar
       quarter ended September 30, 2000, was 4.49%.
      ------------------------------------------------------------------

     During the period shown in the bar chart, the highest return for a calendar
quarter was 1.66% (quarter ended September 30, 2000),  and the lowest return for
a quarter was 0.75% (quarter ended June 30, 1993).

     --------------------------------------------------------------------------
          AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
     --------------------------------------------------------------------------
                                          1 YEAR   5 YEARS    SINCE INCEPTION*
     --------------------------------------------------------------------------
     Money Market Portfolio                5.18%    5.51%          4.85%
     Salomon Smith Barney 3-Month          4.74     5.20           4.67
      Treasury Index
     --------------------------------------------------------------------------
     *May 2, 1991.
     --------------------------------------------------------------------------

     If you would like to know the current  seven-day  yield for the  Portfolio,
call a Vanguard Variable Insurance Fund Associate at 1-800-522-5555.

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.

--------------------------------------------------------------------------------
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  dollar-weighted  average
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  dollar-weighted
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 SHARE PRICE AND YIELD, LIKE THE OVERALL  SHORT-TERM BOND MARKET,
MAY 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.

<PAGE>

3

-    Credit  risk,  which is the  chance  that a bond  issuer  will  fail to pay
     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 February 9, 1999, so performance  information
(including  annual total  returns and average  annual total  returns) for a full
calendar year is not yet available.

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.

--------------------------------------------------------------------------------
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 a higher  level of income by
attempting to match the  performance  of a broad-based  market index of publicly
traded, investment-grade bonds.

INVESTMENT STRATEGIES
The Portfolio invests in a sample of fixed-income and mortgage-backed securities
included  in  the  Lehman  Brothers  Aggregate  Bond  Index.  As  a  group,  the
Portfolio's   holdings   will  have   characteristics   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  higher-yielding  bond earlier
     than scheduled. Forced to invest the unanticipated proceeds at lower rates,
     the Portfolio would experience a decline in income.
-    Credit  risk,  which is the  chance  that a bond  issuer  will  fail to pay
     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
     Portfolio's income to decline. Income risk is generally low for longer-term
     bonds.

BAR CHART AND PERFORMANCE TABLE

The  following  bar  chart  and  table  provide  an  indication  of the risks of
investing in the High-Grade Bond Portfolio.  The bar chart shows the Portfolio's
performance  in each  calendar  year since  inception.  The table  shows how the
Portfolio's  average  annual total returns for one and five  calendar  years and
since  inception  compare with 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.  If such fees and expenses  were included in the
calculation of the  Portfolio's  returns,  such returns would be lower.  Keep in
mind that the Portfolio's past performance does not indicate how it will perform
in the future.


<PAGE>

4

      ------------------------------------------------------------------
                             ANNUAL TOTAL RETURNS*
      ------------------------------------------------------------------
                               1992         6.38%
                               1993         9.40%
                               1994        -2.68%
                               1995        18.04%
                               1996         3.53%
                               1997         9.40%
                               1998         8.60%
                               1999        -0.80%
      ------------------------------------------------------------------

      *The Portfolio's year-to-date return as of the most recent calendar
       quarter ended September 30, 2000, was 6.82%.

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

     During the period shown in the bar chart, the highest return for a calendar
quarter  was 6.00%  (quarter  ended June 30,  1995), and the lowest return for a
quarter was -2.78% (quarter ended March 31, 1994).

     --------------------------------------------------------------------------
          AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
     --------------------------------------------------------------------------
                                          1 YEAR   5 YEARS    SINCE INCEPTION*
     --------------------------------------------------------------------------
     High-Grade Bond Portfolio            -0.80%    7.57%          7.05%
     Lehman Aggregate Bond Index          -0.82     7.73           7.38
     --------------------------------------------------------------------------
     *April 29, 1991.
     --------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------
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  independent  rating  agencies or in unrated  securities of
comparable quality.  The Portfolio may not invest more than 20% of its assets in
securities with credit ratings lower than B or that are unrated. 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 pay
     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
     Portfolio's  income to  decline.  Income  risk is  generally  moderate  for
     intermediate-term bonds.

<PAGE>

5

BAR CHART AND PERFORMANCE TABLE

The  following  bar  chart  and  table  provide  an  indication  of the risks of
investing in the High Yield Bond Portfolio.  The bar chart shows the Portfolio's
performance  in each  calendar  year since  inception.  The table  shows how the
Portfolio's  average  annual  total  returns  for one  calendar  year and  since
inception compare with 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.  If such fees and expenses were included in the calculation of
the  Portfolio's  returns,  such returns  would be lower.  Keep in mind that the
Portfolio's  past  performance  does not  indicate  how it will  perform  in the
future.

      ------------------------------------------------------------------
                             ANNUAL TOTAL RETURNS*
      ------------------------------------------------------------------
                               1997       12.07%
                               1998        4.06%
                               1999        2.89%
      ------------------------------------------------------------------
      *The Portfolio's year-to-date return as of the most recent calendar
       quarter ended September 30, 2000, was 1.02%.

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

     During the period shown in the bar chart, the highest return for a calendar
quarter  was 5.08%  (quarter  ended June 30,  1997), and the lowest return for a
quarter was -2.66% (quarter ended September 30, 1998).

     --------------------------------------------------------------------------
          AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
     --------------------------------------------------------------------------
                                                    1 YEAR    SINCE INCEPTION*
     --------------------------------------------------------------------------
     High Yield Bond Portfolio                       2.89%         7.79%

     Lehman Brothers High Yield Bond Index           2.39          7.02

     --------------------------------------------------------------------------
     *June 3, 1996.
     --------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------
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-cap  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.


<PAGE>

6

-    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 pay
     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  following  bar  chart  and  table  provide  an  indication  of the risks of
investing  in the  Balanced  Portfolio.  The bar  chart  shows  the  Portfolio's
performance  in each  calendar  year since  inception.  The table  shows how the
Portfolio's  average  annual total returns for one and five  calendar  years and
since inception compare with 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-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.  If such fees and expenses
were included in the calculation of the Portfolio's returns,  such returns would
be lower.  Keep in mind that the Portfolio's  past performance does not indicate
how it will perform in the future.

      ------------------------------------------------------------------
                              ANNUAL TOTAL RETURNS*
      ------------------------------------------------------------------
                               1992         7.18%
                               1993        13.18%
                               1994        -0.61%
                               1995        32.43%
                               1996        16.23%
                               1997        23.13%
                               1998        12.04%
                               1999         4.32%
      ------------------------------------------------------------------
      *The Portfolio's year-to-date return as of the most recent calendar
       quarter ended September 30, 2000, was 3.16%.

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

     During the period shown in the bar chart, the highest return for a calendar
quarter was 12.06%  (quarter  ended June 30,  1997), and the lowest return for a
quarter was -5.23% (quarter ended September 30, 1999).

     --------------------------------------------------------------------------
           AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
     --------------------------------------------------------------------------
                                1 YEAR         5 YEARS        SINCE INCEPTION*
     --------------------------------------------------------------------------
     Balanced Portfolio          4.32%         17.24%              13.14%
     S&P 500 Index              21.04          28.56               19.92
     Composite Stock/Bond
      Index**                   10.61          21.39               15.52
     --------------------------------------------------------------------------

      *May 23, 1991.
     **Weighted 65% in the S&P 500 Index and 35% in the Lehman Brothers Long
       Credit A or Better Bond Index.

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

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

<PAGE>

7

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  following  bar  chart  and  table  provide  an  indication  of the risks of
investing in the Equity Income  Portfolio.  The bar chart shows the  Portfolio's
performance  in each  calendar  year since  inception.  The table  shows how the
Portfolio's  average  annual total returns for one and five  calendar  years and
since  inception  compare with 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.  If such fees and expenses  were included in the
calculation of the  Portfolio's  returns,  such returns would be lower.  Keep in
mind that the Portfolio's past performance does not indicate how it will perform
in the future.

      ------------------------------------------------------------------
                             ANNUAL TOTAL RETURNS*
      ------------------------------------------------------------------
                               1994        -1.24%
                               1995        38.90%
                               1996        18.69%
                               1997        34.39%
                               1998        17.62%
                               1999        -2.51%
      ------------------------------------------------------------------
      *The Portfolio's year-to-date return as of the most recent calendar
       quarter ended September 30, 2000, was 3.70%.

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

     During the period shown in the bar chart, the highest return for a calendar
quarter was 13.21%  (quarter  ended June 30,  1997), and the lowest return for a
quarter was -8.58% (quarter ended September 30, 1999).

     --------------------------------------------------------------------------
          AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
     --------------------------------------------------------------------------
                                          1 YEAR   5 YEARS    SINCE INCEPTION*
     --------------------------------------------------------------------------
     Equity Income Portfolio              -2.51%    20.50%         15.93%
     S&P 500 Index                        21.04     28.56          22.36
     --------------------------------------------------------------------------
     *June 7, 1993.
     --------------------------------------------------------------------------

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.

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

<PAGE>

8

INVESTMENT STRATEGIES
The  Portfolio  invests  primarily  in common  stocks  of large and  medium-size
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/or  below-average  prices in  relation  to such  financial
measures as earnings, book value, and cash flow.

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 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 February 9, 1999, so performance  information
(including  annual total  returns and average  annual total  returns) for a full
calendar year 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.

--------------------------------------------------------------------------------
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 provide  long-term  growth of capital and
income by attempting to match the  performance of a broad-based  market index 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  Standard  & Poor's  500  Composite  Stock  Price  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.

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:

-    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-cap 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  following  bar  chart  and  table  provide  an  indication  of the risks of
investing in the Equity  Index  Portfolio.  The bar chart shows the  Portfolio's
performance  in each  calendar  year since  inception.  The table  shows how the
Portfolio's  average  annual total returns for one and five  calendar  years and
since inception compare with those of a broad-based stock market


<PAGE>

9

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. If such fees and expenses were
included in the  calculation of the Portfolio's  returns,  such returns would be
lower.  Keep in mind that the Portfolio's past performance does not indicate how
it will perform in the future.

      ------------------------------------------------------------------
                             ANNUAL TOTAL RETURNS*
      ------------------------------------------------------------------
                               1992         7.36%
                               1993         9.77%
                               1994         1.14%
                               1995        37.37%
                               1996        22.86%
                               1997        33.17%
                               1998        28.68%
                               1999        21.05%
      ------------------------------------------------------------------
      *The Portfolio's year-to-date return as of the most recent calendar
       quarter ended September 30, 2000, was -1.62%.
      ------------------------------------------------------------------

     During the period shown in the bar chart, the highest return for a calendar
quarter was 21.42% (quarter ended December 31, 1998),  and the lowest return for
a quarter was -9.93% (quarter ended September 30, 1998).

     --------------------------------------------------------------------------
          AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
     --------------------------------------------------------------------------
                                          1 YEAR   5 YEARS    SINCE INCEPTION*
     --------------------------------------------------------------------------
     Equity Index Portfolio               21.05%    28.48%         19.60%
     S&P 500 Index                        21.04     28.56          19.86
     --------------------------------------------------------------------------
     *April 29, 1991.
     --------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------
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 provide  long-term  growth of capital by
attempting to match the  performance of a broad-based  market index 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 Standard & Poor's 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.  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.

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:
-    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-cap 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.

<PAGE>

10

PERFORMANCE
The Portfolio began  operations on February 9, 1999, so performance  information
(including  annual total  returns and average  annual total  returns) for a full
calendar year 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.

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

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.  Because the Portfolio  invests a higher percentage of assets
in its ten largest  holdings  than the  average  stock fund,  the  Portfolio  is
subject to the risk that its performance may be hurt  disproportionately  by the
poor performance of relatively few stocks. The Portfolio is also subject to:
-    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.
-    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  following  bar  chart  and  table  provide  an  indication  of the risks of
investing  in  the  Growth  Portfolio.  The  bar  chart  shows  the  Portfolio's
performance  in each  calendar  year since  inception.  The table  shows how the
Portfolio's  average  annual total returns for one and five  calendar  years and
since  inception  compare with 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.  If such fees and expenses  were included in the
calculation of the  Portfolio's  returns,  such returns would be lower.  Keep in
mind that the Portfolio's past performance does not indicate how it will perform
in the future.

      ------------------------------------------------------------------
                             ANNUAL TOTAL RETURNS*
      ------------------------------------------------------------------
                               1994         4.29%
                               1995        38.33%
                               1996        26.90%
                               1997        26.64%
                               1998        40.75%
                               1999        22.43%
      ------------------------------------------------------------------
      *The Portfolio's year-to-date return as of the most recent calendar
       quarter ended September 30, 2000, was 6.43%.

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

     During the period shown in the bar chart, the highest return for a calendar
quarter was 24.90% (quarter ended December 31, 1998),  and the lowest return for
a quarter was -9.15% (quarter ended September 30, 1998).

<PAGE>

11

     --------------------------------------------------------------------------
          AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
     --------------------------------------------------------------------------
                                          1 YEAR   5 YEARS    SINCE INCEPTION*
     --------------------------------------------------------------------------
     Growth Portfolio                     22.43%    30.81%         24.58%
     S&P 500 Index                        21.04     28.56          22.36
     --------------------------------------------------------------------------
     *June 7, 1993.
     --------------------------------------------------------------------------

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 dividend income.
-    You are willing to assume the above-average  risk associated with investing
     in a concentrated portfolio of growth stocks.

--------------------------------------------------------------------------------
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 mainly in the stocks of smaller  companies (which, at the
time of  purchase, typically  have a market  value of less than $1-$2  billion).
These companies are considered by the Portfolio's advisers to have above-average
prospects for growth, but often provide little or no dividend income.

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:
-    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  following  bar  chart  and  table  provide  an  indication  of the risks of
investing  in the  Small  Company  Growth  Portfolio.  The bar  chart  shows the
Portfolio's  performance in each calendar year since inception.  The table shows
how the Portfolio's average annual total returns for one calendar year and since
inception   compare  with  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.  If such fees and expenses  were included in the
calculation of the  Portfolio's  returns,  such returns would be lower.  Keep in
mind that the Portfolio's past performance does not indicate how it will perform
in the future.

      ------------------------------------------------------------------
                             ANNUAL TOTAL RETURNS*
      ------------------------------------------------------------------
                               1997        13.27%
                               1998         7.95%
                               1999        61.34%
      ------------------------------------------------------------------
      *The Portfolio's year-to-date return as of the most recent calendar
       quarter ended September 30, 2000, was 19.74%.

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

<PAGE>

12

     During the period shown in the bar chart, the highest return for a calendar
quarter was 47.30% (quarter ended December 31, 1999),  and the lowest return for
a quarter was -16.11% (quarter ended September 30, 1998).

     --------------------------------------------------------------------------
          AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
     --------------------------------------------------------------------------
                                               1 YEAR       SINCE INCEPTION*
     --------------------------------------------------------------------------
     Small Company Growth Portfolio            61.34%            20.07%
     Small Company Index**                     23.32             11.21
     --------------------------------------------------------------------------
      *June 3, 1996.

     **Russell 2000 Stock Index through July 1997; Small Company Growth Fund
       Stock Index, thereafter.

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

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 dividend income.
-    You are willing to assume the above-average  risk associated with investing
     in small-cap growth stocks.

--------------------------------------------------------------------------------
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 INTERNATIONAL  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 STOCK MARKET RISK,  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  following  bar  chart  and  table  provide  an  indication  of the risks of
investing in the  International  Portfolio.  The bar chart shows the Portfolio's
performance  in each  calendar  year since  inception.  The table  shows how the
Portfolio's  average  annual total returns for one and five  calendar  years and
since inception compare with 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. If such fees and expenses were
included in the  calculation of the Portfolio's  returns,  such returns would be
lower.  Keep in mind that the Portfolio's past performance does not indicate how
it will perform in the future.


<PAGE>

13

      ------------------------------------------------------------------
                             ANNUAL TOTAL RETURNS*
      ------------------------------------------------------------------
                              1995        15.90%
                              1996        14.60%
                              1997         3.34%
                              1998        18.83%
                              1999        25.39%
      ------------------------------------------------------------------

      *The Portfolio's year-to-date return as of the most recent calendar
       quarter ended September 30, 2000, was -6.46%.

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

     During the period shown in the bar chart, the highest return for a calendar
quarter was 21.12% (quarter ended December 31, 1999),  and the lowest return for
a quarter was -11.96% (quarter ended September 30, 1998).

     --------------------------------------------------------------------------
          AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
     --------------------------------------------------------------------------
                                          1 YEAR   5 YEARS    SINCE INCEPTION*
     --------------------------------------------------------------------------
     International Portfolio              25.39%    15.38%         14.01%
     MSCI EAFE Index                      27.30     13.15          11.53
     --------------------------------------------------------------------------
     *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 income.
-    You are willing to assume the  additional  risks  (including  currency  and
     country risk) associated with international stocks.

--------------------------------------------------------------------------------
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. REITs. Holdings of the Index, and thus of the Portfolio, are
weighted  according to each stock's market  capitalization.  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 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:
-    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.

     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.

<PAGE>

14

PERFORMANCE
The Portfolio began  operations on February 9, 1999, so performance  information
(including  annual total  returns and average  annual total  returns) for a full
calendar year 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.

MORE ON THE PORTFOLIOS

This  prospectus  describes  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 any
mutual  fund,  you should take into account your  personal  tolerance  for daily
fluctuations in the financial  markets.  Look for this [FLAG] symbol  throughout
the prospectus.  It is used to mark detailed information about each type of risk
that you would confront as a shareholder of a Portfolio.
     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,  which  oversees  the  management  of the
Portfolios,  may change  investment  strategies  or policies in the  interest of
shareholders.

MARKET RISK

[FLAG] EACH OF THE PORTFOLIOS IS SUBJECT TO MARKET  RISK--THAT IS,  FLUCTUATIONS
     IN  RETURNS  CAUSED BY THE RISE AND FALL OF YIELDS  AND  PRICES  WITHIN THE
     OVERALL MARKETS IN WHICH EACH PORTFOLIO INVESTS.

     You'll find more detail  about the risks that you would face as an investor
as you read about each Portfolio on the following pages.

MANAGER RISK
Nine of the  Portfolios  are actively  managed,  meaning  that their  investment
advisers buy and sell securities based on research, judgment, and analysis in an
attempt to outperform the market as a whole. These nine Portfolios are the MONEY
MARKET,   SHORT-TERM  CORPORATE,  HIGH  YIELD  BOND,  BALANCED,  EQUITY  INCOME,
DIVERSIFIED VALUE, GROWTH, SMALL COMPANY GROWTH, and INTERNATIONAL PORTFOLIOS.

[FLAG] BECAUSE  THEY ARE  ACTIVELY  MANAGED,  THESE  PORTFOLIOS  ARE  SUBJECT TO
     MANAGER RISK, WHICH IS THE CHANCE THAT THEIR ADVISERS WILL DO A POOR JOB OF
     SELECTING SECURITIES.

     Four  Portfolios--HIGH-GRADE  BOND,  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  targeted  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.  These  Portfolios are subject to market
risk--share  price  fluctuations  caused  by the rise and fall of  prices of the
overall markets in which they invest--but are not subject to manager risk.

FUTURES AND OPTIONS CONTRACTS
Except for the Money Market  Portfolio,  all of the  Portfolios  may invest to a
limited extent in futures and options contracts,  which are traditional forms of
derivatives.   Losses  (or   gains)   involving   futures   can   sometimes   be
substantial--in  part  because a  relatively  small price  movement in a futures
contract  may  result  in an  immediate  and  substantial  loss (or  gain) for a
Portfolio.

<PAGE>

15

The  Portfolios  will not use futures for  speculative  purposes or as leveraged
investments  that magnify the gains or losses of an  investment.  A  Portfolio's
obligation to purchase securities under futures contracts will not exceed 20% of
its total assets.
     The reasons for which a 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 or stocks.

-    To reduce  transaction  costs, for hedging  purposes,  or to add value when
     these investments are favorably priced.

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                               PLAIN TALK ABOUT
                                  DERIVATIVES

A derivative is a financial contract whose value is based on (or "derived" from)
a  traditional  security  (such  as a stock  or a  bond),  an  asset  (such as a
commodity like gold), or a market index (such as the S&P 500 Index).  Some forms
of  derivatives,  such as  exchange-traded  futures and  options on  securities,
commodities,  or indexes, have been trading on regulated exchanges for more than
two decades.  These type of  derivatives  are  standardized  contracts  that can
easily be bought and sold,  and whose market values are determined and published
daily.  Nonstandardized  derivatives,  on  the  other  hand,  tend  to  be  more
specialized or complex,  and may be harder to value.  If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------

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.

[FLAG] THE  PORTFOLIO  IS SUBJECT TO INCOME  RISK,  WHICH IS THE CHANCE THAT THE
     PORTFOLIO'S  DIVIDENDS  (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.

     Vanguard's  Fixed  Income  Group  (Vanguard),  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 A3 or better by Moody's or A- or better by
Standard & Poor's.  The Portfolio also invests in short-term  corporate,  state,
and  municipal  obligations  rated A3 or  better by  Moody's  or A- or better by
Standard & Poor's,  and in  securities  issued by the U.S.  Treasury and federal
government agencies and instrumentalities, such as the Federal Home Loan Bank.

--------------------------------------------------------------------------------
                               PLAIN TALK ABOUT
                           MONEY MARKET INSTRUMENTS

The term "money market  instruments"  refers to a variety of short-term,  liquid
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.
--------------------------------------------------------------------------------

     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 chance
that a foreign government will not let U.S.  dollar-denominated assets leave the
country; the chance that the banks that issue Eurodollar  obligations may not be
subject to the same  regulations  as U.S.  banks;  and the chance  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.

[FLAG] THE PORTFOLIO IS SUBJECT,  TO A LIMITED EXTENT,  TO CREDIT RISK, WHICH IS
     THE  CHANCE  THAT THE ISSUER OF A SECURITY  WILL FAIL TO PAY  INTEREST  AND
     PRINCIPAL IN A TIMELY MANNER.

<PAGE>

16

     In  addition,  the  Portfolio  may  invest  up to 10% of its net  assets in
illiquid  securities.  Illiquid  securities  are not  freely  marketable  or are
subject to legal restrictions on their sale.
     The Portfolio  also may invest,  to a limited  extent,  in  adjustable-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).

[FLAG] 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.

--------------------------------------------------------------------------------
                               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"
pass-through  certificates  such as  those  issued  by the  Government  National
Mortgage  Association  (GNMAs).  Each issuer is responsible  for paying back the
bond's initial value as well as making periodic interest payments.
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                               PLAIN TALK ABOUT
                           BONDS AND INTEREST RATES

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

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

     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  Portfolio 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.

FOREIGN BONDS
Each of the bond Portfolios may invest in bonds of foreign  issuers,  so long as
the  securities  are  denominated  in U.S.  dollars.  To the extent that it owns
foreign bonds,  a Portfolio is subject to (1) country risk,  which is the chance
that political events (such as a war),  financial problems (such as a 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 chance  that a rise in the value of the U.S.  dollar  versus
foreign  currencies  could make it  difficult  for a foreign bond issuer to make
payments on its dollar-denominated bonds.

<PAGE>

17

--------------------------------------------------------------------------------
                               PLAIN TALK ABOUT
                                CREDIT QUALITY

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

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  a
dollar-weighted  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.
     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 corporate debt securities,  it
may invest in other types of instruments. The list below shows, at a glance, the
types  of  financial  instruments  that  may  be  purchased  by  the  Portfolio.
Explanations of each type of financial instrument follow the list.
Corporate Debt
U.S. Government and Agency Bonds
State and Municipal Bonds
Cash Reserves
Futures, Options, and Other Derivatives
Asset-Backed Securities
International Dollar-Denominated Bonds
Preferred Stocks
Convertible Securities
Collateralized Mortgage Obligations (CMOs)
Restricted or Illiquid Securities

-    CORPORATE DEBT  OBLIGATIONS--usually  called  bonds--represent  loans by an
     investor to a corporation.
-    U.S. GOVERNMENT AND AGENCY BONDS represent loans by an investor to the U.S.
     Treasury  Department  or  a  wide  variety  of  governmental  agencies  and
     instrumentalities.  Timely  payment  of  principal  and  interest  on  U.S.
     Treasury  bonds is always  guaranteed  by the full  faith and credit of the
     U.S. government; many (but not all) agency bonds have the same guarantee.
-    STATE AND  MUNICIPAL  BONDS  represent  loans by an  investor to a state or
     municipal government, or one of their agencies or instrumentalities.
-    CASH  RESERVES is a blanket  term that  describes  a variety of  short-term
     fixed income investments,  including money market  instruments,  commercial
     paper, bank certificates of deposit,  banker's acceptances,  and repurchase
     agreements. Repurchase agreements represent short-term (normally overnight)
     loans by the Portfolio to commercial banks or large securities dealers.
-    FUTURES,  OPTIONS,  AND OTHER  DERIVATIVES  may  represent up to 20% of the
     Portfolio's  total  assets.  These  investments  may  be  in  bond  futures
     contracts,  options,  credit swaps, interest rate swaps, and other types of
     derivatives.
-    ASSET-BACKED SECURITIES are bonds that represent partial ownership in pools
     of consumer or commercial  loans--most  often credit card,  automobile,  or
     trade  receivables.  Asset-backed  securities are issued by entities formed
     solely for that purpose,  but their value ultimately  depends on repayments
     by underlying borrowers. A primary risk of asset-backed  securities is that
     their   maturity  is  difficult   to  predict  and  driven  by   borrowers'
     prepayments.
-    INTERNATIONAL  DOLLAR-DENOMINATED  BONDS  are  bonds  denominated  in  U.S.
     dollars issued by foreign governments and companies.
-    PREFERRED  STOCKS  distribute set dividends from the issuer.  The preferred
     stockholder's  claim on the issuer's income and assets ranks before that of
     common stockholders, but after that of bondholders.
-    CONVERTIBLE  SECURITIES are bonds or preferred  stocks that are convertible
     into, or exchangeable for, common stocks.
-    COLLATERALIZED  MORTGAGE  OBLIGATIONS  (CMOS)  are  special  bonds that are
     collateralized by mortgages or mortgage pass-through securities.  Cash flow
     rights  on  underlying  mortgages--the  rights  to  receive  principal  and
     interest  payments--are  divided  up  and  prioritized  to  create  short-,
     intermediate-,  and long-term  bonds.  CMOs rely on  assumptions  about the
     timing  of cash  flows  on the  underlying  mortgages,  including  expected
     prepayment  rates. The primary risk of a CMO is that these  assumptions are
     wrong, which would either shorten or lengthen the bond's maturity.
-    ILLIQUID  SECURITIES are  securities  that the Portfolio may not be able to
     sell in the ordinary course of business. The Portfolio may INVEST UP TO 15%
     OF ITS ASSETS IN THESE SECURITIES. RESTRICTED SECURITIES are a special type
     of illiquid  security;  these  securities have not been publicly issued and
     legally can be resold only to qualified  institutional buyers. From time to
     time,  the board of  TRUSTEES  MAY  DETERMINE  THAT  PARTICULAR  RESTRICTED
     SECURITIES ARE NOT illiquid,  and those securities may then be purchased by
     the Portfolio without limit.

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 close to 7,000
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  Brothers  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, 2000, these four types of bonds represented the
following proportions of the Portfolio's market value:

--------------------------------------------------------------------------------
                                                        PORTION OF PORTFOLIO'S
TYPE OF BOND                                                 MARKET VALUE
-------------------------------------------------------------------------------
Mortgage-backed securities                                        35%
Corporate bonds                                                   33
U.S. Treasury and agency securities                               24
Foreign U.S.-dollar obligations                                    8
-------------------------------------------------------------------------------

     Since 1991, the effective dollar-weighted average maturity of the Portfolio
has ranged from a high of 13.0 years to a low of 7.4 years;  it was 8.9 years on
September 30, 2000. 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 up to 15% more of
its net  assets  in  short-term,  high-quality  corporate  bonds  (1- to  4-year
maturities) than does the Index,  while holding up to 15% less of its net 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.

<PAGE>

18

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-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.

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.

[FLAG] 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
     PAY  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  FROM 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.
     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.

--------------------------------------------------------------------------------
                               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 riskier than  investment-grade
bonds,  high-yield  bonds  must pay more  interest  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
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>

19

     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 value its securities accurately.
     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
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.
     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.

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  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.

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

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

     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.  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.

     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 chance that political events (such as
a war), financial problems (such as a 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 chance that
Americans  investing  abroad could lose money  because of a rise in the value of
the U.S. dollar versus foreign currencies.


<PAGE>

20

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.

[FLAG] EACH PORTFOLIO IS SUBJECT TO STOCK MARKET RISK,  WHICH IS THE CHANCE THAT
     STOCK PRICES  OVERALL WILL DECLINE OVER SHORT OR EVEN LONG  PERIODS.  STOCK
     MARKETS TEND TO MOVE IN CYCLES,  WITH PERIODS OF RISING  PRICES AND PERIODS
     OF FALLING PRICES.

     Except for the International  Portfolio,  which invests primarily 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 24.)

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

     The table  covers all of the 1-, 5-,  10-,  and 20-year  periods  from 1926
through 1999. You can see, for example,  that while the average return on stocks
for all of the 5-year periods was 11.0%,  returns for individual  5-year periods
ranged  from a -12.4%  average  (from  1928  through  1932) to 28.6%  (from 1995
through 1999).  These average returns reflect past performance on common stocks;
you should not regard them as an  indication  of future  returns from either the
stock market as a whole or any of these Portfolios in particular.

--------------------------------------------------------------------------------
                               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  have  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, such stocks typically have low dividend yields and above-average  prices
in relation to such measures as revenue,  earnings,  and book values.  Value and
growth stocks have, in the past, produced similar long-term returns, though each
category 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).
--------------------------------------------------------------------------------

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.

<PAGE>

21

     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.)

GRID APPEARS HERE
--------------------------------------------------
FUND                     STYLE          MARKET CAP
Equity Income            VALUE          LARGE
Diversified Value        VALUE          LARGE
Equity Index             BLEND          LARGE
Growth                   GROWTH         LARGE
Mid-Cap Index            BLEND          MEDIUM
REIT Index               VALUE          SMALL
Small Company Growth     GROWTH         SMALL
--------------------------------------------------

[FLAG] EACH PORTFOLIO IS SUBJECT TO INVESTMENT  STYLE RISK,  WHICH IS THE CHANCE
     THAT RETURNS FROM THE MARKET  SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS
     FROM  OTHER  MARKET  SECTORS.  AS A GROUP,  SPECIFIC  TYPES OF STOCKS  (FOR
     INSTANCE,  SMALL-CAP STOCKS, VALUE STOCKS OR HEALTH CARE 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.

FOREIGN SECURITIES
The INTERNATIONAL PORTFOLIO invests primarily in foreign securities. None of the
other stock Portfolios typically makes significant  investments in securities of
companies based outside the United States. For the EQUITY INDEX,  MID-CAP INDEX,
and REIT INDEX  PORTFOLIOS,  foreign  securities will be held only to the extent
that they are represented in the target  benchmark  indexes.  The EQUITY INCOME,
DIVERSIFIED  VALUE,  GROWTH, and SMALL COMPANY GROWTH PORTFOLIOS may each invest
up to 20% of their total assets in foreign securities.
     To the extent that a Portfolio holds foreign  securities,  it is subject to
(1) country  risk,  which is the chance that  political  events (such as a war),
financial problems (such as a 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 chance that returns
on a foreign security will be reduced for American  investors  because of a rise
in the value of the U.S. dollar versus foreign currencies.

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 $3 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 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 to 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).

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

<PAGE>

22

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  76% 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  58% of its market
capitalization.  As of  September  30, 2000,  the five largest  companies in the
Index were:

-------------------------------------------------------------------------------
COMPANY                                                    PERCENTAGE OF INDEX
-------------------------------------------------------------------------------
General Electric Co.                                               4.53%
Cisco Systems, Inc.                                                3.11
Microsoft Corp.                                                    2.51
Exxon Mobil Corp.                                                  2.46
Pfizer, Inc.                                                       2.25
-------------------------------------------------------------------------------

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  39% of its market
capitalization.  As of  September  30, 2000,  the five largest  companies in the
Index were:

-------------------------------------------------------------------------------
COMPANY                                                    PERCENTAGE OF INDEX
-------------------------------------------------------------------------------
Dynegy, Inc.                                                       1.82%
Vitesse Semiconductor Corp.                                        1.65
Calpine Corp.                                                      1.49
Millennium Pharmaceutical Inc.                                     1.41
Rational Software Corp.                                            1.34
-------------------------------------------------------------------------------

     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

<PAGE>

23

Portfolio's overall makeup may differ substantially from that of the broad stock
market in terms of industry weightings and market capitalization.

[FLAG] BECAUSE THE  PORTFOLIO  INVESTS A HIGHER  PERCENTAGE OF ITS ASSETS IN THE
     SECURITIES  OF FEWER  ISSUERS AS  COMPARED  WITH OTHER  MUTUAL  FUNDS,  THE
     PORTFOLIO  IS  SUBJECT  TO THE  RISK  THAT  ITS  PERFORMANCE  MAY  BE  HURT
     DISPROPORTIONATELY BY THE POOR PERFORMANCE OF RELATIVELY FEW SECURITIES.

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 $80
billion.
     The Portfolio employs two investment  advisers,  each of whom independently
chooses and  maintains a portfolio of common stocks for the  Portfolio.  The two
advisers use active management methods, which means they buy and sell securities
based on their  judgments about  companies and their  financial  prospects,  the
prices of  securities,  and the stock  market and the economy in  general.  Each
adviser uses  different  processes to select  securities  for its portion of the
Portfolio's  assets;  however,  each is  committed  to  buying  stocks  of small
companies that, in the adviser's opinion, have strong growth potential.
     GRANAHAN INVESTMENT  MANAGEMENT,  INC. (GRANAHAN) categorizes stocks in its
portion of the  Portfolio's  assets  into three  categories:  (1) "Core"  growth
stocks,  representing 50% to 80% of assets,  are of companies with  demonstrated
records of growth and a strong market position based on a proprietary product or
service;  (2) "Pioneers," 10% to 25% of assets,  are of companies that generally
have unique  technology  or other  innovations  that may lead to new products or
expansion into new markets;  and (3) "Special values," 10% to 25% of assets, are
of companies  whose stock prices are  undervalued  given the  adviser's  view of
their prospects for improvement over the next several years.
     GRANTHAM,  MAYO,  VAN  OTTERLOO & CO. LLC (GMO)  began  managing  Portfolio
assets on  October  1,  2000.  GMO uses  computerized  models to select the most
attractive  small-capitalization  growth stocks  according to several  criteria,
including  changes in  projected  earnings,  earnings  growth,  and recent price
trends. This quantitative investment method is expected to result in a portfolio
that is  broadly  diversified  among  small-cap  stocks.  GMO seeks to  maintain
reasonable liquidity by limiting positions in individual issues.
     The Portfolio's  board of trustees  decides the proportion of net assets to
be managed by each  adviser  and may change  the  proportions  as  circumstances
warrant. Currently, Granahan manages the portion of Portfolio assets (other than
new cash  invested)  existing  on October 1, 2000,  while GMO  manages  new cash
invested on and after that date.

     Besides  common  stocks,  the Portfolio  may invest in securities  that are
convertible to common stocks.
     The  Portfolio's  holdings  may  include  securities  issued  by  small  or
unseasoned companies with speculative risk characteristics. Small company stocks
historically  have 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.

--------------------------------------------------------------------------------
                               PLAIN TALK ABOUT
                             FUND DIVERSIFICATION

In general,  the more  diversified  a fund's  stock or bond  holdings,  the less
likely  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 invested in its ten largest holdings,  while some less-diversified
mutual funds have more than 50% of assets invested in their top ten.
--------------------------------------------------------------------------------

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

<PAGE>

24

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  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 (MSCI 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.
     Because it invests mainly in international stocks, the Portfolio is subject
to:

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

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

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

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

     The table  covers all of the 1-, 5-,  10-,  and 20-year  periods  from 1969
through 1999. Keep in mind that this was a particularly favorable period for all
stock markets.  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
eliminate some of the uncertainty of foreign exchange rates.

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 track 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

<PAGE>

25

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.

--------------------------------------------------------------------------------
                               PLAIN TALK ABOUT
                                     REITS

Rather than owning  properties  directly--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.  That said,  returns from REITs may not  correspond to returns from
direct property ownership.
--------------------------------------------------------------------------------

[FLAG] 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 CHANCE THAT A GENERAL  DECLINE IN
     PROPERTY VALUES COULD CAUSE THE PRICES OF REIT STOCKS TO FALL.

     INTEREST RATE RISK,  WHICH IS THE CHANCE 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.

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

     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  stocks of publicly  traded equity
REITs (other than health care REITs) that meet certain criteria. For example, to
be included in the Index, a REIT must have a total market  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,  2000,  the Index  included  122 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.


<PAGE>

26


     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, 2000, follows.

-------------------------------------------------------------------------------
TYPE OF REIT                                               PERCENTAGE OF INDEX
-------------------------------------------------------------------------------
Apartments                                                          23%
Office                                                              22
Retail                                                              19
Diversified                                                         15
Industrial                                                          15
Hotels                                                               6
-------------------------------------------------------------------------------

     The Index's ten largest  stocks make up more than 33% of its market  value.
The Index's largest stocks, as of September 30, 2000, are listed below.

1. Equity Office Properties Trust REIT      6. Archstone Communities Trust REIT
2. Equity Residential Properties Trust REIT 7. Vornado Realty Trust REIT
3. Simon Property Group, Inc. REIT          8. Public Storage, Inc. REIT
4. ProLogis Trust REIT                      9. Avalon Bay Communities, Inc. REIT
5. Spieker Properties, Inc. REIT           10. Apartment Investment &
                                               Management Co., Inc. Class A 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.

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 counterparty selection and monitoring.

--------------------------------------------------------------------------------
                               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 the securities on a specific date (normally
the next business day) and at a specific price.
--------------------------------------------------------------------------------

TEMPORARY DEFENSIVE MEASURES
Each Portfolio (except the Money Market  Portfolio) may temporarily  depart from
its normal investment policies--for instance, by investing substantially in cash
reserves--in response to extraordinary  market,  economic,  political,  or other
conditions.  In doing  so, a  Portfolio  may  succeed  in  avoiding  losses  but
otherwise fail to achieve its investment objective.

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 may 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.

<PAGE>

27

THE PORTFOLIOS AND VANGUARD

Vanguard Variable  Insurance Fund is a member of The Vanguard Group, a family of
more  than 35  investment  companies  with  more  than 100  distinct  investment
portfolios  holding  assets  worth more than $570  billion.  All of the Vanguard
funds  share  in the  expenses  associated  with  business  operations,  such as
personnel, office space, equipment, and advertising.

     Vanguard  also  provides   marketing   services  to  the  funds.   Although
shareholders do not pay sales commissions or 12b-1  distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.

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

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

INVESTMENT ADVISERS

THE VANGUARD GROUP

The Vanguard Group (Vanguard),  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's  Fixed Income  Group  provides  advisory  services for the MONEY
MARKET,  SHORT-TERM CORPORATE, and HIGH-GRADE BOND PORTFOLIOS.  Vanguard's Fixed
Income Group provides investment advisory services to many Vanguard funds; as of
September  30, 2000,  the Fixed  Income Group  managed more than $158 billion in
total  assets.  The  individuals  responsible  for  overseeing  the  Portfolios'
investments are:

-    IAN A.  MACKINNON,  Managing  Director of Vanguard  and head of  Vanguard's
     Fixed Income Group. He has worked in investment  management since 1974; and
     has had primary  responsibility for Vanguard's internal fixed-income policy
     and strategy since joining the company in 1981. Education:  B.A., Lafayette
     College; M.B.A., Pennsylvania State University.
-    DAVID R.  GLOCKE,  Principal  of  Vanguard.  He has  worked  in  investment
     management since 1991; and has managed portfolio  investments and the Money
     Market Portfolio since 1997. Education: B.S.; University of Wisconsin.
-    ROBERT F.  AUWAERTER,  Principal of Vanguard.  He has worked in  investment
     management since 1978; has managed  portfolio  investments  since 1979; has
     been with Vanguard  since 1981;  and has managed the  Short-Term  Corporate
     Portfolio since its inception. Education: B.S., University of Pennsylvania;
     M.B.A., Northwestern University.
-    KENNETH E. VOLPERT, CFA, Principal of Vanguard, and head of Vanguard's Bond
     Index Group. He has worked in investment management since 1981, has managed
     portfolio  investments  since 1982;  has been with Vanguard and has managed
     the High-Grade Bond Portfolio since 1992.  Education:  B.S.,  University of
     Illinois; M.B.A., University of Chicago.
Mr. Glocke, Mr. Auwaerter, and Mr. Volpert manage the portfolios on a day-to-day
basis. Mr. MacKinnon is responsible for setting the Portfolios' broad investment
policies and for overseeing the Portfolio managers.

     For the fiscal year ended September 30, 2000, the Money Market  Portfolio's
advisory  expenses  represented  an  effective  annual  rate  of  0.01%  of  the
Portfolio's average net assets.
     For the fiscal year ended  September  30, 2000,  the  Short-Term  Corporate
Portfolio's   advisory   expenses   represented  an  effective  annual  rate  of
approximately 0.01% of the Portfolio's average net assets.
     For  the  fiscal  year  ended  September  30,  2000,  the  High-Grade  Bond
Portfolio's  advisory expenses  represented an effective annual rate of 0.01% of
the Portfolio's average net assets.

     Vanguard's  Quantitative  Equity Group provides  advisory  services for the
EQUITY INDEX, MID-CAP INDEX, and REIT INDEX PORTFOLIOS.  Vanguard's Quantitative
Equity Group provides investment advisory services to many Vanguard funds; as of
September 30, 2000, the Quantitative Equity Group managed more than $238 billion
in total assets.  The individual  responsible  for overseeing  each  Portfolio's
investments is:

-    GEORGE U.  SAUTER,  Managing  Director of Vanguard  and head of  Vanguard's
     Quantitative  Equity Group.  He has worked in investment  management  since
     1985 and has had  primary  responsibility  for  Vanguard's  stock  indexing
     investments  and  strategy  since  joining the company in 1987.  Education:
     A.B., Dartmouth College; M.B.A., University of Chicago.

     For the fiscal year ended September 30, 2000, the Equity Index  Portfolio's
advisory  expenses  represented  an  effective  annual  rate  of  0.01%  of  the
Portfolio's average net assets.


<PAGE>

28


     For the fiscal year ended September 30, 2000, the Mid-Cap Index Portfolio's
advisory  expenses  represented  an  effective  annual  rate  of  0.02%  of  the
Portfolio's average net assets.
     For the fiscal year ended  September 30, 2000,  the REIT Index  Portfolio's
advisory  expenses  represented  an  effective  annual  rate  of  0.05%  of  the
Portfolio's average net assets.

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

WELLINGTON MANAGEMENT COMPANY, LLP

Wellington  Management Company,  LLP (Wellington  Management),  75 State Street,
Boston,  MA  02109,  provides  advisory  services  for the HIGH  YIELD  BOND and
BALANCED PORTFOLIOS.  Wellington Management, an investment advisory firm founded
in 1928,  managed  more than $266  billion  in stock and bond  portfolios  as of
September 30, 2000.

     The individual  responsible for overseeing the HIGH YIELD BOND  PORTFOLIO'S
investments is:
-    EARL E. MCEVOY,  Senior Vice President and Partner of Wellington Management
     Company,  LLP.  He has worked in  investment  management  since  1972;  has
     managed portfolio investments for Wellington Management since 1978; and has
     managed the  Portfolio  since its  inception.  Education:  B.A.,  Dartmouth
     College; M.B.A., Columbia Business School.
     The  individuals   responsible  for  overseeing  the  BALANCED  PORTFOLIO'S
investments are:
-    ERNST H. VON METZSCH,  CFA, Senior Vice President and Partner of Wellington
     Management Company, LLP. He has worked in investment management since 1971;
     has been with  Wellington  Management  since 1973;  has  managed  portfolio
     investments   since  1984;  and  has  managed  the  Portfolio  since  1995.
     Education: M.Sc., University of Leiden, Holland; Ph.D., Harvard University.
-    PAUL D. KAPLAN,  Senior Vice President and Partner of Wellington Management
     Company,  LLP. He has worked in investment  management since 1974; has been
     with Wellington  Management  since 1978; and has assisted in the management
     of the Portfolio since 1994. Education:  B.S., Dickinson College; M.S., The
     Sloan School of Management, Massachusetts Institute of Technology.

     Wellington Management's advisory fee with respect to the Balanced Portfolio
is paid quarterly,  and is based on certain annual  percentage  rates applied to
the  Portfolio's  average  month-end  assets  for  each  quarter.  In  addition,
Wellington Management's advisory fee may be incrased or decreased,  based on the
cumulative  total return of the  Portfolio  over a trailing  36-month  period as
compared  with the  cumulative  total return of a Composite  Index over the same
period.  The  index  is a  composite  benchmark,  65% of which is made up of the
Standard & Poor's Composite Stock Price Index and 35% of which is made up of the
Lehman  Brothers  Corporate A or Better Bond  Index.  Please  consult the Fund's
STATEMENT OF ADDITIONAL  INFORMATION for a complete  explanation of how advisory
fees are calculated.
     For the fiscal year ended  September  30,  2000,  the  advisory fee paid to
Wellington  Management  with respect to the Balanced  Portfolio  represented  an
effective annual rate of 0.10% of the Portfolio's  average net assets,  before a
decrease of 0.02% based on performance.
     For the fiscal year ended  September  30,  2000,  the  advisory fee paid to
Wellington  Management with respect to the High Yield Bond Portfolio represented
an effective annual rate of 0.06% of the Portfolio's average net assets.

NEWELL ASSOCIATES

Newell Associates (Newell), 525 University Avenue, Palo Alto, CA 94301, provides
advisory  services  for the  EQUITY  INCOME  PORTFOLIO.  Newell,  an  investment
advisory  firm  founded  in 1986,  managed  about  $1.7  billion in assets as of
September 30, 2000.

     The individual  responsible  for  overseeing the Equity Income  Portfolio's
investments is:
-    ROGER  D.  NEWELL,   Chairman  and  Chief  Investment   Officer  of  Newell
     Associates.  He has worked in investment management since 1958; has managed
     equity funds since 1959;  has been with Newell since 1986;  and has managed
     the  Portfolio  since  its  inception.   Education:   B.A.,  University  of
     Minnesota; J.D., Harvard Law School; M.A., University of Minnesota.

     For the fiscal year ended  September  30,  2000,  the  advisory fee paid to
Newell represented an effective annual rate of 0.10% of the Portfolio's  average
net assets.

BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow,  Hanley), One McKinney Plaza,
3232 McKinney Avenue, 15th Floor,  Dallas, TX 75204,  provides advisory services
for the DIVERSIFIED  VALUE  PORTFOLIO.  Barrow,  Hanley is owned by United Asset
Management,  1 International  Place,  Boston, MA 02109.  Barrow,  Hanley managed
approximately $26 billion in stock and bond portfolios as of September 30, 2000.

     The individual responsible for overseeing the Diversified Value Portfolio's
investments is:
-    JAMES P. BARROW, Partner and Vice President of Barrow, Hanley,  Mewhinney &
     Strauss,  Inc. He has worked in investment  management since 1965; has been
     with Barrow,  Hanley since 1979;  and has managed the  Portfolio  since its
     inception. Education: B.S., University of South Carolina.

     Barrow,  Hanley's  advisory fee is paid quarterly,  and is based on certain
annual  percentage rates applied to the Diversified  Value  Portfolio's  average
month-end assets for each quarter.  In addition,  Barrow,  Hanley's advisory fee
may be  increased  or  decreased,  based on the  cumulative  total return of the
Portfolio over a trailing  36-month period as compared with the cumulative total
return of the Standard &  Poor's/BARRA  Value Index over the same  period.  Note
that this  performance  fee structure will not be in full operation  until March
31, 2002; before then, advisory fees will be calculated using certain transition
rules that are  explained  in the Fund's  STATEMENT OF  ADDITIONAL  INFORMATION.
Please  consult the Fund's  STATEMENT OF ADDITIONAL  INFORMATION  for a complete
explanation of how advisory fees are calculated.
     For the fiscal year ended  September  30,  2000,  the  advisory fee paid to
Barrow,  Hanley represented an effective annual rate of 0.12% of the Portfolio's
average net assets, before a decrease of 0.02% based on performance.


<PAGE>

29

LINCOLN CAPITAL MANAGEMENT COMPANY

Lincoln Capital Management Company (Lincoln),  200 South Wacker Drive,  Chicago,
IL 60606,  provides advisory  services for the GROWTH  PORTFOLIO.  Lincoln is an
investment  advisory  firm founded in 1967.  As of September  30, 2000,  Lincoln
managed  approximately $73 billion in assets. It provides investment  counseling
services to a limited number of clients, most of which are institutional clients
such as pension funds.

     The  individuals   responsible   for  overseeing  the  Growth   Portfolio's
investments are:
-    J. PARKER  HALL III,  Chief  Executive  Officer  and  Managing  Director of
     Lincoln Capital Management Company. He has worked in investment  management
     since 1957; has been with Lincoln since 1971; and has managed the Portfolio
     since its inception.  Education:  B.A., Swarthmore College; M.B.A., Harvard
     Business School.
-    DAVID M. FOWLER,  Executive Vice President and Managing Director of Lincoln
     Capital Management  Company.  He has worked in investment  management since
     1972; has been with Lincoln since 1984; and has managed the Portfolio since
     its inception.  Education:  B.S., Loyola University;  M.B.A.,  Northwestern
     University.
-    JOHN S. COLE, Principal of Lincoln Capital Management Company. He worked in
     investment  management as Executive Vice President and Chief Equity Officer
     at Boatman's  Trust Company from 1992 until he joined  Lincoln in 1997; and
     has managed the Portfolio since 1997.  Education:  B.S.,  Bentley  College;
     M.B.A., Notre Dame University.

     Lincoln's  advisory fee is paid  quarterly,  and is based on certain annual
percentage rates applied to the Growth Portfolio's  average month-end assets for
each quarter. In addition, Lincoln's advisory fee may be increased or decreased,
based on the cumulative  total return of the Portfolio over a trailing  36-month
period as compared with the  cumulative  total return of the Russell 1000 Growth
Index over the same period. Note that this performance fee structure will not be
in full operation until September 30, 2003;  before then,  advisory fees will be
calculated  using  certain  transition  rules that are  explained  in the Fund's
STATEMENT OF  ADDITIONAL  INFORMATION.  Please  consult the Fund's  STATEMENT OF
ADDITIONAL  INFORMATION  for a complete  explanation  of how  advisory  fees are
calculated.
     For the fiscal year ended  September  30,  2000,  the  advisory fee paid to
Lincoln represented an effective annual rate of 0.15% of the Portfolio's average
net assets.

GRANAHAN INVESTMENT MANAGEMENT, INC., and GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
Granahan Investment Management,  Inc. (Granahan),  275 Wyman Street, Waltham, MA
02154, and Grantham,  Mayo, Van Otterloo & Co. LLC (GMO), 40 Rowes Wharf, Boston
MA 02110, each provide investment advisory services for the SMALL COMPANY GROWTH
PORTFOLIO.

     Granahan is an investment advisory firm specializing in small-company stock
invesments. Founded in 1985, Granahan managed approximately $2 billion in assets
as of September 30, 2000.
     GMO is an  investment  advisory  firm founded in 1977.  As of September 30,
2000,  GMO  managed  about  $22  billion  in  assets.  GMO  provides  investment
counseling   services  to  employee  benefit  plans,   endowment  funds,   other
institutions, and individuals.

     Granahan and GMO each independently  manage a percentage of the Portfolio's
assets subject to the control of the trustees and officers of Vanguard  Variable
Insurance Fund.
     The  individuals  responsible  for  overseeing  the  Small  Company  Growth
Portfolio's investments are:
-    JOHN J.  GRANAHAN,  CFA,  Founder  and  President  of  Granahan  Investment
     Management,  Inc. He has worked in investment  management  since 1963;  has
     been with  Granahan  since 1985;  and has managed the  Portfolio  since its
     inception.  Education:  B.A., St. Joseph's  University;  Graduate Fellow of
     Catholic University of America.
-    GARY C. HATTON, CFA, Executive Vice President of Granahan. He has worked in
     investment  management  since 1982;  has been with Granahan since 1985; and
     has managed the Portfolio since its inception.  Education: B.S., University
     of Rhode Island; M.S., University of Wisconsin.
-    JANE M. WHITE,  Executive  Vice  President of  Granahan.  She has worked in
     investment  management  since  1980;  has  been  with  Granahan  since  its
     inception;  and has managed the  Portfolio  since  1996.  Education:  B.A.,
     Boston University.
-    CHRISTOPHER M. DARNELL, Chief Investment Officer of Quantitative Investment
     Products  and  Chairman  of the  U.S.  Equity  Investment  Policy  Group at
     Grantham,  Mayo,  Van  Otterloo & LLC. He has managed  investments  for GMO
     since 1979; and began managing assets of the Portfolio in 2000.  Education:
     B.A., Yale University; M.B.A., Harvard University.
-    ROBERT M. SOUCY,  Managing Director of U.S.  Quantitative Equity at GMO. He
     has managed  investments  for GMO since 1979; and began managing  assets of
     the Portfolio in 2000. Education: B.S., University of Massachusetts.

     The Portfolio pays each adviser on a quarterly basis. For each adviser, the
quarterly  fee is based on certain  annual  percentage  rates applied to average
month-end  net assets  managed by the  adviser  over the  quarterly  period.  In
addition,  the  quarterly  fees paid to each adviser are  increased or decreased
based upon the adviser's  performance  in comparison to a benchmark  index.  For
these purposes,  the cumulative investment performance of each adviser's portion
of the Portfolio over a trailing  36-month  period is compared to the cumulative
total return of the Russell  2000 Growth  Index over the same period.  Note that
this  performance  fee  structure  will not be in full  operation  for GMO until
December 31, 2003;  before then,  GMO's  advisory fees will be calculated  using
certain  transition  rules  that  are  explained  in  the  Fund's  STATEMENT  OF
ADDITIONAL  INFORMATION.  Please  consult  the Fund's  STATEMENT  OF  ADDITIONAL
INFORMATION for a complete explanation of how advisory fees are calculated.
     For the fiscal year ended  September  30,  2000,  the  advisory fee paid to
Granahan  represented  an  effective  annual  rate of 0.15%  of the  Portfolio's
average net assets,  before an increase  0.04% based on  performance.  GMO began
serving as an investment adviser on October 1, 2000.


<PAGE>

30

SCHRODER INVESTMENT MANAGEMENT NORTH AMERICA INC.

Schroder Investment Management North America Inc. (Schroder), 31 Gresham Street,
London  EC2V  7QA,  England,  provides  investment  advisory  services  for  the
INTERNATIONAL PORTFOLIO.  Schroder, an investment advisory firm founded in 1979,
is part of a worldwide group of banks and financial  services companies known as
The Schroder  Group.  As of September 30, 2000,  The Schroder Group managed more
than $210 billion in assets.

     The individual  responsible  for overseeing the  International  Portfolio's
investments is:
-    RICHARD  FOULKES,  Executive Vice President and Deputy Chairman of Schroder
     Investment  Management  North America Inc. He has been with Schroder  since
     1968 and has managed the  Portfolio  since its  inception.  Education:  the
     Sorbonne, France; B.A. and M.A., Cambridge University, England.

     Schroder's  advisory fee is paid quarterly,  and is based on certain annual
percentage  rates applied to the  International  Portfolio's  average  month-end
assets for each quarter.  In addition,  Schroder's advisory fee may be increased
or  decreased,  based on the  cumulative  total return of the  Portfolio  over a
trailing  36-month  period as compared with the  cumulative  total return of the
Morgan Stanley Capital International Europe, Australasia, Far East Index. Please
consult  the  Fund's   STATEMENT  OF  ADDITIONAL   INFORMATION  for  a  complete
explanation of how advisory fees are calculated.
     For the fiscal year ended  September  30,  2000,  the  advisory fee paid to
Schroder  represented  an  effective  annual  rate of 0.125% of the  Portfolio's
average net assets, with no performance adjustment required.

     The advisers are authorized to choose broker-dealers to handle the purchase
and sale of the Portfolios' securities, and to seek out the best available price
and most favorable execution for all transactions.  Also, 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.

TAXES
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.

SHARE PRICE

Each Portfolio's share price,  called its net asset value, or NAV, is calculated
each  business  day after the close of  regular  trading  on the New York  Stock
Exchange (the NAV is not  calculated on holidays or other days when the Exchange
is closed).  Purchase and redemption  orders for each Portfolio are based on the
Portfolio's  net asset value next computed after Vanguard  receives a request in
good order.  Net asset value per share is computed by dividing the net assets of
the Portfolio by the number of Portfolio shares outstanding.

     A NOTE ON PRICING: Each Portfolio's  investments (with the exception of the
Money Market Portfolio,  which uses the amortized cost method of valuation) will
be priced at their market value when market  quotations  are readily  available.
When these quotations are not readily  available,  investments will be priced at
their fair value, calculated according to procedures adopted by the Fund's board
of trustees.
     Each  Portfolio's  NAV is used to determine the unit value for the separate
account that invests in that  Portfolio.  For more  information  on unit values,
please refer to the  accompanying  prospectus of the insurance  company separate
account that offers your annuity or life insurance contract.

FINANCIAL HIGHLIGHTS
The following  financial  highlights  tables are intended to help you understand
each  Portfolio's  financial  performance  for the past five  years or since its
inception,  and  certain  information  reflects  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 or lost each period on an  investment in the
Portfolio   (assuming   reinvestment   of  all   dividend   and  capital   gains
distributions).  This information has been derived from the financial statements
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.

<PAGE>

31


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

This explanation  uses the Money Market  Portfolio as an example.  The Portfolio
began fiscal 2000 with a net asset value (price) of $1.00 per share.  During the
year, the Portfolio earned $.061 per share from investment  income (interest and
dividends).

Shareholders received $.061 per share in the form of dividend distributions. The
earnings ($.061 per share) minus the distributions ($.061 per share) resulted in
a share price of $1.00 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 6.21% for the year.

As of September 30, 2000, the Portfolio had $861 million in net assets.  For the
year, its expense ratio was 0.17% ($1.70 per $1,000 of net assets);  and its net
investment income amounted to 6.06% of its average net assets.
--------------------------------------------------------------------------------

-------------------------------------------------------------------------------
                                               MONEY MARKET PORTFOLIO
                                              YEAR ENDED SEPTEMBER 30,
                                        ---------------------------------------
                                        2000    1999    1998    1997      1996
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR     $1.00   $1.00   $1.00   $1.00     $1.00
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS

 Net Investment Income                  .061    .050    .055    .054      .054
 Net Realized and Unrealized Gain
  (Loss) on Investments                   --      --      --      --        --
                                        ---------------------------------------
   Total from Investment Operations     .061    .050    .055    .054      .054
                                        ---------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment Income  (.061)  (.050)  (.055)  (.054)    (.054)
 Distributions from Realized Capital
  Gains                                   --      --      --      --        --
                                        ---------------------------------------
   Total Distributions                 (.061)  (.050)  (.055)  (.054)    (.054)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR           $1.00   $1.00   $1.00   $1.00     $1.00
===============================================================================

TOTAL RETURN                           6.21%   5.09%   5.60%   5.48%     5.49%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year (Millions)     $861    $723    $590    $393      $285
 Ratio of Total Expenses to Average
  Net Assets                           0.17%   0.20%   0.20%   0.21%     0.19%
 Ratio of Net Investment Income to
  Average Net Assets                   6.06%   4.98%   5.46%   5.36%     5.36%
===============================================================================


-------------------------------------------------------------------------------
                                                SHORT-TERM CORPORATE PORTFOLIO
                                                   YEAR ENDED       FEB. 8* TO
                                           SEPTEMBER 30, 2000    SEP. 30, 1999
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD                    $9.75           $10.00
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income                                   .646             .355
 Net Realized and Unrealized Gain (Loss)
  on Investments                                        (.030)           (.250)
                                           ------------------------------------
   Total from Investment Operations                      .616             .105
                                           ------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment Income                   (.646)           (.355)
 Distributions from Realized Capital Gains                 --               --
                                           ------------------------------------
   Total Distributions                                  (.646)           (.355)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD                          $9.72           $ 9.75
===============================================================================

TOTAL RETURN                                            6.54%            1.08%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year (Millions)                       $63              $29
 Ratio of Total Expenses to Average Net Assets          0.20%          0.27%**
 Ratio of Net Investment Income to Average
  Net Assets                                            6.74%          5.74%**
 Portfolio Turnover Rate                                  44%              39%
===============================================================================
 *Inception.
**Annualized.


<PAGE>

32

FINANCIAL HIGHLIGHTS (continued)

-------------------------------------------------------------------------------
                                              HIGH-GRADE BOND PORTFOLIO
                                               YEAR ENDED SEPTEMBER 30,
                                         --------------------------------------
                                        2000    1999    1998    1997      1996
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR    $10.34  $11.07  $10.57  $10.29    $10.47
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income                  .680    .646    .663    .678      .670
 Net Realized and Unrealized Gain
  (Loss) on Investments                 .020   (.700)   .500    .280     (.180)
                                        ---------------------------------------
   Total from Investment Operations     .700   (.054)  1.163    .958      .490
                                        ---------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment Income  (.680)  (.646)  (.663)  (.678)    (.670)
 Distributions from Realized Capital
  Gains                                   --   (.030)     --      --        --
                                        ---------------------------------------
   Total Distributions                 (.680)  (.676)  (.663)  (.678)    (.670)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR          $10.36  $10.34  $11.07  $10.57    $10.29
===============================================================================

TOTAL RETURN                           7.05%  -0.49%  11.36%   9.60%     4.80%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year (Millions)     $337    $337    $322    $188      $139
 Ratio of Total Expenses to Average Net
  Assets                               0.20%   0.23%   0.28%   0.29%     0.25%
 Ratio of Net Investment Income to
  Average Net Assets                   6.63%   6.06%   6.16%   6.51%     6.43%
 Portfolio Turnover Rate                 61%     69%     65%     40%       56%
===============================================================================


-------------------------------------------------------------------------------
                                          HIGH YIELD BOND PORTFOLIO
                                     YEAR ENDED SEPTEMBER 30,
                                 -------------------------------    JUN. 3* TO
                                 2000    1999    1998    1997    SEP. 30, 1996
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
 PERIOD                         $9.50  $10.09  $10.59  $10.15           $10.00
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income           .849    .847    .895    .922             .299
 Net Realized and Unrealized
  Gain (Loss) on Investments    (.480)  (.573)  (.485)   .450             .150
                                 ----------------------------------------------
   Total from Investment
    Operations                   .369    .274    .410   1.372             .449
                                 ----------------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment
  Income                        (.849)  (.847)  (.895)  (.922)           (.299)
 Distributions from Realized
  Capital Gains                    --   (.017)  (.015)  (.010)              --
                                 ----------------------------------------------
   Total Distributions          (.849)  (.864)  (.910)  (.932)           (.299)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD  $9.02  $ 9.50  $10.09  $10.59           $10.15
===============================================================================

TOTAL RETURN                    4.03%   2.68%   3.85%  14.12%            4.56%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year
  (Millions)                     $142    $146    $131     $85              $22
 Ratio of Total Expenses to
  Average Net Assets            0.26%   0.29%   0.31%   0.31%          0.32%**
 Ratio of Net Investment Income
  to Average Net Assets         9.12%   8.51%   8.45%   8.88%          9.29%**
 Portfolio Turnover Rate          23%     31%     38%     30%               8%
===============================================================================
 *Inception.
**Annualized.


<PAGE>

33


-------------------------------------------------------------------------------
                                                  BALANCED PORTFOLIO
                                               YEAR ENDED SEPTEMBER 30,
                                         --------------------------------------
                                        2000    1999    1998    1997      1996
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR    $17.41  $17.73  $17.97  $14.81    $13.33
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income                   .71     .63     .63     .60      .565
 Net Realized and Unrealized Gain
  (Loss) on Investments                  .26     .95     .56    3.31     1.420
                                       ----------------------------------------
   Total from Investment Operations      .97    1.58    1.19    3.91     1.985
                                       ----------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment Income   (.64)   (.62)   (.60)   (.19)    (.505)
 Distributions from Realized Capital
  Gains                                 (.81)  (1.28)   (.83)   (.56)       --
                                       ----------------------------------------
   Total Distributions                 (1.45)  (1.90)  (1.43)   (.75)    (.505)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR          $16.93  $17.41  $17.73  $17.97    $14.81
===============================================================================

TOTAL RETURN                           5.91%   9.44%   7.26%  27.60%    15.26%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year (Millions)     $512    $599    $553    $468      $330
 Ratio of Total Expenses to Average Net
  Assets                               0.25%   0.29%   0.31%   0.32%     0.31%
 Ratio of Net Investment Income to
  Average Net Assets                   3.98%   3.58%   3.72%   3.96%     4.04%
 Portfolio Turnover Rate                 28%     24%     31%     25%       36%
===============================================================================


--------------------------------------------------------------------------------
                                                EQUITY INCOME PORTFOLIO
                                               YEAR ENDED SEPTEMBER 30,
                                         --------------------------------------
                                        2000    1999    1998    1997      1996
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR    $21.10  $19.69  $18.50  $13.71    $12.00
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income                   .58     .51    .490     .42       .48
 Net Realized and Unrealized Gain
  (Loss) on Investments                  .08    1.50   1.475    4.69      1.75
                                         --------------------------------------
   Total from Investment Operations      .66    2.01   1.965    5.11      2.23
                                         --------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment Income   (.52)   (.49)  (.400)   (.15)     (.46)
 Distributions from Realized Capital
  Gains                                 (.15)   (.11)  (.375)   (.17)     (.06)
                                         --------------------------------------
   Total Distributions                  (.67)   (.60)  (.775)   (.32)     (.52)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR          $21.09  $21.10  $19.69  $18.50    $13.71
===============================================================================

TOTAL RETURN                           3.06%  10.36%  11.19%  38.05%    19.07%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year (Millions)     $322    $429    $375    $271      $142
 Ratio of Total Expenses to Average Net
  Assets                               0.31%   0.33%   0.36%   0.37%     0.35%
 Ratio of Net Investment Income to
  Average Net Assets                   2.44%   2.44%   2.69%   3.11%     3.69%
 Portfolio Turnover Rate                  8%      6%      6%      8%        8%
================================================================================


<PAGE>

34


-------------------------------------------------------------------------------
                                               DIVERSIFIED VALUE PORTFOLIO
                                                   YEAR ENDED       FEB. 8* TO
                                           SEPTEMBER 30, 2000    SEP. 30, 1999
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD                    $9.31           $10.00
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income                                    .21              .11
 Net Realized and Unrealized Gain (Loss)
  on Investments                                          .45             (.80)
                                           ------------------------------------
   Total from Investment Operations                       .66             (.69)
                                           ------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment Income                    (.21)              --
 Distributions from Realized Capital Gains                 --               --
                                           ------------------------------------
   Total Distributions                                   (.21)              --
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD                          $9.85           $ 9.31
===============================================================================

TOTAL RETURN                                            7.18%           -6.90%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year (Millions)                       $47              $42
 Ratio of Total Expenses to Average Net
  Assets                                                0.45%          0.37%**
 Ratio of Net Investment Income to Average
  Net Assets                                            2.67%          2.38%**
 Portfolio Turnover Rate                                  42%              18%
===============================================================================
 *Inception.
**Annualized.

-------------------------------------------------------------------------------
                                                EQUITY INDEX PORTFOLIO
                                               YEAR ENDED SEPTEMBER 30,
                                         --------------------------------------
                                        2000    1999    1998    1997      1996
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR    $33.85  $26.94  $25.32  $18.32    $15.69
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income                   .38     .37     .37     .34       .34
 Net Realized and Unrealized Gain
  (Loss) on Investments                 4.12    7.04    1.83    6.94      2.75
                                       ----------------------------------------
   Total from Investment Operations     4.50    7.41    2.20    7.28      3.09
                                       ----------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment Income   (.38)   (.37)   (.34)   (.19)     (.33)
 Distributions from Realized Capital
  Gains                                 (.33)   (.13)   (.24)   (.09)     (.13)
                                       ----------------------------------------
   Total Distributions                  (.71)   (.50)   (.58)   (.28)     (.46)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR          $37.64  $33.85  $26.94  $25.32    $18.32
===============================================================================

TOTAL RETURN                          13.43%  27.84%   8.97%  40.31%    20.19%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year (Millions)   $1,507  $1,365    $920    $718      $406
 Ratio of Total Expenses to Average Net
  Assets                               0.16%   0.18%   0.20%   0.23%     0.22%
 Ratio of Net Investment Income to
  Average Net Assets                   1.01%   1.21%   1.48%   1.78%     2.13%
 Portfolio Turnover Rate                 11%      4%      1%      1%        2%
===============================================================================


<PAGE>

35


-------------------------------------------------------------------------------
                                                 MID-CAP INDEX PORTFOLIO
                                                   YEAR ENDED       FEB. 8* TO
                                           SEPTEMBER 30, 2000    SEP. 30, 1999
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD                   $10.65           $10.00
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income                                    .08              .04
 Net Realized and Unrealized Gain (Loss)
  on Investments                                         4.49              .61
                                           ------------------------------------
   Total from Investment Operations                      4.57              .65
                                           ------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment Income                    (.05)              --
 Distributions from Realized Capital Gains               (.20)              --
                                           ------------------------------------
   Total Distributions                                   (.25)              --
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD                         $14.97           $10.65
===============================================================================

TOTAL RETURN                                           43.77%            6.50%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year (Millions)                      $192              $54
 Ratio of Total Expenses to Average Net
  Assets                                                0.28%          0.24%**
 Ratio of Net Investment Income to Average
  Net Assets                                            0.90%          1.03%**
 Portfolio Turnover Rate                                  43%              24%
===============================================================================
 *Initial share purchase date. All assets were held in money market instruments
  until February 9, 1999, when performance measurement began.
**Annualized.


-------------------------------------------------------------------------------
                                                   GROWTH PORTFOLIO
                                               YEAR ENDED SEPTEMBER 30,
                                         --------------------------------------
                                        2000    1999    1998    1997      1996
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR    $28.96  $24.33  $21.51  $17.58    $14.10
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income                  .080     .16     .16    .190       .18
 Net Realized and Unrealized Gain
  (Loss) on Investments                7.795    6.16    3.43   4.615      3.65
                                       ----------------------------------------
   Total from Investment Operations    7.875    6.32    3.59   4.805      3.83
                                       ----------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment Income  (.160)   (.16)   (.20)  (.180)     (.16)
 Distributions from Realized Capital
  Gains                               (1.535)  (1.53)   (.57)  (.695)     (.19)
                                       ----------------------------------------
   Total Distributions                (1.695)  (1.69)   (.77)  (.875)     (.35)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR          $35.14  $28.96  $24.33  $21.51    $17.58
===============================================================================

TOTAL RETURN                          28.25%  27.27%  17.37%  28.76%    27.79%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year (Millions)   $1,302    $953    $631    $460      $276
 Ratio of Total Expenses to Average Net
  Assets                               0.31%   0.35%   0.39%   0.38%     0.39%
 Ratio of Net Investment Income to
  Average Net Assets                   0.24%   0.59%   0.74%   1.12%     1.29%
 Portfolio Turnover Rate                 81%     50%     48%     38%       42%
===============================================================================


<PAGE>

36


-------------------------------------------------------------------------------
                                      SMALL COMPANY GROWTH PORTFOLIO
                                 YEAR ENDED SEPTEMBER 30,
                             ---------------------------------      JUN. 3* TO
                             2000     1999      1998     1997    SEP. 30, 1996
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
 OF PERIOD                 $12.87   $ 9.53    $11.97   $ 9.84           $10.00
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income        .17      .06       .06      .04              .04
 Net Realized and Unrealized
  Gain (Loss) on Investments 9.69     3.35     (2.46)    2.13             (.20)
                             --------------------------------------------------
   Total from Investment
    Operations               9.86     3.41     (2.40)    2.17             (.16)
                             --------------------------------------------------
DISTRIBUTIONS
 Dividends from Net
  Investment Income          (.07)    (.06)     (.04)    (.04)              --
 Distributions from
  Realized Capital Gains       --     (.01)       --       --               --
                             --------------------------------------------------
   Total Distributions       (.07)    (.07)     (.04)    (.04)              --
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF
 PERIOD                    $22.66   $12.87    $ 9.53   $11.97           $ 9.84
===============================================================================

TOTAL RETURN               76.97%   35.98%   -20.10%   22.16%           -1.60%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year
  (Millions)                 $480     $168      $111     $133              $44
 Ratio of Total Expenses to
  Average Net Assets        0.46%    0.49%     0.42%    0.39%          0.45%**
 Ratio of Net Investment
  Income to Average Net
  Assets                    0.98%    0.58%     0.54%    0.67%          1.42%**
 Portfolio Turnover Rate     125%      85%      106%      72%              18%
===============================================================================
 *Inception.
**Annualized.


-------------------------------------------------------------------------------
                                               INTERNATIONAL PORTFOLIO
                                               YEAR ENDED SEPTEMBER 30,
                                         --------------------------------------
                                        2000    1999    1998    1997      1996
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR    $15.58  $12.96  $14.55  $12.74    $11.40
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income                   .25     .23     .21     .17       .14
 Net Realized and Unrealized Gain
  (Loss) on Investments                 1.80    2.59   (1.48)   2.10      1.36
                                       ----------------------------------------
   Total from Investment Operations     2.05    2.82   (1.27)   2.27      1.50
                                       ----------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment Income   (.21)   (.20)   (.18)   (.14)     (.16)
 Distributions from Realized Capital
  Gains                                 (.46)     --    (.14)   (.32)       --
                                       ----------------------------------------
   Total Distributions                  (.67)   (.20)   (.32)   (.46)     (.16)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR          $16.96  $15.58  $12.96  $14.55    $12.74
===============================================================================

TOTAL RETURN                          13.62%  21.97%  -8.74%  18.55%    13.36%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year (Millions)     $365    $272    $217    $246      $162
 Ratio of Total Expenses to Average Net
  Assets                               0.38%   0.46%   0.48%   0.46%     0.49%
 Ratio of Net Investment Income to
  Average Net Assets                   1.48%   1.51%   1.48%   1.43%     1.42%
 Portfolio Turnover Rate                 41%     39%     38%     22%       19%
===============================================================================


<PAGE>

37


-------------------------------------------------------------------------------
                                                  REIT INDEX PORTFOLIO
                                                   YEAR ENDED       FEB. 8* TO
                                           SEPTEMBER 30, 2000    SEP. 30, 1999
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD                    $9.85           $10.00
-------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income                                    .43              .28
 Net Realized and Unrealized Gain (Loss)
  on Investments                                         1.57             (.43)
                                           ------------------------------------
   Total from Investment Operations                      2.00             (.15)
                                           ------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment Income                    (.23)              --
 Distributions from Realized Capital Gains               (.01)              --
                                           ------------------------------------
   Total Distributions                                   (.24)              --
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD                         $11.61           $ 9.85
===============================================================================

TOTAL RETURN                                           20.79%           -1.50%
===============================================================================

RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Year (Millions)                       $47              $21
 Ratio of Total Expenses to Average Net
  Assets                                                0.47%          0.27%**
 Ratio of Net Investment Income to Average
  Net Assets                                            6.30%          6.26%**
 Portfolio Turnover Rate                                   6%               4%
===============================================================================

 *Initial share purchase date. All assets were held in money market
  instruments until February 9, 1999, when performance measurement began.
**Annualized.

     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.




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.  "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>

38

GENERAL INFORMATION

If the board of trustees  determines that continued  offering of shares would be
detrimental to the best interests of a Portfolio's  shareholders,  the Portfolio
may  suspend  the  offering  of  shares  for a period  of time.  If the board of
trustees  determines that a specific purchase acceptance would be detrimental to
the best interest of the  Portfolio's  shareholders,  the Fund may reject such a
purchase request.
     If you  wish  to  redeem  monies  from a  Portfolio,  please  refer  to the
instructions  provided in the  prospectus for the insurance  company's  separate
account.  Shares of the  Portfolio  may be redeemed  on any  business  day.  The
redemption  price of shares will be at the  next-determined  net asset value per
share.  Redemption  proceeds will be wired to the administrator for distribution
to the contract owner  generally on the day following  receipt of the redemption
request,  but no later than seven business days.  Contract owners will receive a
check from the administrator for the redemption amount.
     A Portfolio may suspend the redemption  right or postpone  payment at times
when the New York Stock Exchange is closed or under any emergency  circumstances
as determined by the United States Securities and Exchange Commission.
     If the board of trustees  determines  that it would be  detrimental  to the
best interests of a Portfolio's remaining  shareholders to make payment in cash,
the Portfolio may pay redemption  proceeds in whole or in part by a distribution
in kind of readily marketable securities.

<PAGE>

39

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 on securities that a fund
has sold at a profit, minus any realized losses.

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

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

COUNTRY RISK
The chance  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 pay interest and principal in a timely
manner.

CURRENCY RISK
The chance  that  returns  on a foreign  investment  will be reduced  because of
unfavorable changes in currency exchange rates.

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

EXPENSE RATIO
The percentage of a portfolio'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 portfolio's  return is not hurt badly
by the poor performance of a single security, industry, or country.

INVESTMENT GRADE
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely  payment of principal and interest  under current
economic circumstances.

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

PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock  selling for $20, with  earnings of $2 per share,  has a  price/earnings
ratio of 10.

PRINCIPAL
The amount of money you put into an investment.

TOTAL RETURN
A percentage change,  over a specified time period, in a mutual fund's net asset
value,  assuming 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>


                                                [SHIP LOGO]
                                                [THE VANGUARD GROUP(R) LOGO]

                                                Post Office Box 2600
                                                Valley Forge, PA 19482-2600

FOR MORE INFORMATION
If you'd like more information about
Vanguard Variable Insurance Fund, the
following documents are available free
upon request:

ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the Fund's
investments is available in the Fund's
annual and semiannual reports to
shareholders.

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.

All market indexes referenced in this
prospectus are the exclusive property of
their respective owners.

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 19482-2600

TELEPHONE:
1-800-522-5555

WORLD WIDE WEB:
WWW.VANGUARD.COM

INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)

You can review and copy information
about the Fund (including the SAI) at the
SEC's Public Reference Room in
Washington, DC. To find out more about
this public service, call the SEC at 1-202-
942-8090. Reports and other information
about the Fund are also available on the
SEC's Internet site at http://www.sec.gov, or
you can receive copies of this information, for a
fee, by electronic request at the following
e-mail address: [email protected], or by
writing the Public Reference Section,
Securities and Exchange Commission,
Washington, DC 20549-0102.

Fund's Investment Company Act
file number: 811-5962




                                                (C)2000 The Vanguard Group, Inc.
                                                All rights reserved.
                                                Vanguard Marketing Corporation,
                                                Distributor.

<PAGE>

                                                P064N 122000

<PAGE>

                                                P064NY 122000

<PAGE>

                                     PART B

                 VANGUARD(R) VARIABLE INSURANCE FUND (THE FUND)

             STATEMENT OF ADDITIONAL INFORMATION DECEMBER 29, 2000

This Statement is not a prospectus,  but should be read in conjunction  with the
Fund's current Prospectus (dated December 29, 2000). To obtain the Prospectus or
the most recent Annual Report to  Shareholders,  containing the Fund's financial
statements, which are hereby incorporated by reference, please write to the Fund
or contact the  insurance  company  sponsoring  the  accompanying  variable life
insurance or variable annuity contract.

                                TABLE OF CONTENTS

                                                                 PAGE
                                                                 ----
DESCRIPTION OF THE FUND..........................................B-1
INVESTMENT POLICIES..............................................B-3
FUNDAMENTAL INVESTMENT LIMITATIONS...............................B-8
SHARE PRICE......................................................B-9
PURCHASE OF SHARES...............................................B-11
REDEMPTION OF SHARES.............................................B-11
YIELD (MONEY MARKET PORTFOLIO)...................................B-11
YIELD AND TOTAL RETURN...........................................B-12
MANAGEMENT OF THE FUND...........................................B-14
INVESTMENT ADVISORY SERVICES.....................................B-17
PORTFOLIO TRANSACTIONS...........................................B-28
COMPARATIVE INDEXES..............................................B-29
FINANCIAL STATEMENTS.............................................B-31
APPENDIX--DESCRIPTION OF SECURITIES AND RATINGS..................B-32


                             DESCRIPTION OF THE FUND

ORGANIZATION

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
(the Commission)  under the Investment  Company Act of 1940 (the 1940 Act) as an
open-end  diversified  management  investment  company.  It currently offers the
following portfolios (all Investor Share Class):

      Balanced Portfolio                 High-Grade Bond Portfolio
      Diversified Value Portfolio        International Portfolio
      Equity Income Portfolio            Mid-Cap Index Portfolio
      Equity Index Portfolio             Money Market Portfolio
      Growth Portfolio                   REIT Index Portfolio
      High Yield Bond Portfolio          Short-Term Corporate Portfolio
                         Small Company Growth Portfolio
           (individually, a Portfolio; collectively, the Portfolios)

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

                                       B-1

<PAGE>

SERVICE PROVIDERS

     CUSTODIAN. Brown Brothers Harriman & Co., 40 Water Street, Boston, MA 02109
(for  International  Portfolio);  First Union National Bank,  PA4943, 530 Walnut
Street,  Philadelphia,  PA 19106, (for High-Grade Bond, Equity Index,  Balanced,
High Yield Bond, Small Company Growth,  Diversified  Value,  Mid-Cap Index, REIT
Index,  and  Short-Term  Corporate  Portfolios);  State  Street  Bank and  Trust
Company,  225 Franklin  Street,  Boston,  MA 02110 (for Equity Income and Growth
Portfolios);  and The Bank of New York, One Wall Street, New York, NY 10286 (for
Money Market  Portfolio)  serve as the Fund's  custodians.  The  custodians  are
responsible for maintaining the Fund's assets and keeping all necessary accounts
and records.

     INDEPENDENT ACCOUNTANTS.  PricewaterhouseCoopers  LLP, Two Commerce Square,
Suite 1700,  2001 Market  Street,  Philadelphia,  PA  19103-7042,  serves as the
Fund's  independent  accountants.  The  accountants  audit the Fund's  financial
statements and provide other related services.

     TRANSFER  AND   DIVIDEND-PAYING   AGENT.  The  Fund's  transfer  agent  and
dividend-paying  agent is The Vanguard  Group,  Inc.,  100  Vanguard  Boulevard,
Malvern, PA 19355.

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 Portfolios.  The
Fund or any of its Portfolios may be terminated by  reorganization  into another
mutual fund or by  liquidation  and  distribution  of the assets of the affected
Portfolio. Unless terminated by reorganization or liquidation,  the Fund and its
Portfolios will continue indefinitely.

     SHAREHOLDER  LIABILITY.  The Fund is organized  under  Delaware law,  which
provides  that  shareholders  of a  business  trust  are  entitled  to the  same
limitations of personal  liability as  shareholders  of a corporation  organized
under Delaware law. Effectively,  this means that a shareholder of the 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 Portfolio are entitled to receive
any dividends or other  distributions  declared for such  Portfolios.  No shares
have priority or  preference  over any other shares of the same  Portfolio  with
respect  to  distributions.  Distributions  will be made  from the  assets  of a
Portfolio,  and will be paid ratably to all  shareholders  of the  Portfolio (or
class)  according to the number of shares of such  Portfolio  (or class) held by
shareholders  on the record date.  The amount of income  dividends per share may
vary between separate share classes of the same Portfolio based upon differences
in the way that  expenses are  allocated  between  share  classes  pursuant to a
multiple class plan.

     VOTING  RIGHTS.  Shareholders  are  entitled  to vote on a matter if: (i) a
shareholder  vote is required  under the 1940 Act;  (ii) the matter  concerns an
amendment to the Declaration of Trust that would adversely  affect to a material
degree the rights and  preferences  of the shares of any class or Portfolio;  or
(iii) the  trustees  determine  that it is  necessary  or  desirable to obtain a
shareholder  vote.  The 1940 Act  requires  a  shareholder  vote  under  various
circumstances, including to elect or remove trustees upon the written request of
shareholders  representing  10% or more of the Fund's net assets,  and to change
any fundamental policy of the Fund. Unless otherwise required by applicable law,
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  shares of the
Portfolio  affected by a particular  matter are entitled to vote on that matter.
Voting rights are  non-cumulative and cannot be modified without a majority vote
of shareholders.

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

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

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

     REDEMPTION  PROVISIONS.  The Fund's redemption  provisions are described in
the current  Plan  prospectus  and  elsewhere in this  Statement  of  Additional
Information.
                                       B-2

<PAGE>

     SINKING FUNDS PROVISION. The Fund has no sinking fund provisions.

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

TAX STATUS OF THE FUND

Each  Portfolio  of the Fund  intends  to  qualify  as a  "regulated  investment
company"  under  Subchapter M of the  Internal  Revenue  Code.  This special tax
status  means that a Portfolio  will not be liable for federal tax on income and
capital gains distributed to shareholders.  In order to preserve its tax status,
each Portfolio of the Fund must comply with certain requirements. If a Portfolio
fails to meet these  requirements in any taxable year, it will be subject to tax
on its taxable income at corporate  rates, and all  distributions  from earnings
and  profits,  including  any  distributions  of net  tax-exempt  income and net
long-term  capital gains, will be taxable to shareholders as ordinary income. In
addition,  the Portfolio could be required to recognize  unrealized  gains,  pay
substantial  taxes  and  interest,  and make  substantial  distributions  before
regaining its tax status as a regulated investment company.

                               INVESTMENT POLICIES

     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  instruments.  The  Bank  of New  York 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 Federal  Reserve  member  bank or a  registered
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  instrument.  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.

     The use of repurchase  agreements  involves certain risks. For example,  if
the other party to the agreement  defaults on its  obligation to repurchase  the
underlying  security at a time when the value of the  security has  declined,  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 reorganization
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
management  acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.

     LENDING OF  SECURITIES.  Each  Portfolio  of the Fund (except for the Money
Market Portfolio) may lend its securities to qualified  institutional  investors
(typically brokers,  dealers, banks or other financial institutions) who need to
borrow  securities in order to complete certain  transactions,  such as covering
short sales,  avoiding  failures to deliver  securities or completing  arbitrage
operations.  By lending  its  portfolio  securities,  a  Portfolio  attempts  to
increase its net investment  income through the receipt of interest on the loan.
Any gain or loss in the market price of the  securities  loaned that might occur
during the term of the loan would be for the account of the Portfolio. The terms
and the structure and the aggregate amount of such loans must be consistent with
the 1940 Act, and the Rules and Regulations or interpretations of the Commission
thereunder. These provisions limit the amount of securities a Portfolio may lend
to 33 1/3% of the Portfolio's  total assets,  and require that: (a) the borrower
pledge and maintain with the Portfolio  collateral  consisting of cash, a letter
of credit issued by a domestic U.S. bank, or securities  issued or guaranteed by
the United States Government having at all times not less than 100% of the value
of the securities loaned,  (b) the borrower add to such collateral  whenever the
price

                                       B-3

<PAGE>

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 receive  reasonable  interest on the loan, which
may include the Portfolio's  investing any cash  collateral in interest  bearing
short-term  investments,  any  distribution  on the  loaned  securities  and any
increase in their  market  value.  Loan  arrangements  made by a Portfolio  will
comply with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange, which presently require the borrower, after notice,
to redeliver the securities  within the normal settlement time of three business
days. All relevant facts and circumstances,  including the  creditworthiness  of
the broker,  dealer or institution,  will be considered in making decisions with
respect to the lending of  securities,  subject to review by the Fund's board of
trustees.

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

     VANGUARD INTERFUND LENDING PROGRAM.  The Commission has issued an exemptive
order  permitting  the  Fund to  participate  in  Vanguard's  interfund  lending
program.  This program  allows the Vanguard  funds to borrow money from and loan
money to each other for temporary or emergency purposes.  The program is subject
to a number of conditions,  including the requirement that no fund may borrow or
lend money through the program unless it receives a more favorable interest rate
than is available from a typical bank for a comparable transaction. In addition,
a fund may  participate  in the  program  only if and to the  extent  that  such
participation  is  consistent  with the fund's  investment  objective  and other
investment  policies.   The  Boards  of  trustees  of  the  Vanguard  funds  are
responsible  for  ensuring  that  the  interfund  lending  program  operates  in
compliance with all conditions of the Commission's exemptive order.

     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 securities are securities that may not be sold or disposed
of  in  the  ordinary   course  of  business   within  seven  business  days  at
approximately the value at which they are being carried on a Portfolio's books.

     The Fund may invest in restricted,  privately placed securities that, under
the  Commission's  rules,  may be sold only 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.  This  generally  includes
securities  that are  unregistered  that can be sold to qualified  institutional
buyers in accordance  with Rule 144A under the  Securities Act of 1933 (the 1933
Act).  While the  Portfolios'  investment  advisers  determine  the liquidity of
restricted  securities on a daily basis, the Board oversees and retains ultimate
responsibility for the advisers'  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.

     FOREIGN  INVESTMENTS.  As indicated in the Prospectus,  the  International,
Equity Index, Growth, Equity Income, Small Company Growth, Balanced,  Short-Term
Corporate,  High Grade Bond,  and Money Market  Portfolios  may include  foreign
securities to a certain  extent.  Investors  should  recognize 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
accounting,  auditing and financial reporting standards and practices comparable
to those applicable to domestic companies,  there may be less publicly available
information  about certain  foreign  companies  than about  domestic  companies.
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

                                       B-4

<PAGE>

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, commissions on many foreign stock exchanges
are generally  higher than  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
interest  income.  Although  in some  countries  a  portion  of  these  taxes is
recoverable,  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
denominated 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 conversions
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 currency rates.
Such contracts  involve an obligation to purchase or sell a specific 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
Federal 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
acquisition  of any  forward  contract,  futures  contract,  option,  or similar
financial 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
applicable  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 contracts 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 integrated and treated
as a single  transaction or otherwise  treated  consistently for purposes of the
Code.  Any gain or loss  attributable  to the foreign  currency  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 certain 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  anticipated  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.

     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, the Portfolio
purchases  these less risky  classes of CMOs issued only by agencies of the U.S.
Government or  privately-issued  CMOs that carry  high-quality  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.  Under 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 issuance,

                                       B-5

<PAGE>

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
security,  such as a CMO issuance,  is its exposure to  prepayment  risk. To the
extent 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 security,
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 average maturity
and market risks  profile.  Consequently,  the  Short-Term  Corporate  Portfolio
invests only in CMOs with highly predictable short-term average maturities.

     The  maturity  of some  classes  of CMOs may be very  difficult  to predict
because any such predictions are highly dependent upon assumptions regarding the
prepayments  which CMOs may  experience.  Deviations  in the actual  prepayments
experienced may significantly  affect the ultimate maturity of CMOs, and in such
an  event,  the  maturity  and risk  characteristics  of CMOs  purchased  by the
Portfolios 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 prepayment experience.  The Portfolios expect to control extension risk
by purchasing these specific  classes of CMOs which, in the advisers'  opinions,
are reasonably predictable.

     FUTURES  CONTRACTS AND OPTIONS THEREON.  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 regulated under the Commodity  Exchange Act by
the Commodity  Futures Trading  Commission  (CFTC),  a U.S.  Government  agency.
Assets committed to futures  contracts will be segregated to the extent required
by law.

     Although  futures  contracts  by their  terms call for actual  delivery  or
acceptance 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  previously
"purchased")  in an identical  contract to  terminate  the  position.  Brokerage
commissions are incurred when a futures contract is bought or sold.

     Futures traders are required to make a good faith margin deposit in cash or
government  securities  with a broker or custodian to initiate and maintain open
positions  in  futures  contracts.  A  margin  deposit  is  intended  to  assure
completion of the contract  (delivery or acceptance of the underlying  security)
if it is not terminated  prior to the specified  delivery date.  Minimal initial
margin  requirements are established by the futures exchange and may be changed.
Brokers may establish  deposit  requirements  which are higher than the exchange
minimums.  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
contract  value may reduce the  required  margin,  resulting  in a repayment  of
excess margin to the contract holder.  Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Portfolios
of the Fund may earn interest income on their 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 securities  underlying the futures  contracts which they trade,  and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying  securities.  The  Portfolios of the Fund intend to use
futures contracts only for bona fide hedging purposes.

                                       B-6

<PAGE>

     Regulations  of the CFTC  applicable to the  Portfolios of the Fund require
that all of its futures  transactions  constitute bona fide hedging transactions
except 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
contracts  to protect  securities  they own against  price  declines or purchase
contracts 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  exposure.
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 Future  Contracts.  A Portfolio of the Fund will
not enter into futures  contracts  transactions to the extent that,  immediately
thereafter,  the sum of its initial margin deposits 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  exceed 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 assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be  possible  to  close a  futures  position.  In the  event  of  adverse  price
movements, a 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 inability to close options and futures  positions  also
could have an adverse impact on the ability to hedge effectively.

     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 secondary
market.

     The risk of loss in trading  futures  contracts in some  strategies  can be
substantial,  due both to the low margin  deposits  required,  and the extremely
high degree of leverage  involved in futures pricing.  As a result, a relatively
small  price  movement  in a  futures  contract  may  result  in  immediate  and
substantial loss (as well as gain) to the investor.  For example, if at the time
of purchase,  10% of the value of the futures contract is deposited as margin, a
subsequent  10% decrease in the value of the futures  contract would result in a
total  loss of the margin  deposit,  before any  deduction  for the  transaction
costs,  if the account  were then closed out. A 15%  decrease  would result in a
loss equal to 150% of the original  margin  deposit if the contract  were closed
out.  Thus,  a purchase  or sale of a futures  contract  may result in losses in
excess of the amount  invested  in the  contract.  However,  because the futures
strategies  of the  Portfolios  are  engaged in only for hedging  purposes,  the
advisers 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 Portfolio  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 Portfolio of margin  deposits in the event of  bankruptcy of a
broker with whom the  Portfolio  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.

                                       B-7

<PAGE>

The daily limit governs only price movement during a particular  trading day and
therefore  does not limit  potential  losses,  because the limit may prevent the
liquidation of unfavorable positions.  Futures contract prices have occasionally
moved to the daily limit for several  consecutive trading days with little or no
trading,   thereby  preventing  prompt  liquidation  of  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 income for each taxable year its net
unrealized  gains and losses on certain  futures  contracts as of the end of the
year as well as those actually realized during the year. In most cases, any gain
or loss  recognized  with respect to a futures  contract is considered to be 60%
long-term capital gain or loss and 40% short-term  capital gain or loss, without
regard to the  holding  period of the  contract.  Furthermore,  sales of futures
contracts  which  are  intended  to  hedge  against  a  change  in the  value of
securities  held by a Portfolio may affect the holding period of such securities
and,  consequently,  the  nature  of the  gain or loss on such  securities  upon
disposition.  A Portfolio may be required to defer the  recognition of losses on
futures  contracts to the extent of any unrecognized  gains on related positions
held by the Portfolio.

     In order for a Portfolio  to  continue  to qualify  for Federal  income tax
treatment as a regulated  investment  company,  at least 90% of its gross income
for a taxable  year must be derived from  qualifying  income;  i.e.,  dividends,
interest,  income  derived  from  loans of  securities,  gains  from the sale of
securities or foreign  currencies,  or other income  derived with respect to its
business 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 qualifying income for purposes 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
including  unrealized  gains at the end of a Portfolio's  fiscal year on futures
transactions.  Such distributions will be combined with distributions of capital
gains  realized on a Portfolio's  other  investments  and  shareholders  will be
advised on the nature of the payments.

                       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  Portfolios'  shares.  For  these
purposes,  a  "majority"  of shares  means the lesser of: (i) 67% or more of the
shares voted, so long as more than 50% of a Portfolio's  outstanding  shares are
present  or  represented  by proxy;  or (ii)  more  than 50% of the  Portfolio's
outstanding shares.

     BORROWING.  Each  Portfolio may not borrow  money,  except for temporary or
emergency 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, FUTURES, AND OPTIONS THEREON. Each Portfolio may not invest in
commodities,  except that the Portfolios (except for the Money Market Portfolio)
may invest in futures contracts and options  transactions.  No more than 5% of a
Portfolio's  total  assets may be used as initial  margin  deposit  for  futures
contracts,  and no more than 20% of the Portfolio's total 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
securities.  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.

                                       B-8

<PAGE>

     INDUSTRY CONCENTRATION.  Each Portfolio may not invest more than 25% of its
total assets in any one industry.  (Except that for the Money Market  Portfolio,
this   limitation  does  not  apply  to  certificates  of  deposit  and  bankers
acceptances,  and  for  all  Portfolios,  this  limitation  does  not  apply  to
securities issued by the U.S. Government, its agencies and instrumentalities.)

     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
investment  objectives  and  investment  policies  consistent  with those of the
Portfolio.

     LOANS. Each Portfolio may not lend money to any person except by purchasing
fixed income  securities or by entering into repurchase  agreements,  by lending
its portfolio securities, or through Vanguard's interfund lending program.

     MARGIN.*  Each  Portfolio  may not  purchase  securities  on margin or sell
securities  short,  except as permitted by the Portfolio's  investment  policies
relating 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 OPTIONS, CALL OPTIONS,  STRADDLES, AND SPREADS.* Each Portfolio may not
invest  in put or call  options,  or  employ  straddles  or  spreads,  except as
permitted by the  Portfolio's  fundamental  investment  limitations  relating to
commodities, futures, and options thereon.

     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,  except
in compliance with the 1940 Act.

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

     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
Vanguard's costs or other financial  requirements.  See "Management of the Fund"
for more information.

     *The above  asterisked  items are  operational,  rather  than  fundamental,
policies for the Diversified  Value,  Mid-Cap Index,  REIT Index, and Short-Term
Corporate   Portfolios  of  Vanguard  Variable   Insurance  Fund.   Accordingly,
shareholder  approval is not required in order to change  these stated  policies
for the Diversified Value,  Mid-Cap Index, 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
regular 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
maturity of any  discount or premium,  regardless  of the impact of

                                       B-9

<PAGE>

fluctuating  interest  rates on the market value of the  instrument.  While this
method  provides  certainty in valuation,  it may result in periods during which
value,  as determined by amortized cost, is higher or lower than the price which
the Portfolio  would receive if it sold the  instrument.  Such  procedures  will
include a review of the Portfolio's holdings by the trustees,  at such intervals
as they may deem  appropriate,  to determine  whether the  Portfolio's net asset
value  calculated by using available market  quotations  deviates from $1.00 per
share based on amortized  cost.  The extent of any deviation will be examined by
the trustees.  If such  deviation  exceeds 1/2 of 1%, the trustees will promptly
consider  what  action,  if any,  will be  initiated.  In the event the trustees
determine that a deviation exists which may result in material dilution or other
unfair results to investors or existing  shareholders,  they have agreed to take
such corrective  action as they regard as necessary and  appropriate,  including
the sale of portfolio  instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity; withholding dividends; making a
special capital  distribution;  redemptions of shares in kind; or establishing a
net asset value per share by using available market quotations.

     The  use  of  amortized  cost  and  the  maintenance  of the  Money  Market
Portfolio's  net asset value at $1.00 is based on its election to operate  under
Rule 2a-7 under the 1940 Act. 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  approved 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 or the official  closing  price on the
day the valuation is made. Such securities which are not traded on the valuation
date are  valued at the mean of the bid and ask  prices.  Price  information  on
exchange-listed  securities  is taken from the  exchange  where the  security is
primarily traded.  Securities may be valued on the basis of prices provided by a
pricing  service  when such prices are believed to reflect the fair market value
of such securities.

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

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

     Foreign  securities are valued at the last quoted sales price,  or the most
recently   determined  closing  price  calculated   according  to  local  market
convention,  available at the time the Portfolio is valued.  Prices are obtained
from the broadest and most representative  market on which the securities trade.
If events which materially  affect the value of a Portfolio's  investments occur
after the close of the securities markets on which such securities 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
liabilities  initially  expressed in foreign  currencies  will be converted into
U.S.  dollars using the  officially  quoted daily  exchange rates used by Morgan
Stanley Capital  International in calculating various benchmarking indexes. 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 or do not
reflect  market  conditions  at the time the  Portfolio  is valued,  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.

                                      B-10

<PAGE>

                               PURCHASE OF SHARES

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

                              REDEMPTION OF SHARES

Each Portfolio 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  Commission,  (ii) during any
period when an emergency  exists as defined by the rules of the  Commission as a
result of which it is not reasonably  practicable  for a Portfolio 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.

     Each  Portfolio has made an election with the Commission to pay in cash all
redemptions  requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Portfolio
at the beginning of such period.

                         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  multiplying 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 additional
shares.  An  effective  yield,  which  reflects the effects of  compounding  and
represents an annualization of the current yield with all dividends  reinvested,
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
current and effective yield  calculations for the Money Market Portfolio for the
7-day base period ended September 30, 2000.

                                                       MONEY MARKET PORTFOLIO
                                                             9/30/2000
                                                             ---------
            Value of account at beginning of period.          $1.00000
            Value of same account at end of period*.          $1.00125
                                                              --------
            Net change in account value. . . . . . .          $0.00125
            Annualized current net yield
             (Net change X 365/7) / average net
             asset value . . . . . . . . . . . . . .             6.51%
                                                                 =====
            Effective Yield
             [(Net change) + 1]365/7 - 1 . . . . . .             6.72%
                                                                 =====
            Average weighted maturity of investments           55 days
                                                               =======
---------
*    Exclusive of any capital changes.

     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
fluctuate.  The Fund has obtained private insurance that partially  protects the
Money Market Portfolio  against default of principal or interest payments on the
instruments 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
dividend 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

                                      B-11

<PAGE>

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  factors  set forth in the  preceding  sentence,
differences in the time periods compared, and differences in the methods used in
valuing portfolio instruments, computing net asset value and calculating yield.

                             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, 2000,  is set forth below.  Premiums and
discounts on asset-backed securities are not amortized.

            Balanced Portfolio. . . . . . . . .            3.89%
            Diversified Value. . . . . . . . .             3.04%
            Equity Income Portfolio. . . . . .             2.35%
            Equity Index Portfolio. . . . . . .            0.96%
            Growth Portfolio. . . . . . . . . .            0.09%
            High Yield Bond Portfolio. . . . .            10.28%
            High-Grade Bond Portfolio. . . . .             6.99%
            International Portfolio. . . . . .               N/A
            Mid-Cap Index Portfolio. . . . . .             0.97%
            REIT Index. . . . . . . . . . . . .              N/A
            Short-Term Corporate Portfolio. . .            7.44%
            Small Company Growth Portfolio. . .            1.02%

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

                             ONE YEAR ENDED   FIVE YEARS ENDED   TEN YEARS ENDED
                                9/30/2000        9/30/2000          9/30/2000
                                ---------        ---------          ---------
      Balanced Portfolio          5.91%            12.83%            12.43%*
      Diversified Value
       Portfolio                  7.18%            -0.13%*              N/A
      Equity Income
       Portfolio                  3.06%            15.76%            14.80%*
      Equity Index Portfolio     13.43%            21.66%            17.74%*
      Growth Portfolio           28.25%            25.81%            22.90%*
      High Yield Bond
       Portfolio                  4.03%             6.70%*              N/A
      High-Grade Bond
       Portfolio                  7.05%             6.38%             7.25%*
      International
       Portfolio                 13.62%            11.19%            11.12%*
      Mid-Cap Index
       Portfolio                 43.77%            29.68%*              N/A
      REIT Index Portfolio       20.79%            11.19%*              N/A
      Short-Term Corporate
       Portfolio                  6.54%             4.62%*              N/A
      Small Company Growth
       Portfolio                 76.97%            21.37%*              N/A
---------
* Since Inception:
      Balanced Portfolio--May 23, 1991
      Diversified Value Portfolio and Short-Term Corporate Portfolio--
       February 8, 1999
      Equity Income Portfolio and Growth Portfolio--June 7, 1993
      Equity Index Portfolio and High-Grade Bond Portfolio--April 29, 1991
      High Yield Bond Portfolio and Small Company Growth Portfolio--
       June 3, 1996
      International Portfolio--June 3, 1994
      Mid-Cap Index Portfolio and REIT Index Portfolio--February 9, 1999

                                      B-12

<PAGE>

SEC YIELDS

Yield is the net  annualized  yield based on a  specified  30-day (or one month)
period  assuming  semiannual  compounding  of  income.  Yield is  calculated  by
dividing the net  investment  income per share  earned  during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:

                          YIELD = 2[((A-B)/CD+1)6 - 1]

  Where:

          a     =dividends and interest earned during the period
          b     =expenses accrued for the period (net of  reimbursements)
          c     =the average daily number of shares outstanding during
                 the period that were entitled to receive dividends
          d     =the maximum offering price per share on the last day of
                 the period

AVERAGE ANNUAL TOTAL RETURN

Average annual total return is the average annual  compounded rate of return for
the periods of one year,  five years,  ten years, or the life of each Portfolio,
all  ended on the  last  day of a recent  month.  Average  annual  total  return
quotations  will  reflect  changes  in the price of the  Portfolios'  shares and
assume that all dividends and capital gains distributions  during the respective
periods were  reinvested  in Portfolio  shares.  Average  annual total return is
calculated  by  finding  the  average  annual  compounded  rates of  return of a
hypothetical  investment  over such periods  according to the following  formula
(average annual total return is then expressed as a percentage):

                               T = (ERV/P)1/N - 1

  Where:

          T     =average annual total return
          P     =a hypothetical initial investment of $1,000
          n     =number of years
          ERV   =ending redeemable value: ERV is the value, at the end
                 of the applicable period, of a hypothetical $1,000
                 investment made at the beginning of the applicable
                 period

CUMULATIVE TOTAL RETURN

Cumulative  total  return is the  cumulative  rate of  return on a  hypothetical
initial  investment of $1,000 for a specified  period.  Cumulative  total return
quotations  reflect changes in the price of each  Portfolios'  shares and assume
that all  dividends  and  capital  gains  distributions  during the period  were
reinvested in Portfolio shares. Cumulative total return is calculated by finding
the cumulative rates of a return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):

                                C = (ERV/P) - 1

  Where:

          C     =cumulative total return
          P     =a hypothetical initial investment of $1,000
          ERV   =ending redeemable value: ERV is the value, at the end
                 of the applicable period, of a hypothetical $1,000
                 investment made at the beginning of the applicable
                 period

                                      B-13

<PAGE>

                             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 rrustees 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 109 investment  companies  administered  by Vanguard (107 in the case of Mr.
Malkiel and 99 in the case of Mr. MacLaury). The mailing address of the trustees
and officers of the Fund is Post Office Box 876, Valley Forge, PA 19482.

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

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

BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President  Emeritus  of  The  Brookings  Institution  (Independent  Non-Partisan
Research  Organization);  Director of American  Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.

BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University;  Director
of Prudential  Insurance Co. of America,  Banco Bilbao Argentaria,  Gestion, BKF
Capital (Investment Management), The Jeffrey Co. (Holding Company), NeuVis, Inc.
(Software Co.), and Select Sector SPDR Trust (Exchange-Traded Mutual Fund).

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

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

J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Retired  Chairman  and CEO of Rohm & Haas Co.  (Chemicals);  Director of Cummins
Engine Co. (Diesel Engines),  The Mead Corp.  (Paper Products),  and AmeriSource
Health  Corp.   (Pharmaceutical   Distribution);   and  Trustee  of   Vanderbilt
University.

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

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




---------
*Officers of the Fund are "interested persons" as defined in the 1940 Act.


                                      B-14

<PAGE>

THE VANGUARD GROUP

Vanguard Variable Insurance Fund is a member of The Vanguard Group of Investment
Companies,  which  consists  of more  than 100  individual  portfolios  (funds).
Through their jointly-owned subsidiary, The Vanguard Group, Inc. (Vanguard), the
Fund and the other funds in The Vanguard  Group obtain at cost  virtually all of
their corporate management,  administrative, and distribution services. Vanguard
also  provides  investment  advisory  services  on an  at-cost  basis to certain
Vanguard funds.

     Vanguard  employs  a  supporting  staff of  management  and  administrative
personnel  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
addition,  each fund bears its own direct expenses such as legal,  auditing, and
custodian 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 adviser
for the funds.

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

     Vanguard was  established and operates under an Amended and Restated Funds'
Service  Agreement which was approved by the  shareholders of each of the 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, 2000,
each Portfolio had  contributed  capital to Vanguard  (included in other assets)
representing  0.02% of each Portfolio's net assets. The total amount contributed
by  the  Fund   was   $1,153,000,   which   represented   1.15%  of   Vanguard's
capitalization.  The Amended and Restated Funds' Service  Agreement  provides as
follows: (a) each Vanguard fund may invest up to 0.40% of its current net assets
in Vanguard, and (b) there is no other limitation on the dollar amount that each
Vanguard fund may contribute to Vanguard's capitalization.

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

     DISTRIBUTION.  Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the funds in the Group. The principal distribution expenses are for advertising,
promotional  materials and marketing personnel.  Distribution  services may also
include  organizing  and offering to the public,  from time to time, one or more
new investment companies which will become members of Vanguard. The trustees and
officers of Vanguard  determine the amount to be spent annually on  distribution
activities,  the  manner and  amount to be spent on each  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 contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for The Vanguard Group, and that no fund shall
incur  annual  distribution  expenses  in excess of 20/100 of 1% of its  average
month-end net assets.

                                      B-15

<PAGE>

     During the fiscal years ended  September  30,  1998,  1999,  and 2000,  the
Portfolios incurred the following  approximate amounts of Vanguard's  management
(including transfer agency), distribution, and marketing expenses:


      PORTFOLIO                           1998          1999            2000
      ---------                           ----          ----            ----
      Balanced Portfolio            $1,126,000    $1,240,000        $880,000
      Diversified Value Portfolio          N/A        42,000         113,000
      Equity Income Portfolio          872,000       952,000         701,000
      Equity Index Portfolio         1,653,000     2,111,000       2,331,000
      Growth Portfolio               1,262,000     1,680,000       1,799,000
      High Yield Bond Portfolio        288,000       314,000         265,000
      High-Grade Bond Portfolio        555,000       663,000         527,000
      International Portfolio          591,000       656,000         650,000
      Mid-Cap Index Portfolio              N/A        32,000         243,000
      Money Market Portfolio           810,000     1,082,000       1,176,000
      REIT Index Portfolio                 N/A         8,000         110,000
      Short-Term Corporate
       Portfolio                           N/A        21,000          72,000
      Small Company Growth
       Portfolio                       372,000       445,000         931,000

     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
compensation  and other  expenses of this staff are paid by the funds  utilizing
these services.

TRUSTEE COMPENSATION

The  same  individuals  serve  as  trustees  of all  Vanguard  funds  (with  two
exceptions,  which are noted in the table appearing on page B-17), 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 funds--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
     service.  This annual fee is paid for ten years  following  retirement,  or
     until each trustee's death.

     "INTERESTED"  TRUSTEES. Mr. Brennan serves as a trustee, but is not paid in
this  capacity.  He is,  however,  paid in his role as officer  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  compensation
paid to each trustee by all Vanguard funds.

                                      B-16

<PAGE>

                                                VANGUARD VARIABLE INSURANCE FUND
                                                       COMPENSATION TABLE


<TABLE>
<CAPTION>
<S>                                <C>               <C>                   <C>                    <C>
                                                         PENSION OR
                                     AGGREGATE       RETIREMENT BENEFITS                          TOTAL COMPENSATION
                                   COMPENSATION      ACCRUED AS PART OF    ESTIMATED ANNUAL        FROM ALL VANGUARD
                                       FROM              THIS FUND'S        BENEFITS UPON           FUNDS PAID TO
       NAMES OF TRUSTEES           THIS FUND(1)          EXPENSES(1)         RETIREMENT               TRUSTEES(2)
---------------------------------------------------------------------------------------------------------------------
John C. Bogle(3)                        None                None               None                         None
John J. Brennan                         None                None               None                         None
JoAnn Heffernan Heisen                $1,091                 $48            $15,000                     $100,000
Bruce K. MacLaury                     $1,129                 $80            $12,000                     $ 95,000
Burton G. Malkiel                     $1,097                 $80            $15,000                     $100,000
Alfred M. Rankin, Jr.                 $1,091                 $58            $15,000                     $100,000
James O. Welch, Jr.                   $1,091                 $85            $15,000                     $100,000
J. Lawrence Wilson                    $1,091                 $62            $15,000                     $100,000
</TABLE>

---------
(1)  The amounts  shown in this column are based on the Fund's fiscal year ended
     September 30, 2000.

(2)  The amounts reported in this column reflect the total  compensation paid to
     each trustee for his or her service as trustee of 109  Vanguard  funds (107
     in the case of Mr.  Malkiel;  99 in the case of Mr.  MacLaury) for the 1999
     calendar year.

(3)  Mr. Bogle retired from the Fund's Board on December 31, 1999.


                          INVESTMENT ADVISORY SERVICES

The investment  policies of each of the Portfolios may lead to frequent  changes
in investments, particularly in periods of rapidly fluctuating interest 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,  underwriting
commissions,  and other  transaction costs on the sales of securities as well as
on the  reinvestment of the proceeds in other  securities.  The annual portfolio
turnover  rate for the  Portfolios  is set forth  under the  heading  "Financial
Highlights" in the Vanguard  Variable  Insurance Fund Prospectus.  The portfolio
turnover  rate is not a limiting  factor when  management  deems it desirable to
sell or purchase  securities.  It is  impossible  to predict  whether or not the
portfolio  turnover rates in future years will vary significantly from the rates
in recent years.

THE BALANCED AND HIGH YIELD BOND PORTFOLIOS' INVESTMENT ADVISORY AGREEMENTS

BALANCED PORTFOLIO

The Fund employs Wellington  Management Company, LLP (Wellington  Management) to
manage the  investment  and  reinvestment  of the assets  included in the Fund's
BALANCED  PORTFOLIO and to continuously  review,  supervise,  and administer the
Balanced Portfolio's  investment program.  Wellington  Management discharges its
responsibilities  subject to the  control of the  officers  and  trustees of the
Fund.

     The Fund pays  Wellington  Management 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 Balanced  Portfolio's  average month-end net assets for
the quarter:

            NET ASSETS                              RATE
            ----------                              ----
            First $500 million. . . . . . .         .100%
            Next $500 million. . . . . . . .        .050%
            Over $1 billion. . . . . . . . .        .040%

     The basic fee will be increased or decreased by applying a performance  fee
adjustment  based  on  the  investment  performance  of the  Balanced  Portfolio
relative  to  the  investment   performance  of  the  composite  benchmark  (the
Benchmark),  of which 65% will be comprised of the Standard and Poor's Composite
Stock Price Index (the Stock  Index) and 35% of which will be  comprised  of the
Lehman Brothers  Credit A or Better Bond Index (the Bond Index).  The investment
performance of the Balanced Portfolio will be based on the cumulative

                                      B-17

<PAGE>


return  over a trailing  36-month  period  ending with the  applicable  quarter,
relative  to the  cumulative  total  return of the  Benchmark  for the same time
period. The adjustment applies as follows:

            CUMULATIVE 36-MONTH                          PERFORMANCE FEE
            PERFORMANCE VS. THE BENCHMARK                    ADJUSTMENT*
            -----------------------------                    -----------
            Trails by -6% or more. . . . . . . . . .   -0.20 X Basic Fee
            Trails by more than -6% up to -3%. . . .   -0.10 X Basic Fee
            Trails/exceeds from -3% through +3%. . .       0 X Basic Fee
            Exceeds by more than +3% but less
             than +6%. . . . . . . . . . . . . . . .   +0.10 X Basic Fee
            Exceeds by +6% or more . . . . . . . . .   +0.20 X Basic Fee
---------
*    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.

     The Benchmark will not be fully operable as the sole performance index used
to determine the adjustment  until the quarter ending March 31, 2003. Until that
date, the adjustment will be determined by linking the investment performance of
the Benchmark and that of the "Prior  Benchmark," 65% of which will be comprised
of the Stock  Index and 35% of which will be  comprised  of the Lehman  Brothers
Long Credit A or Better Bond Index (the Prior Bond Index) as follows.

     1. QUARTER ENDED JUNE 30, 2000.  The  adjustment  was determined by linking
the investment  performance of the Prior Benchmark for the eleven quarters ended
March 31, 2000, with that of the Benchmark for the quarter ended June 30, 2000.

     2. QUARTER  ENDED  SEPTEMBER 30, 2000.  The  adjustment  was  determined by
linking the investment  performance of the Prior  Benchmark for the ten quarters
ended March 31, 2000,  with that of the  Benchmark  for the two  quarters  ended
September 30, 2000.

     3. QUARTER ENDING  DECEMBER 31, 2000. The adjustment  will be determined by
linking the investment  performance of the Prior Benchmark for the nine quarters
ended March 31, 2000,  with that of the Benchmark for the three quarters  ending
December 31, 2000.

     4. QUARTER  ENDING MARCH 31, 2001.  The  adjustment  will be  determined by
linking the  investment  performance  of the Prior  Benchmark for eight quarters
ended March 31, 2000,  with that of the Benchmark  for the four quarters  ending
March 31, 2001.

     5. QUARTER  ENDING JUNE 30, 2001.  The  adjustment  will be  determined  by
linking the investment performance of the Prior Benchmark for the seven quarters
ended March 31, 2000,  with that of the  Benchmark  for the five quarter  ending
June 30, 2001.

     6. QUARTER ENDING  SEPTEMBER 30, 2001. The adjustment will be determined by
linking the investment  performance of the Prior  Benchmark for the six quarters
ended March 31,  2000,  with that of the  Benchmark  for the six quarter  ending
September 30, 2001.

     7. QUARTER ENDING  DECEMBER 31, 2001. The adjustment  will be determined by
linking the investment  performance of the Prior Benchmark for the five quarters
ended March 31, 2000,  with that of the Benchmark for the seven quarters  ending
December 31, 2001.

     8. QUARTER  ENDING MARCH 31, 2002.  The  adjustment  will be  determined by
linking the  investment  performance  of the Prior  Benchmark  for four quarters
ended March 31, 2000,  with that of the Benchmark for the eight quarters  ending
March 31, 2002.

     9. QUARTER  ENDING JUNE 30, 2002.  The  adjustment  will be  determined  by
linking the investment performance of the Prior Benchmark for the three quarters
ended March 31, 2000,  with that of the  Benchmark  for the nine quarter  ending
June 30, 2002.

     10. QUARTER ENDING SEPTEMBER 30, 2002. The adjustment will be determined by
linking the investment  performance of the Prior  Benchmark for the two quarters
ended March 31,  2000,  with that of the  Benchmark  for the ten quarter  ending
September 30, 2002.

                                      B-18

<PAGE>

     11. QUARTER ENDING  DECEMBER 31, 2002. The adjustment will be determined by
linking the investment  performance  of the Prior  Benchmark for the one quarter
ended March 31, 2000,  with that of the Benchmark for the eleven quarters ending
December 31, 2002.

     12. QUARTER ENDING MARCH 31, 2003. The Benchmark will be fully operable.

     The following special rules also apply to the adviser's compensation.

     1. FUND  PERFORMANCE.  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.

     2.  BENCHMARK  PERFORMANCE.  Computations  of  the  two  components  of the
Benchmark will be made at the beginning of each quarter, based on the allocation
set forth in the agreement.

     3. INDEX  PERFORMANCE.  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  distributions  having an ex-dividend  date occurring  within the
period  made by  companies  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 interest  accrued or paid on the bonds included in the Bond Index,  assuming
the reinvestment of such interest on a monthly basis.

     During the fiscal years ended September 30, 1998,  1999, and 2000, the Fund
incurred  investment  advisory  fees with respect to the  Balanced  Portfolio of
approximately  $514,000  (before a decrease  of $68,000  based on  performance),
$556,000  (before a decrease  of $93,000  based on  performance),  and  $518,000
(before  a  decrease  of  $105,000  based  on  performance),   respectively,  to
Wellington Management.

HIGH YIELD BOND PORTFOLIO

The Fund also  employs  Wellington  Management  to  manage  the  investment  and
reinvestment  of the assets of the  Fund's  HIGH  YIELD  BOND  PORTFOLIO  and to
continuously review,  supervise,  and administer the investment program for such
Portfolio.  Wellington Management discharges its responsibilities subject to the
control of the officers and trustees of the Fund.

     The Fund pays Wellington Management a basic advisory fee at the end of each
fiscal  quarter  calculated  by  applying a quarterly  rate,  based on an annual
percentage  rate of 0.06% to the average  month-end net assets of the High Yield
Bond Portfolio for the quarter.

     During the fiscal years ended September 30, 1998,  1999, and 2000, the Fund
incurred  investment advisory fees with respect to the High Yield Bond Portfolio
of approximately  $74,000,  $90,000,  and $85,000,  respectively,  to Wellington
Management.

DESCRIPTION OF WELLINGTON MANAGEMENT

Wellington  Management is a Massachusetts limited liability partnership of which
the  following  persons are  managing  partners:  Laurie A.  Gabriel,  Duncan M.
McFarland, and John R. Ryan.

THE DIVERSIFIED VALUE PORTFOLIO INVESTMENT ADVISORY AGREEMENT

The Fund has entered into an investment advisory agreement with Barrow,  Hanley,
Mewhinney  & Strauss,  Inc.  (Barrow,  Hanley) to manage the  Diversified  Value
Portfolio.  Under this  agreement,  Barrow,  Hanley  manages the  investment and
reinvestment of the Portfolio's assets and continuously reviews, supervises, and
administers  the  investment  program  of the  Portfolio  with  respect to those
assets. Barrow, Hanley discharges its responsibilities subject to the control of
the officers and trustees of the Fund.

     The Fund pays  Barrow,  Hanley an  advisory  fee at the end of each  fiscal
quarter,  calculated by applying a quarterly rate based on an annual  percentage
rate of 0.125% to the  average  month-end  net assets of the  Portfolio  for the
quarter.

                                      B-19

<PAGE>

     The  basic  advisory  fee may be  increased  or  decreased  by  applying  a
performance adjustment to the basic fee reflecting the investment performance of
the Portfolio  relative to the investment  record of the Standard & Poor's/BARRA
Value Index (the Index) over the same period as follows:

            CUMULATIVE 36-MONTH                             PERFORMANCE FEE
            PERFORMANCE VS. THE INDEX                           ADJUSTMENT*
            -------------------------                           -----------
            Trails by -9% or more. . . . . . . . . . .    -0.25 X Basic Fee
            Trails by more than -6% up to -9%. . . . .    -0.15 X Basic Fee
            Trails/exceeds from -6% through +6%. . . .     0.00 X Basic Fee
            Exceeds by more than +6% but less than +9%    +0.15 X Basic Fee
            Exceeds by +9% or more . . . . . . . . . .    +0.25 X Basic Fee
---------
*    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.

     Until the quarter ending December 31, 2001, the performance  adjustment for
Barrow, Hanley will be calculated according to the following transition rules:

     1.  FEBRUARY  8, 1999  THROUGH  DECEMBER  31,  1999.  The  performance  fee
adjustment was not operable, and Barrow, Hanley was paid the basic fee set forth
above.

     2. QUARTER ENDING MARCH 31, 2000 THROUGH QUARTER ENDING MARCH 31, 2002. The
performance  fee  adjustment  shall be  calculated  based on a comparison of the
Portfolio's  investment  performance  and that of the Index  over the  number of
months that have elapsed  between  March 31, 1999 and the end of the quarter for
which  the fee is  computed.  The  number  of  percentage  points  by which  the
Portfolio's  investment  performance must exceed or fall below that of the Index
shall increase proportionately from 3 percentage points and 2 percentage points,
respectively,  for the twelve months ended March 31, 2000 to 9 percentage points
and 6 percentage  points,  respectively,  for the thirty-six months ending March
31, 2002.

     The BARRA  Value  Index  includes  stocks in the  Standard  and  Poor's 500
Composite  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  Portfolio  began  operations  on February  9, 1999.  During the fiscal
period ended  September 30, 1999, and the fiscal year ended  September 30, 2000,
the Fund incurred investment advisory fees of approximately $28,000 and $46,000,
(before a decrease of $8,000  based on  performance),  respectively,  to Barrow,
Hanley.

DESCRIPTION OF BARROW, HANLEY

Barrow,  Hanley is a Nevada corporation  controlled by the following officers of
Barrow, Hanley: James Purdy Barrow, President, Secretary, and Treasurer; Richard
Albert  Englander,  Principal;  Joseph Ray Nixon, Jr.,  Principal;  Robert David
Barkley,  Principal;  Robert James  Chambers,  Principal;  Timothy James Culler,
Principal; Mary Jane Gilday, Principal; and Hiram Monroe Helm III, Principal.

THE EQUITY INCOME PORTFOLIO INVESTMENT ADVISORY AGREEMENT

The Fund  employs  Newell  Associates  (Newell),  to manage the  investment  and
reinvestment  of the assets of the Equity Income  Portfolio and to  continuously
review,  supervise,  and administer the Portfolio's  investment program.  Newell
discharges  its  responsibilities  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,
calculated by applying a quarterly rate,  based on an annual  percentage rate of
0.10%, to the average month-end net assets of the Portfolio for the quarter.

     During the fiscal years ended September 30, 1998,  1999, and 2000, the Fund
incurred  investment  advisory fees of  approximately  $357,000,  $436,000,  and
$356,000, respectively, to Newell.

                                      B-20

<PAGE>

DESCRIPTION OF NEWELL

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,  Jennifer C. Newell,
President, Robert A. Huret, Vice Chairman, and Alan E. Rothenberg, Director.

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
continuously reviews,  supervises,  and administers the Fund's Growth Portfolio.
Lincoln 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 a basic fee
at the end of each fiscal  quarter,  calculated  by  applying a quarterly  rate,
based on an annual percentage rate of 0.15% to the Portfolio's average month-end
net assets for the quarter.

     The basic fee will be increased or decreased by applying a performance  fee
adjustment based on the investment  performance of the Growth Portfolio relative
to the investment  performance of the Russell 1000 Growth Index (the Index). The
investment  performance of the Growth  Portfolio will be based on its cumulative
return  over a trailing  36-month  period  ending with the  applicable  quarter,
compared with the cumulative total return of the Index for the same period.  The
adjustment applies as follows:

            CUMULATIVE 36-MONTH
            PERFORMANCE VS. THE INDEX            PERFORMANCE FEE ADJUSTMENT*
            -------------------------            ---------------------------
            Exceeds by more than +9%. . . . .               +15% x Basic Fee
            Exceeds by 0% to +9%. . . . . . .     Linear increase between 0%
                                                        and +15% x Basic Fee
            Trails by 0% to -9% . . . . . . .     Linear decrease between 0%
                                                        and -15% x Basic Fee
            Trails by more than -9% . . . . .               -15% x Basic Fee
---------
*    For purposes of the adjustment calculation,  the basic fee is calculated by
     applying  the above rate  schedule  against  the  average net assets of the
     Growth  Portfolio  over  the same  period  for  which  the  performance  is
     measured.  Linear  application of the  adjustment  provides for an infinite
     number of results  within the stated range.  Example:  Cumulative  36-month
     performance of the Growth Portfolio versus the Index is +7.2%. Accordingly,
     a  performance  fee  adjustment  of +12% [(7.2%  divided by 9.0%) times 15%
     maximum] of the basic fee, as calculated over the trailing 36-months, would
     be due and payable.

     The  adjustment  will not be fully  operable until the close of the quarter
ending September 30, 2003. Until that date, the following  transition rules will
apply:

     1. OCTOBER 1, 2000 THROUGH  JUNE 30, 2001.  Compensation  will be the basic
fee. No adjustment will apply during this period.

     2. JULY 1, 2001 THROUGH  SEPTEMBER 30, 2003.  Beginning  July 1, 2001,  the
adjustment will take effect on a progressive basis with regards to the number of
months  elapsed  between  October 1, 2000,  and the quarter for which the fee is
computed.  During this period,  the +/-9% hurdle rate, as well as the adjustment
described above,  will be multiplied by a fraction,  which will equal the number
of months  elapsed since  October 1, 2000,  divided by 36.  Example:  Cumulative
18-month  performance  of the  Growth  Portfolio  versus  the  Index  is  +8.1%.
Accordingly,  a  performance  fee  adjustment of +7.5% [(8.1 divided by 4.5%(a))
times 7.5% maximum] of the basic fee, as calculated over the trailing 18-months,
would be due and payable.

     (a)  Note that the  cumulative  performance  versus the Index  exceeds  the
          maximum hurdle rate (adjusted in this case).

     3. ON AND AFTER OCTOBER 1, 2003. The  adjustment  will be fully operable at
this time.

     The following special rules will also apply to Lincoln's compensation:

     1. GROWTH PORTFOLIO  PERFORMANCE.  The investment performance of the Growth
Portfolio  for any period,  expressed as a percentage  of the "Growth  Portfolio
unit value" at the  beginning of the period,  will be the sum of: (i) the change
in the Growth  Portfolio  unit value during such period;  (ii) the unit value of
the Portfolio's cash  distributions  from the Growth  Portfolio's net investment
income and realized  net capital  gains  (whether  short or long term) having an
ex-dividend  date  occurring  within  the  period;  and (iii) the unit  value of
capital gains taxes

                                      B-21

<PAGE>

per share paid or payable on  undistributed  realized  long-term  capital  gains
accumulated  to the end of such period;  expressed  as a  percentage  of its net
asset value per share at the  beginning of such period.  For this  purpose,  the
value of  distributions  per share of realized  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 investment  company 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  dividends  and the date on which  provision is made for such
taxes, after giving effect to such distributions, dividends, and taxes.

     2. "GROWTH PORTFOLIO UNIT VALUE". The "Growth Portfolio unit value" will be
determined  by dividing the total net assets of the Growth  Portfolio by a given
number of units.  Initially,  the number of units in the Growth  Portfolio  will
equal the total Portfolio shares  outstanding on October 1, 2000.  Subsequently,
as assets are added to or  withdrawn  from the Growth  Portfolio,  the number of
units of the Growth  Portfolio  will be adjusted  based on the unit value of the
Growth  Portfolio  on the  day  such  changes  are  executed.  Any  cash  buffer
maintained by the  Portfolio  outside of the Growth  Portfolio  shall neither be
included  in the total net assets of the Growth  Portfolio  nor  included in the
computation of the Growth Portfolio unit value.

     3. INDEX  PERFORMANCE.  The investment  record of the Index for any period,
expressed  as a percentage  of the Index level at the  beginning of such period,
will be the sum of (i) the change in the level of the Index  during such period,
and (ii) the value,  computed consistently with the Index, of cash distributions
having an ex-dividend  date occurring within such period made by companies whose
securities  make up the  Index.  For this  purpose,  cash  distributions  on the
securities that make up the Index will be treated as reinvested in the Index, at
least as frequently as the end of each calendar quarter following the payment of
the dividend. The calculation will be gross of applicable costs and expenses.

     4. PERFORMANCE COMPUTATIONS. The foregoing notwithstanding, any computation
of the investment  performance of the Growth Portfolio and the investment record
of the Index shall be in accordance with any then  applicable  rules of the U.S.
Securities and Exchange Commission.

     During the fiscal years ended September 30, 1998,  1999, and 2000, the Fund
incurred investment  advisory fees of approximately  $859,000,  $1,362,000,  and
$1,802,000, respectively, to Lincoln.

DESCRIPTION OF LINCOLN

Lincoln is an Illinois  corporation  in which a controlling  interest is held by
the following  persons:  J. Parker Hall III,  Chairman;  Kenneth R. Meyer, Chief
Executive Officer; David M. Fowler,  President;  Richard W. Knee, Executive Vice
President;  Alan M. Sebulsky,  Executive Vice President; John S. Cole, Executive
Vice President; and Peter J. Knez, Executive Vice President.

THE INTERNATIONAL PORTFOLIO INVESTMENT ADVISORY AGREEMENT

The Fund  has  entered  into an  investment  advisory  agreement  with  Schroder
Investment  Management  North  America  Inc.  (Schroder)  under  which  Schroder
supervises and administers the International  Portfolio's investment program. In
this regard, it is the  responsibility of Schroder to make decisions relating to
the International  Portfolio's investment in foreign securities and to place the
International Portfolio's purchase and sale orders for such securities. Schroder
will invest or reinvest the assets of the International  Portfolio predominantly
in foreign  (non-U.S.)  securities.  Schroder  discharges  its  responsibilities
subject to the control of the officers and trustees of the Fund.

     As compensation for the services  rendered by Schroder under the agreement,
the Fund pays Schroder 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  International  Portfolio  for the
quarter.

                                      B-22

<PAGE>

     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:


CUMULATIVE 36-MONTH PERFORMANCE VS. EAFE         ANNUAL PERFORMANCE FEE RATE
--------------------------------------------     ---------------------------
+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%

     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  Portfolio  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  International
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 International
Portfolio  accumulated to the end of such period; and (iii) the value of capital
gains  taxes  per  share  paid or  payable  by the  International  Portfolio  on
undistributed  realized  long-term  capital gains accumulated to the end of such
period.  For this  purpose,  the value of  distributions  per share of  realized
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  International
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 dividends and the date
on  which  provision  is made  for  such  taxes,  after  giving  effect  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 consistently 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 Index 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 Commission.

     The trustees 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  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 outstanding.

     During the fiscal years ended September 30, 1998,  1999, and 2000, the Fund
incurred  investment  advisory  fees of  approximately  $351,000  (including  an
increase of $62,000 based on  performance),  $332,000  (including an increase of
$13,000  based on  performance),  and  $462,000  (including  no  adjustment  for
performance), respectively, to Schroder.

DESCRIPTION OF SCHRODER

Schroder is the London branch  office of Schroder  Investment  Management  North
America,  Inc.  (SIMNA).  SIMNA  is  a  wholly-owned   subsidiary  of  Schroders
Incorporated,  787 7th Avenue, 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 seventeen countries.  The Schroder
Group specializes in providing investment management services,  with Group funds
under management currently in excess of $210 billion.

                                      B-23

<PAGE>

THE SMALL COMPANY GROWTH PORTFOLIO INVESTMENT ADVISORY AGREEMENTS

GRANAHAN INVESTMENT MANAGEMENT, INC.

The Fund entered into an investment  advisory agreement with GRANAHAN INVESTMENT
MANAGEMENT,  INC.  (GRANAHAN)  under which  Granahan  manages the investment and
reinvestment  of a portion of the Small Company Growth  Portfolio's  assets (the
Granahan Portfolio) and continuously  reviews,  supervises,  and administers the
Portfolio's investment program with respect 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,
calculated by applying a quarterly  rate based on an annual  percentage  rate of
0.15% to the average  month-end  net assets of the  Granahan  Portfolio  for the
quarter.

     The  basic  advisory  fee may be  increased  or  decreased  by  applying  a
performance fee adjustment to the basic fee based on the investment  performance
of the Granahan  Portfolio relative to the investment record of the Russell 2000
Growth Index (the Index).  The investment  performance of the Granahan Portfolio
will be based on the cumulative  return over a trailing  36-month  period ending
with the  applicable  quarter,  relative to the  cumulative  total return of the
Index for the same time period as follows:

            CUMULATIVE 36-MONTH                            PERFORMANCE FEE
            PERFORMANCE VS. THE INDEX                          ADJUSTMENT*
            -------------------------                          -----------
            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 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
---------
*    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.

     The Index will not be fully  operable  as the sole index used to  determine
the performance  adjustment  until the quarter ending June 30, 2003.  Until that
date, the adjustment will be determined by linking the investment performance of
the Index and that of the Small  Company  Growth  Fund  Stock  Index  (the Prior
Index) as follows.

     1. QUARTER  ENDED  SEPTEMBER 30, 2000.  The  adjustment  was  determined by
linking the investment  performance  of the Prior Index for the eleven  quarters
ended June 30, 2000,  with that of the Index for the quarter ended September 30,
2000.

     2. QUARTER ENDING  DECEMBER 31, 2000. The adjustment  will be determined by
linking the investment performance of the Prior Index for the ten quarters ended
June 30, 2000,  with that of the Index for the two quarters  ending December 31,
2000.

     3. QUARTER  ENDING MARCH 31, 2001.  The  adjustment  will be  determined by
linking the  investment  performance  of the Prior  Index for the nine  quarters
ended June 30, 2000,  with that of the Index for the three quarters ending March
31, 2001.

     4. QUARTER  ENDING JUNE 30, 2001.  The  adjustment  will be  determined  by
linking the  investment  performance of the Prior Index for eight quarters ended
June 30,  2000,  with that of the Index for the four  quarters  ending  June 30,
2001.

     5. QUARTER ENDING  SEPTEMBER 30, 2001. The adjustment will be determined by
linking the  investment  performance  of the Prior Index for the seven  quarters
ended  June 30,  2000,  with  that of the  Index  for the five  quarters  ending
September 30, 2001.

     6. QUARTER ENDING  DECEMBER 31, 2001. The adjustment  will be determined by
linking the investment performance of the Prior Index for the six quarters ended
June 30, 2000,  with that of the Index for the six quarters  ending December 31,
2001.

     7. QUARTER  ENDING MARCH 31, 2002.  The  adjustment  will be  determined by
linking the  investment  performance  of the Prior  Index for the five  quarters
ended June 30, 2000,  with that of the Index for the seven quarters ending March
31, 2002.

                                      B-24

<PAGE>

     8. QUARTER  ENDING JUNE 30, 2002.  The  adjustment  will be  determined  by
linking the  investment  performance  of the Prior Index for four quarters ended
June 30,  2000,  with that of the Index for the eight  quarters  ending June 30,
2002.

     9. QUARTER ENDING  SEPTEMBER 30, 2002. The adjustment will be determined by
linking the  investment  performance  of the Prior Index for the three  quarters
ended  June 30,  2000,  with  that of the  Index  for the nine  quarters  ending
September 30, 2002.

     10. QUARTER ENDING  DECEMBER 31, 2002. The adjustment will be determined by
linking the investment performance of the Prior Index for the two quarters ended
June 30, 2000,  with that of the Index for the ten quarters  ending December 31,
2002.

     11. QUARTER  ENDING MARCH 31, 2003.  The  adjustment  will be determined by
linking the investment  performance of the Prior Index for the one quarter ended
June 30, 2000,  with that of the Index for the eleven  quarters ending March 31,
2003.

     12. QUARTER ENDING JUNE 30, 2003. The Index will be fully operable.

     During the fiscal years ended September 30, 1998,  1999, and 2000, the Fund
incurred investment  advisory fees of approximately  $196,000 (before a decrease
of $55,000 based on performance), $229,000 (after an increase of $9,000 based on
performance), and $710,000 (after an increase of $131,000 based on performance),
respectively, to Granahan.

DESCRIPTION OF GRANAHAN

Granahan is a  professional  investment  advisory  firm  founded in 1985.  As of
September  30, 2000,  Granahan  held  discretionary  management  authority  with
respect to  approximately  $2 billion in assets.  John J.  Granahan is portfolio
manager of the Granahan  Portfolio of the Small Company  Growth  Portfolio,  and
Gary C. Hatton and Jane M. White are assistant portfolio managers.

GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC

The Fund also entered into an investment advisory agreement with GRANTHAM, MAYO,
VAN  OTTERLOO  & CO.  LLC (GMO)  under  which GMO  manages  the  investment  and
reinvestment  of a portion of the Small Company Growth  Portfolio's  assets (the
GMO  Portfolio)  and  continuously  reviews,  supervises,  and  administers  the
Portfolio's  investment program with respect to those assets. GMO discharges its
responsibilities  subject to the  control of the  officers  and  trustees of the
Fund.

     The Fund pays GMO a basic fee at the end of each fiscal quarter, calculated
by applying a quarterly rate based on an annual percentage rate of 0.225% to the
average month-end net assets of the GMO Portfolio for the quarter.

     Subject to the transition rule described  below, the basic fee, as provided
above,  will be  increased  or  decreased  by the  amount of a  performance  fee
adjustment. The adjustment will be calculated as a percentage of the average net
assets  managed  by GMO for the  36-month  period  ending  with  the  then-ended
quarter,  and the  adjustment  will change  proportionately  with the investment
performance of the GMO Portfolio  relative to the investment  performance of the
Russell  2000 Growth Index (the Index) for the same period.  The  adjustment  is
computed as follows:

                                      B-25

<PAGE>

            CUMULATIVE 36-MONTH               PERFORMANCE FEE ADJUSTMENT AS A
            PERFORMANCE VS. THE INDEX(A)       PERCENTAGE OF AVERAGE ASSETS(B)
            ----------------------------       -------------------------------
            Trails by any amount. . . . . .                             -0.15%
            Equals-to-Exceeds by up to 3% .  Linear decrease from 0% to -0.15%
            Exceeds by 3% to 6% . . . . . .  Linear increase from 0% to +0.15%
            Exceeds by more than 6% . . . .                             +0.15%
---------
(a)  During the second through thirty-sixth month under the
     agreement, the adjustment will be calculated using cumulative
     performance of the GMO Portfolio and the Index from October 31,
     2000 until the end of the applicable quarter.
(b)  For purposes of this calculation, the average net assets will be calculated
     as  average  month-end  net  assets  over the same  time  period  for which
     performance is measured.  Linear application of the adjustment provides for
     an infinite  number of results  within the stated  range.  Example:  If the
     cumulative  36-month  performance of the GMO Portfolio  versus the Index is
     +3.6%,  an  adjustment of +0.03%* or  [(0.6%/3%)  0.15%] would apply.  This
     would be  calculated  as [(a/b)  0.15%],  where "a" equals  the  percentage
     amount by which the  performance  of the GMO  Portfolio  has  exceeded  the
     applicable  baseline  percentage for the linear adjustment,  and "b" equals
     the size of the range over which the linear adjustment applies.

     *As rounded for purposes of this example. In practice, the calculation
      will be extended to the eighth decimal point.

     The  adjustment  will not be fully  operable until the close of the quarter
ending December 31, 2003.  Until that time, the following  transition rules will
apply:

     1. OCTOBER 1, 2000 THROUGH SEPTEMBER 30, 2001. The compensation will be the
basic fee. No adjustment will apply during this period.

     2. OCTOBER 1, 2001 THROUGH OCTOBER 31, 2003. Beginning October 1, 2001, the
adjustment will take effect on a progressive basis with regards to the number of
months  elapsed  between  October 31, 2000, and the end of the quarter for which
the fee is being computed,  subject to the special rules described below. During
this  period,  the  endpoints  and size of the range over  which a  positive  or
negative adjustment applies and the corresponding  maximum fee adjustment amount
will be multiplied by a fractional  time-elapsed  adjustment.  The fraction will
equal  the  number  of  months  elapsed  since  October  31,  2000,  divided  by
thirty-six.  Example:  Assume  that  compensation  is being  calculated  for the
quarter ended September 30, 2002 and that the cumulative  performance of the GMO
Portfolio versus the Index for the applicable  period is +2.5%. In this case, an
adjustment of +0.03%* would apply. This would be calculated as [(a/c)(+0.095%)],
where "a"  equals  the  percentage  amount by which the  performance  of the GMO
Portfolio has exceeded the baseline percentage for the linear adjustment and "c"
equals the size of the adjusted range over which the linear adjustment  applies.
The adjusted range is determined as [(23/36) x 3%] to [(23/36) x 6%] = +1.91% to
+3.82%. The size of the adjustment range is 3.82% minus 1.91% = 1.91% = "c". The
value of "a" is 2.5% minus 1.91% = +0.59%.  Similarly,  +0.095% is determined as
[(23/36)(+0.15%)].

*As rounded for purposes of this example. In practice, the calculation will be
 extended to the eighth decimal point.

     3. ON AND  AFTER  NOVEMBER  1,  2003.  Commencing  November  1,  2003,  the
adjustment will be fully operable.

     The following special rules will also apply to GMO's compensation:

     1. GMO  PORTFOLIO  UNIT  VALUE.  The "GMO  Portfolio  unit  value"  will be
determined  by  dividing  the total net assets of the GMO  Portfolio  by a given
number of units. Initially,  the number of units in the GMO Portfolio will equal
a nominal  value as  determined  by dividing  initial  assets by a unit value of
$22.64 on  October 1, 2000.  Subsequently,  as assets are added to or  withdrawn
from  the GMO  Portfolio,  the  number  of units  of the GMO  Portfolio  will be
adjusted  based on the unit value of the GMO  Portfolio  on the day such changes
are  executed.  Any  cash  buffer  maintained  by the  Fund  outside  of the GMO
Portfolio  will neither be included in the total net assets of the GMO Portfolio
nor included in the computation of the GMO Portfolio unit value.

     2. GMO PORTFOLIO  PERFORMANCE.  The GMO Portfolio's  investment performance
for any period,  expressed as a percentage of the "GMO  Portfolio unit value" at
the  beginning  of such  period,  shall be the sum of: (i) the change in the GMO
Portfolio unit value during such period;  (ii) the unit value of the Fund's cash
distributions  from the GMO Portfolio's  net investment  income and realized net
capital gains (whether short- or long-term) having an ex-dividend date occurring
within  the  period;  and (iii) the unit value of  capital  gains  taxes paid or
payable  by  the  Fund  on  undistributed   realized   long-term  capital  gains
accumulated  to the end of the  period  by the  GMO  Portfolio,  expressed  as a
percentage of the GMO Portfolio's unit value at the beginning of the period.

                                      B-26

<PAGE>

For this purpose,  the value of distributions of realized capital gains per unit
of the GMO  Portfolio,  of  dividends  per unit of the GMO  Portfolio  paid from
investment income, and of capital gains taxes per unit of the GMO Portfolio paid
or payable on undistributed realized long-term capital gains shall be treated as
reinvested  in units of the GMO  Portfolio  at the unit  value in  effect at the
close of business on the record date for the payment of such  distributions  and
dividends and the date on which  provision is made for such taxes,  after giving
effect to such distributions, dividends, and taxes.

     3. INDEX  PERFORMANCE.  The investment  record of the Index for any period,
expressed as a percentage of the Index at the beginning of such period, shall be
the sum of: (i) the change in the level of the Index,  during such  period,  and
(ii) the  value,  computed  consistently  with the  Index of cash  distributions
having an ex-dividend  date occurring within such period made by companies whose
securities  comprise the Index.  For this  purpose,  cash  distributions  on the
securities  which comprise the Index shall be treated as reinvested in the Index
at least as frequently as the end of each calendar quarter following the payment
of the dividend.

     4. PERFORMANCE COMPUTATIONS. The foregoing notwithstanding, any computation
of the investment performance of the Fund and the investment record of the Index
shall be in accordance with any then applicable rules of the U.S. Securities and
Exchange Commission.

DESCRIPTION OF GMO

GMO is an investment  advisory firm founded in 1977. GMO currently manages about
$22 billion in assets. It provides  investment  counseling  services to employee
benefit plans, endowment funds, other institutions, and individuals. Christopher
M. Darnell and Robert M. Soucy are  portfolio  managers of the GMO  Portfolio of
the Small Company Growth Portfolio.

THE VANGUARD GROUP

The Equity Index,  High-Grade Bond, Mid-Cap Index, Money Market, REIT 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 Income Group
provides advisory services for the High-Grade Bond, Money Market, and Short-Term
Corporate Portfolios, and Vanguard's Quantitative Equity Group provides advisory
services to the Equity Index, Mid-Cap Index, and REIT Index Portfolios.

     Vanguard's   investment  management  staff  is  also  responsible  for  the
allocation of principal business and portfolio  brokerage and the negotiation of
commissions. For the Money Market Portfolio, the purchase and sale of investment
securities will ordinarily be principal transactions.  Portfolio securities will
normally be purchased  directly from the issuer or from an underwriter or market
maker for the securities. There will usually be no brokerage commissions paid by
the Money Market  Portfolio for such purchases.  Purchases from  underwriters of
securities  will include a commission  or  concession  paid by the issuer 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 competing broker-dealers; and the brokerage and research services provided to
the Fund.

<PAGE>

                                      B-27

     During the fiscal years ended  September  30,  1998,  1999,  and 2000,  the
Portfolios  managed  by  Vanguard  incurred  expenses  for  investment  advisory
services in the following amounts:

      PORTFOLIO                            1998          1999          2000
      ---------                            ----          ----          ----
      Equity Index Portfolio            $22,000       $93,000       $23,000
      High-Grade Bond Portfolio          30,000        42,000        38,000
      Mid-Cap Index Portfolio               N/A         7,000        17,000
      Money Market Portfolio             58,000        74,000        88,000
      REIT Index Portfolio                  N/A         7,000        17,000
      Short-Term Corporate Portfolio        N/A         1,000         5,000

DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS

The Fund's  current  agreements  with  Wellington  Management,  Barrow,  Hanley,
Newell,  Lincoln,  Schroder,  Granahan,  GMO,  and Vanguard  are  renewable  for
successive one-year periods,  only if (1) each renewal is specifically  approved
by a vote of the Portfolio'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 1940 Act) of any such  party,  cast in
person at a meeting called for the purpose of considering such approval,  or (2)
each renewal is specifically approved by a vote of a majority of the Portfolio's
outstanding  voting  securities.  An agreement is  automatically  terminated  if
assigned,  and may be terminated  without penalty at any time (1) by vote of the
board of trustees of the  Portfolio  on sixty (60) days'  written  notice to the
adviser,  (2) by a vote of a  majority  of the  Portfolio's  outstanding  voting
securities,  or (3) by the adviser upon ninety (90) days' written  notice to the
Portfolio.


                             PORTFOLIO TRANSACTIONS

The investment advisory agreements  authorize  Wellington  Management,  Lincoln,
Newell, Granahan, GMO, Schroder,  Barrow, Hanley, Vanguard's Quantitative Equity
Group,  and Vanguard's  Fixed Income Group (the Advisers)  (with the approval of
the  Fund's  board of  trustees),  to select the  brokers  or dealers  that will
execute the purchases and sales of portfolio  securities  for the  Portfolios of
the Fund and directs the  Advisers to use their best  efforts to obtain the best
available  price and most  favorable  execution as to all  transactions  for the
Portfolios.  The Advisers have undertaken to execute each investment transaction
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
Advisers  will use their best  judgment  to choose the  broker  most  capable of
providing the brokerage  services  necessary to obtain best available  price and
most  favorable  execution.  The full range and  quality of  brokerage  services
available will be considered in making these determinations.  In those instances
where it is  reasonably  determined  that  more  than one  broker  can offer the
brokerage  services needed to obtain the best available price and most favorable
execution,  consideration  may be given to those brokers which supply investment
research and  statistical  information and provide other services in addition to
execution  services to the Portfolios of the Fund and/or the Advisers.  Research
services may include,  but are not limited to,  individual  company and industry
analysis,  and investment  publications.  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 Portfolios
of the Fund to pay a broker-dealer  which furnishes  brokerage 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  respective  Portfolios and the other
Funds in the Group.

     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
otherwise  might  not be  available.  The  Advisers  will  only pay such  higher


                                      B-27

<PAGE>

commissions if they believe this to be in the best interest of the Portfolios of
the Fund.  Some  brokers or dealers who may receive such higher  commissions  in
recognition   of  brokerage   services   related  to  execution  of   securities
transactions  are also providers of research  information to the Advisers and/or
the  Portfolios of the Fund.  However,  the Advisers have informed the Fund that
they generally will not pay higher commission rates specifically for the purpose
of obtaining research services.

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

     During the fiscal years ended  September  30,  1998,  1999,  and 2000,  the
Portfolios paid brokerage commissions in the following amounts:

      PORTFOLIO                            1998          1999           2000
      ---------                            ----          ----           ----
      Balanced Portfolio               $165,000      $155,000       $187,000
      Diversified Value Portfolio           N/A        54,000         56,000
      Equity Income Portfolio           135,000       105,000        186,000
      Equity Index Portfolio             42,000        65,000         60,000
      Growth Portfolio                  437,000       736,000      1,111,000
      High Yield Bond Portfolio               0             0              0
      High-Grade Bond Portfolio               0             0              0
      International Portfolio           341,000       417,000        696,000
      Mid-Cap Index Portfolio               N/A        17,000         38,000
      Money Market Portfolio                  0             0              0
      REIT Index Portfolio                  N/A        12,000         12,000
      Short-Term Corporate Portfolio        N/A             0              0
      Small Company Growth Portfolio    215,000       219,000        619,000

                               COMPARATIVE INDEXES

Each of the investment company members of The Vanguard Group, including Vanguard
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--includes  stocks selected by
Standard & Poor's  Index  Committee  to  include  leading  companies  in leading
industries and to reflect 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.

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

STANDARD & POOR'S  500/BARRA GROWTH INDEX--contains  stocks of the S&P 500 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.

                                      B-29

<PAGE>

RUSSELL  1000 GROWTH  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 highest  price-to-book  ratios,  comprising 50% of the
market capitalization of the Russell 1000 Index.

WILSHIRE  5000 TOTAL MARKET  INDEX--consists  of more than 7,000  common  equity
securities,  covering  all  stocks  in the  U.S.  for  which  daily  pricing  is
available.

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

RUSSELL 3000 STOCK  INDEX--consists of approximately the 3,000 largest stocks of
U.S.-domiciled  companies  commonly  traded on the New York and  American  Stock
Exchanges or the NASDAQ over-the-counter market,  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 Stock  Index;  a  widely-used  benchmark  for small  capitalization
common stocks.

RUSSELL  2000 VALUE  INDEX--contains  stocks from the Russell  2000 Index with a
less-than-average growth orientation.

RUSSELL  2000 GROWTH  INDEX--contains  stocks from the Russell 2000 Index with a
better-than-average growth orientation.

MORGAN  STANLEY  CAPITAL  INTERNATIONAL  EAFE  INDEX--is an  arithmetic,  market
value-weighted  average of the performance of over 900 securities  listed on the
stock exchanges of countries in Europe, Australia, Asia, and the Far East.

MORGAN STANLEY REIT  INDEX--consist  of approximately  122 stocks of equity Real
Estate  Investment  Trusts  (REITs).  REITs in the index meet size and liquidity
criteria specified by Morgan Stanley.

SMALL COMPANY GROWTH FUND STOCK  INDEX--tracks the performance of stocks held by
the nation's largest small-capitalization mutual funds.

GOLDMAN SACHS 100  CONVERTIBLE  BOND  INDEX--currently  includes 71 bonds and 29
preferreds.   The  original  list  of  names  was  generated  by  screening  for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.

SALOMON BROTHERS GNMA  INDEX--includes  pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.

SALOMON BROTHERS HIGH GRADE CORPORATE BOND  INDEX--consists  of publicly issued,
non-convertible  corporate bonds rated AA or AAA. It is a value-weighted,  total
return index, including  approximately 800 issues with maturities of 12 years or
greater.

SALOMON  SMITH  BARNEY  3-MONTH   TREASURY   INDEX--tracks  the  performance  of
short-term U.S. government debt instruments.

LEHMAN BROTHERS  AGGREGATE BOND INDEX--is a market-weighted  index that contains
individually    priced    investment-grade    corporate    bonds   and   foreign
dollar-denominated  bonds rated BBB or better,  U.S.  Treasury and agency issues
and mortgage  pass-through  securities.  The index has a market value of over $5
trillion.

LEHMAN BROTHERS LONG-TERM  TREASURY BOND INDEX--is a market-weighted  index that
contains  individually  priced U.S.  Treasury  securities  with maturities of 10
years or greater.

LEHMAN  BROTHERS HIGH YIELD BOND  INDEX--includes  all  fixed-income  securities
having a maximum  quality rating of Ba1 (including  defaulted  issues);  with at
least $100  million  principal  outstanding,  and at least one year to maturity;
payment-in-kind bonds and Eurobonds are excluded.

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

LEHMAN   BROTHERS   CREDIT  BOND   INDEX--all   publicly   offered   fixed-rate,
nonconvertible  domestic  corporate bonds rated Baa by Moody's,  with a maturity
longer  than 1 year and with more  than $100  million  outstanding.  This  index
includes over 1,500 issues.

                                      B-30

<PAGE>

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

LEHMAN  BROTHERS  LONG  CREDIT BOND  INDEX--is  a subset of the Lehman  Brothers
Credit  Bond  Index  covering  all  corporate,   publicly  issued,   fixed-rate,
nonconvertible  U.S.  debt issues rated at least Baa, with at least $100 million
principal outstanding and maturity greater than 10 years.

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

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

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

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

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

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



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

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

LIPPER FIXED INCOME FUND AVERAGE--an  industry benchmark of average fixed income
funds with similar  investment  objectives  and policies,  as measured by Lipper
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 covered 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 fiscal year
ended September 30, 2000,  appearing in the Vanguard  Variable  Insurance Fund's
Annual Reports to Shareholders, and the report thereon of PricewaterhouseCoopers
LLP,  independent  accountants,  also appearing  therein,  are  incorporated  by
reference  in this  Statement of  Additional  Information.  For a more  complete
discussion  of  the  performance,  please  see  the  Fund's  Annual  Reports  to
Shareholders, which may be obtained without charge.

                                      B-31

<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
characteristics:  (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  unquestioned.  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 industry
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) financial
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 traded, and there is
no secondary  market for these notes,  although  they are  redeemable  (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 liquidity  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
characteristically  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
classification  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.

                                      B-32

<PAGE>

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
principal 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 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 protection 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
rating  categories from AA to CCC. The indicators show relative  standing within
the major rating categories.














                                      B-33
<PAGE>

                                                                   SAI064 122000
<PAGE>


                                     PART C

                        VANGUARD VARIABLE INSURANCE FUND
                               OTHER INFORMATION

ITEM 23. EXHIBITS

(a)    Declaration of Trust**
(b)    By-Laws**
(c)    Reference is made to Articles III and V of the Registrant's Declaration
       of Trust
(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 Agreements**
(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)    Not Applicable
(o)    Not Applicable
(p)    Codes of Ethics*
----------
  *Filed previously for Grantham, Mayo, Van  Otterloo & Co. LLC;  filed herewith
   for all other advisers.
 **Filed previously.
  +Filed  herewith.

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

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

ITEM 25. INDEMNIFICATION

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

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  concerning The
Vanguard Group set forth in Parts A and B.

                                      C-1
<PAGE>


     Investment  advisory  services  are  provided  to the HIGH  YIELD  BOND and
BALANCED  PORTFOLIOS  by  Wellington   Management  Company,   LLP  (Wellington).
Wellington 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,  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 incorporated  herein
by reference from Schedules B and D of Form ADV filed by Wellington  pursuant to
the Advisers Act (SEC File No. 801-15908).

     Investment advisory services are provided to the EQUITY INCOME PORTFOLIO by
Newell Associates (Newell). Newell is an investment adviser registered under the
Advisers  Act. The list  required by this Item 26 of officers  and  directors of
Newell,  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 Newell  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
registered under 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 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 Lincoln  pursuant to the
Advisers Act (SEC File No. 801-11417).

     Investment  advisory  services  are  provided to the SMALL  COMPANY  GROWTH
PORTFOLIO by Granahan Investment  Management,  Inc.  (Granahan).  Granahan is an
investment  adviser registered under 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 SMALL  COMPANY  GROWTH
PORTFOLIO by Grantham,  Mayo, Van Otterloo & Co. LLC (GMO). GMO is an investment
adviser  registered under the Advisers Act. The list required by this Item 26 of
officers and directors of GMO,  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 GMO  pursuant  to the
Advisers Act (SEC File No. 801-15028).

     Investment advisory services are provided to the INTERNATIONAL PORTFOLIO by
Schroder Investment  Management North America,  Inc. (Schroder).  Schroder is an
investment  adviser registered under the Advisers Act. The list required by this
Item 26 of officers and directors of Schroder,  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
incorpo-rated  herein by reference  from  Schedules B and D of Form ADV filed by
Schroder 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. (Barrow, Hanley). Barrow,
Hanley is an  investment  adviser  registered  under the Advisers  Act. The list
required by this Item 26 of officers and directors of Barrow,  Hanley,  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 Barrow, Hanley pursuant to the Advisers Act (SEC File No. 801-31237).

ITEM 27. PRINCIPAL UNDERWRITERS

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

                                      C-2
<PAGE>

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

The books, accounts, and other documents required to be maintained by Section 31
(a) of the Investment  Company Act and the rules promulgated  thereunder will be
maintained  at the  offices of  Registrant;  Registrant's  Transfer  Agent,  The
Vanguard Group, Inc., Malvern,  Pennsylvania;  and the Registrant's  Custodians,
Brown Brothers Harriman & Co., Boston, Massachusetts, First Union National Bank,
Philadelphia,  Pennsylvania,  State  Street  Bank  and  Trust  Company,  Boston,
Massachusetts, and The Bank of New York, New York, New York.

ITEM 29. MANAGEMENT SERVICES

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

ITEM 30. UNDERTAKINGS

Not Applicable


                                      C-3
<PAGE>


                                   SIGNATURES


Pursuant to the  requirements  of the  Securities Act of 1933 and the Investment
Company  Act of  1940,  the  Registrant  hereby  certifies  that  it  meets  all
requirements of this  Registration  Statement  pursuant to Rule 485(b) under the
Securities  Act of 1933 and has duly caused this  Registration  Statement  to be
signed on its behalf by the undersigned,  thereunto duly authorized, in the Town
of Malvern and the  Commonwealth  of  Pennsylvania, on the 27th day of December,
2000.


                                   VANGUARD VARIABLE INSURANCE FUND

                                   BY:_________________________________
                                               (signature)
                                               (HEIDI STAM)
                                             JOHN J. BRENNAN*
                                   CHAIRMAN AND CHIEF EXECUTIVE OFFICER


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


SIGNATURE                     TITLE                           DATE
--------------------------------------------------------------------------------

By:/S/ JOHN J. BRENNAN        President, Chairman, Chief      December 27, 2000
   ---------------------------Executive Officer, and Trustee
       (Heidi Stam)
      John J. Brennan*


By:/S/ JOANN HEFFERNAN HEISEN Trustee                         December 27, 2000
   ---------------------------
       (Heidi Stam)
     JoAnn Heffernan Heisen*


By:/S/ BRUCE K. MACLAURY      Trustee                         December 27, 2000
   ---------------------------
       (Heidi Stam)
      Bruce K. MacLaury*


By:/S/ BURTON G. MALKIEL      Trustee                         December 27, 2000
   ---------------------------
       (Heidi Stam)
       Burton G. Malkiel*


By:/S/ ALFRED M. RANKIN, JR.  Trustee                         December 27, 2000
   ---------------------------
       (Heidi Stam)
     Alfred M. Rankin, Jr.*


By:/S/ JAMES O. WELCH, JR.    Trustee                         December 27, 2000
   ---------------------------
       (Heidi Stam)
     James O. Welch, Jr.*


By:/S/ J. LAWRENCE WILSON     Trustee                         December 27, 2000
   ---------------------------
       (Heidi Stam)
     J. Lawrence Wilson*


By:/S/ THOMAS J. HIGGINS      Treasurer, Principal Financial  December 27, 2000
   ---------------------------  Officer, and Principal
       (Heidi Stam)             Accounting Officer
      Thomas J. Higgins*


*By Power of  Attorney.  See File Number  33-4424,  filed on January  25,  1999.
 Incorporated by Reference.

<PAGE>

                               INDEX TO EXHIBITS


Consent of Independent Accountants. . . . . . . . . . . . . . . . . .Ex-99.BJ
Codes of Ethics.. . . . . . . . . . . . . . . . . . . . . . . . . . .Ex-99.BP




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