VANGUARD VARIABLE INSURANCE FUND, 485BPOS, 2000-01-03

VANGUARD VARIABLE INSURANCE FUND
485BPOS, 2000-01-03

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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. 16
AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 19

VANGUARD VARIABLE INSURANCE FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)

P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

REGISTRANT'S TELEPHONE NUMBER (610) 669-1000

R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482

IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON JANUARY 21, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.

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

WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SECURITIES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF
1940. REGISTRANT FILED ITS RULE 24F-2 NOTICE FOR ITS FISCAL YEAR ENDED SEPTEMBER
30, 1999 WITH THE COMMISSION ON DECEMBER 29, 1999.

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VANGUARD VARIABLE INSURANCE FUND
CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
<S> <C> <C>
FORM N-1A
ITEM NUMBER
- -----------------------------------------------------------------------------------------------------
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
- -----------------------------------------------------------------------------------------------------
Item 1. Front and Back Cover Pages .................Front and Back Cover Pages

Item 2. Risk/Return: Investments, Risk, and
Performance ................................Portfolio Profiles

Item 3. Risk/Return Summary: Fee Table .............Fee Tables

Item 4. Investment Objectives, Principal Investment
Strategies, and Related Risks ..............A Word About Risk; Primary Investment
Policies, Strategies, and Risks
Item 5. Management's Discussion of Fund
Performance ................................Herein incorporated by reference to
Registrant's Annual Report to Shareholders
dated September 30, 1999 filed with the
Securities & Exchange Commission's EDGAR
system December 2, 1999.
Item 6. Management, Organization, and Capital
Structure ..................................The Portfolios and Vanguard; Investment
Advisers

Item 7. Shareholder Information ....................Share Price; Taxes; General Information

Item 8. Distribution Arrangements ..................Not Applicable

Item 9. Financial Highlights Information ...........Financial Highlights

FORM N-1A LOCATION IN STATEMENT OF ADDITIONAL
ITEM NUMBER INFORMATION
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Item 10. Cover Page and Table of Contents ...........Cover Page; Table of Contents

Item 11. Fund History ...............................Description of the Fund

Item 12. Description of the Fund and its Investments
and Risks ..................................Investment Policies; Description of the Fund;
Fundamental Investment Limitations

Item 13. Management of the Trust ....................Management of the Fund

Item 14. Control Persons and Principal Holders of
Securities .................................Management of the Fund

Item 15. Investment Advisory and Other Services .....Investment Advisory Services

Item 16. Brokerage Allocation and Other Practices ...Portfolio Transactions

Item 17. Capital Stock and Other Securities .........Description of the Fund

Item 18. Purchase, Redemption, and Pricing of Shares.Purchase of Shares; Redemption of Shares;
Share Price

Item 19. Taxation of the Fund .......................Description of the Fund

Item 20. Underwriters ...............................Not Applicable

Item 21. Calculation of Performance Data ............Calculation of Yield; Calculation of Total
Return; Yield and Total Return

Item 22. Financial Statements .......................Financial Statements

</TABLE>
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VANGUARD /(R)/ VARIABLE INSURANCE FUND

Prospectus January 21, 2000

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MONEY MARKET PORTFOLIO

SHORT-TERM CORPORATE PORTFOLIO

HIGH-GRADE BOND PORTFOLIO

HIGH YIELD BOND PORTFOLIO

BALANCED PORTFOLIO

EQUITY INCOME PORTFOLIO

DIVERSIFIED VALUE PORTFOLIO

EQUITY INDEX PORTFOLIO

MID-CAP INDEX PORTFOLIO

GROWTH PORTFOLIO

SMALL COMPANY GROWTH PORTFOLIO

INTERNATIONAL PORTFOLIO

REIT INDEX PORTFOLIO

This prospectus contains
financial data for the
Portfolios through the
fiscal year ended
September 30, 1999

[A MEMBER OF
THE VANGUARD GROUP
LOGO]
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VANGUARD VARIABLE INSURANCE FUND
Prospectus

January 21, 2000

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CONTENTS
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1 AN INTRODUCTION TO 20 INVESTMENT POLICIES, STRATEGIES,
VANGUARD VARIABLE INSURANCE FUND AND RISKS
2 PORTFOLIO PROFILES 20 MARKET RISK
2 MONEY MARKET PORTFOLIO 20 MANAGER RISK
3 SHORT-TERM CORPORATE PORTFOLIO 21 FUTURES AND OPTIONS CONTRACTS
4 HIGH-GRADE BOND PORTFOLIO 21 OVERVIEW OF THE MONEY MARKET
PORTFOLIO
6 HIGH YIELD BOND PORTFOLIO 22 OVERVIEW OF THE BOND PORTFOLIOS
7 BALANCED PORTFOLIO 27 OVERVIEW OF THE BALANCED PORTFOLIO
9 EQUITY INCOME PORTFOLIO 28 OVERVIEW OF THE STOCK PORTFOLIOS
11 DIVERSIFIED VALUE PORTFOLIO 38 TURNOVER RATE
11 EQUITY INDEX PORTFOLIO 38 THE PORTFOLIOS AND VANGUARD
13 MID-CAP INDEX PORTFOLIO 38 INVESTMENT ADVISERS
14 GROWTH PORTFOLIO 42 TAXES
15 SMALL COMPANY GROWTH PORTFOLIO 42 SHARE PRICE
17 INTERNATIONAL PORTFOLIO 43 FINANCIAL HIGHLIGHTS
19 REIT INDEX PORTFOLIO 51 GENERAL INFORMATION
20 A WORD ABOUT RISK GLOSSARY (inside back cover)
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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 to decide which portfolio, if any, is the
right investment for you. We suggest that you keep it for future reference.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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AN INTRODUCTION TO VANGUARD VARIABLE INSURANCE FUND

This prospectus explains the objectives, risks, and strategies of the 13
Portfolios that make up Vanguard Variable Insurance Fund (the Fund). The
Portfolios are mutual funds used solely as investment options for variable
annuity or variable life insurance contracts offered by insurance companies.
This means that you cannot purchase shares of the Portfolios directly, but only
through such a contract as offered by an insurance company.

After this introductory page you'll find Portfolio Profiles. Each Profile
summarizes important facts about a Portfolio, including information about its
investment objective, strategies, risks, and past performance.

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 in
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.

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PLAIN TALK ABOUT
THE COSTS OF INVESTING

Costs are an important consideration in choosing a mutual fund. That's because
you, as a 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 fund achieves. Even seemingly small differences in
expenses can, over time, have a dramatic effect on a fund's performance.
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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.

BAR CHART AND PERFORMANCE TABLE

The bar chart and table below provide an indication of the risk of investing in
the Money Market Portfolio. The bar chart shows the Portfolio's performance in
each calendar year since 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. Keep in mind that the Portfolio's past performance does not indicate how
it will perform in the future.

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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 x.xx%
------------------------------------------------------------------

During the period shown in the bar chart, the highest return for a calendar
quarter was x.xx% (quarter ended xxxx xx, xxxx) and the lowest return for a
quarter was x.xx% (quarter ended xxxx xx, xxxx).

------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
------------------------------------------------------------------
Money Market Portfolio x.xx% x.xx% x.xx%
Salomon Smith Barney 3 Month x.xx x.xx x.xx
Treasury Index
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*May 2, 1991.
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IF YOU WOULD LIKE TO KNOW THE CURRENT SEVEN-DAY YIELD FOR THE FUND, 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

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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.

- - 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.

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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 bar chart and table below provide an indication of the risk of investing in
the High-Grade Bond Portfolio. The bar chart shows the Portfolio's performance
in each calendar year since 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. Keep in mind that the Portfolio's past performance does not indicate
how it will perform in the future.

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ANNUAL TOTAL RETURNS
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1992 6.38%
1993 9.40%
1994 -2.68%
1995 18.04%
1996 3.53%
1997 9.40%
1998 8.60%
1999 x.xx%
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
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High-Grade Bond Portfolio x.xx% x.xx% x.xx%
Lehman Aggregate Bond Index x.xx x.xx x.xx
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*April 29, 1991.
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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>

BAR CHART AND PERFORMANCE TABLE

The bar chart and table below provide an indication of the risk of investing in
the High Yield Bond Portfolio. The bar chart shows the Portfolio's performance
in each calendar year since 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. Keep in mind that the Portfolio's past performance does not indicate how
it will perform in the future.

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ANNUAL TOTAL RETURNS
------------------------------------------------------------------
1997 12.07%
1998 4.06%
1999 x.xx%
------------------------------------------------------------------

------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
------------------------------------------------------------------
High Yield Bond Portfolio x.xx% x.xx%
Lehman High Yield Bond Index x.xx x.xx
------------------------------------------------------------------
*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.

<PAGE>

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

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

PRIMARY RISKS
THE PORTFOLIO'S TOTAL RETURN, LIKE THE PRICES OF STOCKS AND BONDS GENERALLY,
WILL FLUCTUATE WITHIN A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT
OR EVEN LONG PERIODS. The Portfolio is also subject to:

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

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

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

- - Credit risk, which is the chance that a bond issuer will fail to 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 bar chart and table below provide an indication of the risk of investing in
the Balanced Portfolio. The bar chart shows the Portfolio's performance in each
calendar year since 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. 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 x.xx%
------------------------------------------------------------------

<PAGE>

------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
------------------------------------------------------------------
Balanced Portfolio x.xx% x.xx% x.xx%
S&P 500 Index x.xx x.xx x.xx
Composite Stock/Bond Index** x.xx x.xx x.xx
------------------------------------------------------------------
*May 23, 1991.
**Weighted 65% in the S&P 500 Index and 35% in the Lehman Long
Corporate AA 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 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.

- - 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

<PAGE>

go through cycles of doing better--or worse--than the stock market in
general. These periods have, in the past, lasted for as long as several
years.

BAR CHART AND PERFORMANCE TABLE

The bar chart and table below provide an indication of the risk of investing in
the Equity Income Portfolio. The bar chart shows the Portfolio's performance in
each calendar year since 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. 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 x.xx%
------------------------------------------------------------------

------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
------------------------------------------------------------------
Equity Income Portfolio x.xx% x.xx% x.xx%
S&P 500 Index x.xx x.xx x.xx
------------------------------------------------------------------
*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.

<PAGE>

PORTFOLIO PROFILE--DIVERSIFIED VALUE PORTFOLIO

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

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

INVESTMENT STRATEGIES
The Portfolio invests primarily in common stocks of large and medium-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.

- - 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.

<PAGE>

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.

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

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

BAR CHART AND PERFORMANCE TABLE

The bar chart and table below provide an indication of the risk of investing in
the Equity Index Portfolio. The bar chart shows the Portfolio's performance in
each calendar year since 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. 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 x.xx%
------------------------------------------------------------------

<PAGE>

------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
------------------------------------------------------------------
Equity Index Portfolio x.xx% x.xx% x.xx%
S&P 500 Index x.xx x.xx x.xx
------------------------------------------------------------------
*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.

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

<PAGE>

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 bar chart and table below provide an indication of the risk of investing in
the Growth Portfolio. The bar chart shows the Portfolio's performance in each
calendar year since inception. The table shows how the Portfolio's average
annual total returns for one and five

<PAGE>

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. 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 x.xx%
------------------------------------------------------------------

------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
------------------------------------------------------------------
Growth Portfolio x.xx% x.xx% x.xx%
S&P 500 Index x.xx x.xx x.xx
------------------------------------------------------------------
*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.

<PAGE>

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

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

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

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

BAR CHART AND PERFORMANCE TABLE

The bar chart and table below provide an indication of the risk of investing in
the Small Company Growth Portfolio. The bar chart shows the Portfolio's
performance in each calendar year since 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. 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 x.xx%
------------------------------------------------------------------

<PAGE>

------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
------------------------------------------------------------------
Small Company Growth Portfolio x.xx% x.xx%
Small Company Index** x.xx x.xx
------------------------------------------------------------------
*June 3, 1996.
**Russell 2000 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.

<PAGE>

BAR CHART AND PERFORMANCE TABLE

The bar chart and table below provide an indication of the risk of investing in
the International Portfolio. The bar chart shows the Portfolio's performance in
each calendar year since 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. Keep in mind that the Portfolio's past performance does not
indicate how it will perform in the future.

------------------------------------------------------------------
ANNUAL TOTAL RETURNS
------------------------------------------------------------------
1995 15.90%
1996 14.60%
1997 3.34%
1998 18.83%
1999 x.xx%
------------------------------------------------------------------

------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
------------------------------------------------------------------
International Portfolio x.xx% x.xx% x.xx%
MSCI EAFE Index x.xx x.xx x.xx
------------------------------------------------------------------
*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.

<PAGE>

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.

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.

<PAGE>

================================================================================
A WORD ABOUT RISK

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 one or
more of the Portfolios, you should also take into account your personal
tolerance for the daily fluctuations of 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.
================================================================================

INVESTMENT POLICIES, STRATEGIES, AND RISKS

Each of the Portfolios follows a distinct set of investment policies and
strategies. This section explains the policies and strategies used by the
investment advisers in pursuit of each Portfolio's objective, and how the
advisers implement these policies and strategies. In addition, this section
discusses important risks faced by investors in the Portfolios.
The section begins with policy information that applies to all the
Portfolios. Next is information specific to the Money Market Portfolio, the
three bond Portfolios, the Balanced Portfolio, and the eight Portfolios that
invest in stocks.
The Fund's Board of Trustees oversees the management of the Portfolios, and
may change the investment strategies in the interest of shareholders.

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 by investment advisers who use their
research and judgment in deciding which securities to buy and which to sell.
These nine 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 passively managed funds. In other words, each seeks to track a
securities market index by holding all--or a representative sample--of the
securities in the index. These Portfolios are

<PAGE>

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. 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 or add value when these investments are
favorably priced.

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

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

<PAGE>

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
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.

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.

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TYPES OF BONDS

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

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

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

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>

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

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

SHORT-TERM CORPORATE PORTFOLIO

The Portfolio invests primarily in a variety of high-quality--and, to a lesser
extent, medium-quality--fixed-income securities. The Portfolio maintains 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 short- and intermediate-term
bonds issued by corporations, it also may invest in the following types of
investment-grade securities:

- - Bonds issued by the U.S. Treasury and U.S. government agencies and
instrumentalities.

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

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

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

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

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 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, 1999, these four types of bonds represented the following
proportions of the Portfolio's market value:

<PAGE>

--------------------------------------------------------------
PORTION OF PORTFOLIO'S
TYPE OF BOND MARKET VALUE
--------------------------------------------------------------
U.S. Treasury and agency securities 28%
Corporate bonds 33
Foreign U.S.-dollar obligations 5
Mortgage-backed securities 34
--------------------------------------------------------------

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 9.1 years on
September 30, 1999. 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.

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.

<PAGE>

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 considered riskier than
investment-grade bonds, high-yield bonds must pay higher interest yields to
attract investors. Some high-yield bonds are issued by smaller, less-seasoned
companies, while others are issued as part of a corporate restructuring, such as
an acquisition, merger, or leveraged buyout. Some high-yield bonds were once
rated as investment-grade securities but have been downgraded to junk-bond
status because of financial difficulties experienced by their issuers.
Conversely, an issuer's improving financial condition may result in an upgrading
of its junk bonds to investment-grade status.
- --------------------------------------------------------------------------------

<PAGE>

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 tend not to move in lockstep, balanced funds are
able to use rewards from one type of investment to help offset the risks from
another.
- --------------------------------------------------------------------------------

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

<PAGE>

portfolio that will produce increased income and capital appreciation over time,
with moderate risk in comparison with the stock market as a whole.

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

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

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 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 34.)

<PAGE>

-----------------------------------------------------
U.S. STOCK MARKET RETURN (1926-1998)
-----------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
-----------------------------------------------------
Best 54.2% 24.1% 19.9% 17.7%
Worst -43.1 -12.4 -0.8 3.1
Average 13.1 10.7 11.0 11.0
-----------------------------------------------------

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1998. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 10.7%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 24.1% (from 1994
through 1998). 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).
- --------------------------------------------------------------------------------

PASSIVE VERSUS ACTIVE MANAGEMENT

Three of the Portfolios--EQUITY INDEX, MID-CAP INDEX, and REIT INDEX--are index
funds. Index funds are "passively" managed, meaning that their investment
advisers try to match, as closely as possible, the performance of an established
target index. Index funds do this by holding either all--or a representative
sample--of the securities in the target index. So, instead of trying to
outperform the market as a whole, index funds simply mirror what their target
indexes do, for better or worse.
Five of the Portfolios--EQUITY INCOME, DIVERSIFIED VALUE, GROWTH, SMALL
COMPANY GROWTH, and INTERNATIONAL--are actively managed, meaning that their
investment advisers buy and sell securities based on research and analysis in an
attempt to outperform the market as a whole.

[FLAG]THESE FIVE PORTFOLIOS ARE SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE
THAT THEIR ADVISERS MAY DO A POOR JOB OF SELECTING STOCKS.

<PAGE>

INVESTMENT STYLES

Mutual funds that invest in U.S. stocks can be classified according to the
average market capitalization (shares outstanding x market price) of their
holdings. The usual categories are small-cap, mid-cap, and large-cap. Stock
funds can also be categorized according to whether the stocks they hold are
value or growth stocks or a blend of those.
The following illustration shows how each of the seven Portfolios that
invest in U.S. stocks generally fits into these categories. (The International
Portfolio invests primarily in large-capitalization growth stocks of companies
outside the United States.)

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 OF THE PORTFOLIOS IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE
CHANCE THAT RETURNS FROM ITS SEGMENT OF THE STOCK MARKET WILL TRAIL RETURNS
FROM OTHER ASSET CLASSES OR THE OVERALL MARKET. VARIOUS SEGMENTS OF THE
STOCK MARKET (FOR EXAMPLE, LARGE-CAP VALUE STOCKS, OR SMALL-CAP GROWTH
STOCKS) TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON
STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS
SEVERAL YEARS. LIKEWISE, INTERNATIONAL STOCKS GO THROUGH CYCLES OF DOING
BETTER--OR WORSE--THAN U.S. STOCKS.

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

<PAGE>

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

DIVERSIFIED VALUE PORTFOLIO

The Diversified Value Portfolio seeks to provide long-term growth of capital and
a moderate level of dividend income by investing primarily in common stocks of
mid- and large-capitalization companies. The adviser's method is to research
stocks on a company-by-company basis and to develop earnings forecasts for them.
From those companies that appear to have strong finances and good prospects for
growth in earnings and dividends, the adviser will select those whose stock
prices appear to be undervalued by the overall market. Such stocks (often called
value stocks) will typically have above-average current dividend yields and sell
at below-average prices in comparison to such fundamentals as their book value
and earnings.
To keep the Portfolio well-diversified, the adviser generally will invest
no more than 15% of the Portfolio's assets in a single industry group. The
Portfolio's overall makeup is expected to differ from the broad stock market in
terms of industry weightings and market capitalization. Therefore, the
Portfolio's performance is likely to differ from the performance of the overall
market or broad indexes such as the S&P 500 Index.

EQUITY INDEX PORTFOLIO

The Portfolio is a stock index fund that seeks long-term growth of capital and
income by attempting to match the performance of the S&P 500 Index, which is
made up primarily of stocks of large U.S. companies. These stocks represent
approximately 75% 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 56% of its market
capitalization. As of September 30, 1999, the five largest companies in the
Index were:

<PAGE>

----------------------------------------------------
PERCENTAGE
COMPANY OF INDEX VALUE
----------------------------------------------------
Microsoft Corp. 4.37%
General Electric Co. 3.68
INTEL Corp. 2.33
Cisco Systems Inc. 2.11
IBM 2.07
----------------------------------------------------

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 34% of its market
capitalization. As of September 30, 1999, the five largest companies in the
Index were:

----------------------------------------------------
PERCENTAGE
COMPANY OF INDEX VALUE
----------------------------------------------------
Veritas Software Corp. 1.56%
Biogen Inc. 1.43
Xilinx Inc. 1.25
Linear Technology Corp. 1.08
Analog Devices Inc. 1.07
----------------------------------------------------

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

GROWTH PORTFOLIO

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

<PAGE>

[FLAG]BECAUSE THE PORTFOLIO INVESTS A HIGHER PERCENTAGE OF ASSETS IN ITS TEN
LARGEST HOLDINGS THAN THE AVERAGE STOCK FUND DOES, THE PORTFOLIO IS SUBJECT
TO THE RISK THAT ITS PERFORMANCE MAY BE HURT DISPROPORTIONATELY BY THE POOR
PERFORMANCE OF RELATIVELY FEW STOCKS.

SMALL COMPANY GROWTH PORTFOLIO

The Portfolio seeks long-term growth of capital by investing primarily in
small-capitalization stocks of companies that appear to offer favorable
prospects for growth and price appreciation. The Portfolio's stocks are expected
to provide only minimal dividend income.
The median market capitalization of the stocks held in the Portfolio is
expected to be below $1 billion. By way of comparison, the median market cap of
stocks in the S&P 500 Index, which is dominated by large stocks, exceeds $40
billion.
The Portfolio's investment adviser categorizes stocks into three
categories: (1) "Core" growth stocks, representing 50% to 80% of assets, are
companies with demonstrated records of growth and a strong market position based
on a proprietary product or service; (2) "Pioneers," 10% to 25% of assets,
generally have unique technology or other innovations that may lead to new
products or expansion into new markets; and (3) "Special values," 10% to 25% of
assets, are companies whose stock prices are undervalued given the adviser's
view of their prospects for improvement over the next several years.
Besides common stocks, the Portfolio may invest in securities that are
convertible into common stocks.
The Portfolio's holdings may include securities issued by small or
unseasoned companies with speculative risk characteristics. Small company stocks
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 it is that a specific security's poor performance will hurt the fund. One
measure of a fund's diversification is the percentage of its assets represented
by its ten largest holdings. The average U.S. equity mutual fund has about 30%
of its assets invested in its ten largest holdings, while some less-diversified
mutual funds have more than 50% of their assets invested in the stocks of just
ten companies.
- --------------------------------------------------------------------------------

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

<PAGE>

potential and whose stocks sell at reasonable prices. The adviser's assessments
are based on extensive research by a team of analysts at 12 regional offices
around the world.
The core of the Portfolio--normally constituting 60% to 70% of its total
assets--consists of stocks of companies that possess what the adviser believes
are sustainable competitive advantages and strong prospects for growth. These
core holdings may include small- and mid-cap stocks along with large-cap stocks.
The remainder of the Portfolio's assets consist of "noncore" stocks selected to
increase the Portfolio's presence in markets where the near-term outlook is
particularly favorable. These noncore holdings typically are large-cap stocks
that have historically moved in accordance with their local markets.
The adviser's investment approach results in a Portfolio whose overall
characteristics will often differ substantially from those of broad
international stock indexes, such as the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. As a result of its different makeup,
the Portfolio's performance is apt to differ substantially from time to time
from the performance of broad international stock indexes.
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 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 EAFE Index, a widely used barometer of
international stock market activity. (Total returns consist of dividend income
plus change in market price.) Note that the returns shown in the table do not
include the costs of buying and selling stocks or other expenses that a
real-world investment portfolio would incur. Note, also, that the gap between
best and worst tends to narrow over the long term. Also, keep in mind that past
returns are not indicative of future returns and that volatility in the future
could be greater or less than past volatility.

<PAGE>

-------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURN (1969-1998)
-------------------------------------------------------
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 14.7 13.6 14.9 14.7
-------------------------------------------------------

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1998. 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 match the
performance of the Morgan Stanley REIT Index, a benchmark of U.S. real estate
investment trusts (REITs).
The Portfolio invests in stocks of REITs, which own office buildings,
hotels, shopping centers, and other properties. The Portfolio uses a "passively"
managed--or index--approach to create a mix of securities that will track, as
closely as possible, the performance of the REIT Index. Holdings of the Index,
and thus of the Portfolio, are weighted according to each stock's
market-capitalization. The Portfolio will hold each stock found in the Index in
approximately the same proportion as represented in the Index itself. For
example, if a specific stock represented 2% of the Morgan Stanley REIT Index,
the Portfolio would invest 2% of its assets in that stock.

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

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

<PAGE>

[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 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, 1999, the Index included 128 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>

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, 1999, follows.

----------------------------------------------------
PERCENTAGE
TYPE OF REIT OF INDEX VALUE
----------------------------------------------------
Retail 24%
Residential Apartments 20
Office 19
Industrial 16
Hotels 11
Diversified 10
----------------------------------------------------

The Index's ten largest stocks make up more than 31% of its market value.
The Index's largest stocks, as of September 30, 1999, are listed below.

1. Equity Office Properties Trust REIT 6. Crescent Real Estate, Inc. REIT
2. Starwood Hotels & Resorts REIT 7. Archstone Communities Trust REIT
3. Simon Property Group, Inc. REIT 8. ProLogis Trust REIT
4. Equity Residential Properties Trust REIT 9. Vornado Realty Trust REIT
5. Public Storage, Inc. REIT 10. Spieker Properties, Inc. REIT

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

*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.

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 them 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.

<PAGE>

TURNOVER RATE

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

THE PORTFOLIOS AND VANGUARD

Vanguard Variable Insurance Fund is a member of The Vanguard Group, a family of
more than 35 investment companies with more than 100 distinct investment
portfolios holding assets worth more than $510 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, Pennsylvania,
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, 1999, the Fixed Income Group managed more than $140 billion in
total assets. The individuals responsible for overseeing the Portfolios'
investments are:

- - Ian A. MacKinnon, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal
fixed-income policy and strategy since 1981; B.A., Lafayette College;
M.B.A., Pennsylvania State University.

<PAGE>

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

- - Robert F. Auwaerter, Principal and (since its inception) Portfolio Manager
of the Short-Term Corporate Portfolio; has managed portfolio investments
since 1979; B.S., University of Pennsylvania; M.B.A., Northwestern
University.

- - Kenneth E. Volpert, CFA, Principal and (since 1992) Portfolio Manager of
the High-Grade Bond Portfolio; has managed portfolio investments since
1982; B.S., University of Illinois; M.B.A., University of Chicago.

For the fiscal year ended September 30, 1999, the Money Market Portfolio's
advisory costs represented an effective annual rate of 0.01% of the Portfolio's
average net assets.
The Short-Term Corporate Portfolio began operations on February 9, 1999.
For the period ended September 30, 1999, the Short-Term Corporate Portfolio's
advisory costs represented an effective annual rate of 0.00% of the Portfolio's
average net assets.
For the fiscal year ended September 30, 1999, the High-Grade Bond
Portfolio's advisory costs represented an effective annual rate of 0.01% of the
Portfolio's average net assets.

Vanguard's Core Management Group provides advisory services for the EQUITY
INDEX, MID-CAP INDEX, and REIT INDEX PORTFOLIOS. Vanguard's Core Management
Group provides investment advisory services to many Vanguard funds; as of
September 30, 1999, the Core Management Group managed more than $180 billion in
total assets. The individual responsible for overseeing each Portfolio's
investments is:

- - George U. Sauter, Managing Director of Vanguard; has managed portfolio
investments with Vanguard since 1987; A.B., Dartmouth College; M.B.A.,
University of Chicago.

For the fiscal year ended September 30, 1998, the Equity Index Portfolio's
advisory costs represented an effective annual rate of 0.01% of the Portfolio's
average net assets.
The Mid-Cap Index Portfolio began operations on February 9, 1999. For the
period ended September 30, 1999, the Mid-Cap Index Portfolio's advisory costs
represented an effective annual rate of 0.04% of the Portfolio's average net
assets.
The REIT Index Portfolio began operations on February 9, 1999. For the
period ended September 30, 1999, the REIT Index Portfolio's advisory costs
represented an effective annual rate of 0.08% of the Portfolio's average net
assets.

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

WELLINGTON MANAGEMENT COMPANY, LLP

Wellington Management Company, LLP (Wellington Management), 75 State Street,
Boston, Massachusetts, provides advisory services for the HIGH YIELD BOND and
BALANCED PORTFOLIOS. Wellington Management, an investment advisory firm founded
in 1928, managed more than $217 billion in stock and bond portfolios as of
September 30, 1999.

The individual responsible for overseeing the HIGH YIELD BOND PORTFOLIO'S
investments is:

- - Earl E. McEvoy, Senior Vice President and Partner of Wellington Management;
has worked in investment management since 1972; with Wellington Management
since 1978; has managed the Portfolio since its inception; B.A., Dartmouth
College; M.B.A., Columbia University School of Business.

<PAGE>

The individuals responsible for overseeing the BALANCED PORTFOLIO'S
investments are:

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

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

Wellington Management's advisory fee with respect to the Balanced Portfolio
is paid quarterly based on a percentage of net assets. The basic advisory fee
may be increased or decreased by applying an adjustment formula based on the
investment performance of the Balanced Portfolio relative to that of a
"Composite Index," 65% of which is comprised of the Standard & Poor's Composite
Stock Price Index and 35% of which is comprised of the Lehman Long-Term
Corporate AA or Better Bond Index.
For the fiscal year ended September 30, 1999, the advisory fee paid to
Wellington Management with respect to the Balanced Portfolio represented an
effective annual rate of 0.09% of the Portfolio's average net assets, before a
decrease of 0.02% based on performance.
For the fiscal year ended September 30, 1999, 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, California,
provides advisory services for the EQUITY INCOME PORTFOLIO. Newell, an
investment advisory firm founded in 1986, currently manages about $2.5 billion
in assets.
The individual responsible for overseeing the Equity Income Portfolio's
investments is:

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

For the fiscal year ended September 30, 1999, 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, Texas, provides advisory services for
the DIVERSIFIED VALUE PORTFOLIO. Barrow, Hanley is owned by United Asset
Management, 1 International Place, Boston, Massachusetts. Barrow, Hanley
currently manages approximately $35 billion in stock and bond portfolios.
The individual responsible for overseeing the Diversified Value Portfolio's
investments is:

- - James P. Barrow, Partner of Barrow, Hanley; has worked in investment
management since 1965; with Barrow, Hanley since 1980; has managed the
Portfolio since its inception; B.S., University of South Carolina.

Barrow, Hanley's advisory fee is paid quarterly based on an annual
percentage rate of 0.125% applied to the average month-end net assets of the
Diversified Value Portfolio for the quarter.

<PAGE>

The basic advisory fee may be increased or decreased by applying an
adjustment formula based on the investment performance of the Diversified Value
Portfolio relative to that of the Standard & Poor's/BARRA Value Index.
The incentive/penalty fee will not be fully operable until the quarter
ending December 31, 2001. Until that date, the incentive/penalty will be
calculated using certain transition rules that are explained in the Statement of
Additional Information.

The Diversified Value Portfolio began operations on February 9, 1999. For
the period ended September 30, 1999, the advisory fee paid to Barrow, Hanley
represented an effective annual rate of 0.125% of the Portfolio's average net
assets.

LINCOLN CAPITAL MANAGEMENT COMPANY

Lincoln Capital Management Company (Lincoln), 200 South Wacker Drive, Chicago,
Illinois, provides advisory services for the GROWTH PORTFOLIO. Lincoln is an
investment advisory firm founded in 1967. As of September 30, 1999, Lincoln
managed more than $62 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; has worked in investment management since 1957; with Lincoln since
1971; has managed the Portfolio since its inception; B.A., Swarthmore
College; M.B.A., Harvard Business School.

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

- - John S. Cole, Principal; has worked in investment management since 1992;
with Lincoln since 1997; has managed the Portfolio since joining Lincoln;
B.S., Bentley College; M.B.A., University of Notre Dame.

For the fiscal year ended September 30, 1999, 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.

Granahan Investment Management, Inc. (Granahan), 275 Wyman Street, Waltham,
Massachusetts, provides investment advisory services for the SMALL COMPANY
GROWTH PORTFOLIO. Granahan is an investment advisory firm specializing in
small-company stock investments. Founded in 1985, Granahan currently manages
approximately $1.3 billion in assets.
The individuals responsible for overseeing the Small Company Growth
Portfolio's investments are:

- - John J. Granahan, CFA, Founder and President of Granahan; has worked in
investment management since 1963; founded Granahan in 1985; a manager of
the Portfolio since its inception; B.A., St. Joseph's University; Graduate
Fellow, Catholic University of America.

- - Gary C. Hatton, CFA, Executive Vice President of Granahan; has worked in
investment management since 1982; with Granahan since 1985; a manager of
the Portfolio since 1996; B.S., University of Rhode Island; M.S.,
University of Wisconsin.

- - Jane M. White, Executive Vice President of Granahan; has worked in
investment management since 1980; with Granahan since 1985; a manager of
the Portfolio since 1996; B.A., Boston University.

For the fiscal year ended September 30, 1999, the advisory fee paid to
Granahan represented an effective annual rate of 0.15% of the Portfolio's
average net assets, before an increase 0.01% based on performance.

<PAGE>

SCHRODER INVESTMENT MANAGEMENT NORTH AMERICA INC.

Schroder Investment Management North America Inc. (Schroder), provides
investment advisory services for the INTERNATIONAL PORTFOLIO. Schroder is the
London branch office of Schroder Investment Management North America Inc. which
is a wholly owned subsidiary of Schroder US Holdings Inc., 787 7th Avenue, New
York, New York. Schroder US Holdings Inc. is a wholly owned subsidiary of
Schroders PLC. As of September 30, 1999, Schroders PLC managed more than $190
billion in assets.

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

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

Schroder's advisory fee is paid quarterly based on a percentage of net
assets. The basic advisory fee may 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.
For the fiscal year ended September 30, 1999, the advisory fee paid to
Schroder represented an effective annual rate of 0.125% of the Portfolio's
average net assets, before an increase of 0.005% based on performance.

The advisers are authorized to choose brokers or dealers to handle the
purchase and sale of the Portfolios' securities, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions. The Fund may direct an adviser to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Fund or its Portfolios.

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 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 adding up the total value of each
Portfolio's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Portfolio shares outstanding:

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

<PAGE>

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 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.

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

This explanation uses the Money Market Portfolio as an example. The Portfolio
began fiscal 1999 with a net asset value (price) of $1.00 per share. During the
year, the Portfolio earned $.05 per share from investment income (interest and
dividends).
Shareholders received $.05 per share in the form of dividend distributions. The
earnings ($.05 per share) minus the distributions ($.05 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 5.09% for the year.
As of September 30, 1999, the Portfolio had $723 million in net assets. For the
year, its expense ratio was 0.20% ($2.00 per $1,000 of net assets); and its net
investment income amounted to 4.98% of its average net assets.
- --------------------------------------------------------------------------------

<PAGE>

- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .050 .055 .054 .054 .056
Net Realized and Unrealized Gain
(Loss) on Investments -- -- -- -- --
-----------------------------------------
Total from Investment Operations .050 .055 .054 .054 .056
-----------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.050) (.055) (.054) (.054) (.056)
Distributions from Realized Capital
Gains -- -- -- -- --
-----------------------------------------
Total Distributions (.050) (.055) (.054) (.054) (.056)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
================================================================================
TOTAL RETURN 5.09% 5.60% 5.48% 5.49% 5.77%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $723 $590 $393 $285 $218
Ratio of Total Expenses to Average
Net Assets 0.20% 0.20% 0.21% 0.19% 0.23%
Ratio of Net Investment Income to
Average Net Assets 4.98% 5.46% 5.36% 5.36% 5.66%
================================================================================

- --------------------------------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO
-------------------------------
FEB. 8* TO
SEP. 30, 1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS .355
Net Investment Income
Net Realized and Unrealized Gain (Loss) on Investments (.250)
--------------
Total from Investment Operations .105
--------------
DISTRIBUTIONS
Dividends from Net Investment Income (.355)
Distributions from Realized Capital Gains --
--------------
Total Distributions (.355)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.75
================================================================================
TOTAL RETURN 1.08%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $29
Ratio of Total Expenses to Average Net Assets 0.27%**
Ratio of Net Investment Income to Average Net Assets 5.74%**
Portfolio Turnover Rate 39%
================================================================================
*Inception.
**Annualized.

<PAGE>

- --------------------------------------------------------------------------------
HIGH-GRADE BOND PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $11.07 $10.57 $10.29 $10.47 $9.82
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .646 .663 .678 .670 .663
Net Realized and Unrealized Gain
(Loss) on Investments (.700) .500 .280 (.180) .650
-----------------------------------------
Total from Investment Operations (.054) 1.163 .958 .490 1.313
-----------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.646) (.663) (.678) (.670) (.663)
Distributions from Realized Capital
Gains (.030) -- -- -- --
-----------------------------------------
Total Distributions (.676) (.663) (.678) (.670) (.663)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.34 $11.07 $10.57 $10.29 $10.47
================================================================================
TOTAL RETURN -0.49% 11.36% 9.60% 4.80% 13.83%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $337 $322 $188 $139 $120
Ratio of Total Expenses to Average
Net Assets 0.23% 0.28% 0.29% 0.25% 0.29%
Ratio of Net Investment Income to
Average Net Assets 6.06% 6.16% 6.51% 6.43% 6.58%
Portfolio Turnover Rate 69% 65% 40% 56% 29%
================================================================================

- --------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO
YEAR ENDED SEPTEMBER 30,
----------------------------- JUN. 3* TO
1999 1998 1997 Sep. 30, 1996
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.09 $10.59 $10.15 $10.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .847 .895 .922 .299
Net Realized and Unrealized Gain
(Loss) on Investments (.573) (.485) .450 .150
--------------------------------------------
Total from Investment Operations .274 .410 1.372 .449
--------------------------------------------

DISTRIBUTIONS
Dividends from Net Investment Income (.847) (.895) (.922) (.299)
Distributions from Realized
Capital Gains (.017) (.015) (.010) --
--------------------------------------------
Total Distributions (.864) (.910) (.932) (.299)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.50 $10.09 $10.59 $10.15
================================================================================
TOTAL RETURN 2.68% 3.85% 14.12% 4.56%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $146 $131 $85 $22
Ratio of Total Expenses to
Average Net Assets 0.29% 0.31% 0.31% 0.32%**
Ratio of Net Investment Income
to Average Net Assets 8.51% 8.45% 8.88% 9.29%**
Portfolio Turnover Rate 31% 38% 30% 8%
================================================================================
*Inception.
**Annualized.

<PAGE>

- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $17.73 $17.97 $14.81 $13.33 $11.33
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .63 .63 .60 .565 .51
Net Realized and Unrealized Gain
(Loss) on Investments .95 .56 3.31 1.420 2.07
-----------------------------------------
Total from Investment Operations 1.58 1.19 3.91 1.985 2.58
-----------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.62) (.60) (.19) (.505) (.50)
Distributions from Realized Capital
Gains (1.28) (.83) (.56) -- (.08)
-----------------------------------------
Total Distributions (1.90) (1.43) (.75) (.505) (.58)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $17.41 $17.73 $17.97 $14.81 $13.33
================================================================================
TOTAL RETURN 9.44% 7.26% 27.60% 15.26% 23.65%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $599 $553 $468 $330 $280
Ratio of Total Expenses to Average
Net Assets 0.29% 0.31% 0.32% 0.31% 0.36%
Ratio of Net Investment Income to
Average Net Assets 3.58% 3.72% 3.96% 4.04% 4.25%
Portfolio Turnover Rate 24% 31% 25% 36% 26%
================================================================================

- --------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $19.69 $18.50 $13.71 $12.00 $10.05
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .51 .490 .42 .48 .46
Net Realized and Unrealized Gain
(Loss) on Investments 1.50 1.475 4.69 1.75 2.02
-----------------------------------------
Total from Investment Operations 2.01 1.965 5.11 2.23 2.48
-----------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.49) (.400) (.15) (.46) (.48)
Distributions from Realized Capital
Gains (.11) (.375) (.17) (.06) (.05)
-----------------------------------------
Total Distributions (.60) (.775) (.32) (.52) (.53)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $21.10 $19.69 $18.50 $13.71 $12.00
================================================================================
TOTAL RETURN 10.36% 11.19% 38.05% 19.07% 25.69%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $429 $375 $271 $142 $91
Ratio of Total Expenses to Average
Net Assets 0.33% 0.36% 0.37% 0.35% 0.39%
Ratio of Net Investment Income to
Average Net Assets 2.44% 2.69% 3.11% 3.69% 4.28%
Portfolio Turnover Rate 6% 6% 8% 8% 10%
================================================================================

<PAGE>

- --------------------------------------------------------------------------------
DIVERSIFIED VALUE PORTFOLIO
----------------------------
FEB. 8* TO
SEP. 30, 1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .11
Net Realized and Unrealized Gain (Loss) on Investments (.80)
--------------
Total from Investment Operations (.69)
--------------
DISTRIBUTIONS
Dividends from Net Investment Income --
Distributions from Realized Capital Gains --
--------------
Total Distributions --
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.31
================================================================================
TOTAL RETURN -6.90%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $42
Ratio of Total Expenses to Average Net Assets 0.37%**
Ratio of Net Investment Income to Average Net Assets 2.38%**
Portfolio Turnover Rate 18%
================================================================================
*Inception.
**Annualized.

- --------------------------------------------------------------------------------
EQUITY INDEX PORTFOLIO
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $26.94 $25.32 $18.32 $15.69 $12.47
- -------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .37 .37 .34 .34 .33
Net Realized and Unrealized Gain
(Loss) on Investments 7.04 1.83 6.94 2.75 3.26
-----------------------------------------
Total from Investment Operations 7.41 2.20 7.28 3.09 3.59
-----------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.37) (.34) (.19) (.33) (.29)
Distributions from Realized Capital
Gains (.13) (.24) (.09) (.13) (.08)
-----------------------------------------
Total Distributions (.50) (.58) (.28) (.46) (.37)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $33.85 $26.94 $25.32 $18.32 $15.69
================================================================================
TOTAL RETURN 27.84% 8.97% 40.31% 20.19% 29.51%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,365 $920 $718 $406 $276
Ratio of Total Expenses to Average
Net Assets 0.18% 0.20% 0.23% 0.22% 0.28%
Ratio of Net Investment Income to
Average Net Assets 1.21% 1.48% 1.78% 2.13% 2.53%
Portfolio Turnover Rate 4% 1% 1% 2% 2%
================================================================================

<PAGE>

- --------------------------------------------------------------------------------
MID-CAP INDEX PORTFOLIO
------------------------
FEB. 8* TO
SEP. 30, 1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .04
Net Realized and Unrealized Gain (Loss) on Investments .61
--------------
Total from Investment Operations .65
--------------
DISTRIBUTIONS
Dividends from Net Investment Income --
Distributions from Realized Capital Gains --
--------------
Total Distributions --

- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.65
================================================================================
TOTAL RETURN 6.50%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $54
Ratio of Total Expenses to Average Net Assets 0.24%**
Ratio of Net Investment Income to Average Net Assets 1.03%**
Portfolio Turnover Rate 24%
================================================================================
*Initial share purchase date. All assets were held in money market instruments
until February 9, 1999, when performance measurement begins.
**Annualized.

- --------------------------------------------------------------------------------
GROWTH PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $24.33 $21.51 $17.58 $14.10 $10.79
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .16 .16 .190 .18 .16
Net Realized and Unrealized Gain
(Loss) on Investments 6.16 3.43 4.615 3.65 3.26
-----------------------------------------
Total from Investment Operations 6.32 3.59 4.805 3.83 3.42
-----------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.16) (.20) (.180) (.16) (.11)
Distributions from Realized Capital
Gains (1.53) (.57) (.685) (.19) --
-----------------------------------------
Total Distributions (1.69) (.77) (.875) (.35) (.11)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $28.96 $24.33 $21.51 $17.58 $14.10
================================================================================
TOTAL RETURN 27.27% 17.37% 28.76% 27.79% 32.02%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $953 $631 $460 $276 $162
Ratio of Total Expenses to Average
Net Assets 0.35% 0.39% 0.38% 0.39% 0.47%
Ratio of Net Investment Income to
Average Net Assets 0.59% 0.74% 1.12% 1.29% 1.64%
Portfolio Turnover Rate 50% 48% 38% 42% 32%
================================================================================

<PAGE>

- --------------------------------------------------------------------------------
SMALL COMPANY GROWTH PORTFOLIO
YEAR ENDED SEPTEMBER 30,
------------------------ JUN. 3* TO
1999 1998 1997 Sep. 30, 1996
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.53 $11.97 $ 9.84 $10.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .06 .06 .04 .04
Net Realized and Unrealized
Gain (Loss) on Investments 3.35 (2.46) 2.13 (.20)
-------------------------------------------
Total from Investment Operations 3.41 (2.40) 2.17 (.16)
-------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.06) (.04) (.04) --
Distributions from Realized
Capital Gains (.01) -- -- --
--------------------------------------------
Total Distributions (.07) (.04) (.04) --
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.87 $ 9.53 $11.97 $ 9.84
================================================================================
TOTAL RETURN 35.98% -20.10% 22.16% -1.60%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $168 $111 $133 $44
Ratio of Total Expenses to
Average Net Assets 0.49% 0.42% 0.39% 0.45%**
Ratio of Net Investment Income to
Average Net Assets 0.58% 0.54% 0.67% 1.42%**
Portfolio Turnover Rate 85% 106% 72% 18%
================================================================================
*Inception.
**Annualized.

- --------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $12.96 $14.55 $12.74 $11.40 $10.31
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .23 .21 .17 .14 .16
Net Realized and Unrealized Gain
(Loss) on Investments 2.59 (1.48) 2.10 1.36 .99
-----------------------------------------
Total from Investment Operations 2.82 (1.27) 2.27 1.50 1.15
-----------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.20) (.18) (.14) (.16) (.06)
Distributions from Realized Capital
Gains -- (.14) (.32) -- --
-----------------------------------------
Total Distributions (.20) (.32) (.46) (.16) (.06)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $15.58 $12.96 $14.55 $12.74 $11.40
================================================================================
TOTAL RETURN 21.97% -8.74% 18.55% 13.36% 11.21%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $272 $217 $246 $162 $90
Ratio of Total Expenses to Average
Net Assets 0.46% 0.48% 0.46% 0.49% 0.54%
Ratio of Net Investment Income to
Average Net Assets 1.51% 1.48% 1.43% 1.42% 1.67%
Portfolio Turnover Rate 39% 38% 22% 19% 27%
================================================================================

<PAGE>

- --------------------------------------------------------------------------------
REIT INDEX PORTFOLIO
--------------------
FEB. 8* TO
SEP. 30, 1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .28
Net Realized and Unrealized Gain (Loss) on Investments (.43)
--------------
Total from Investment Operations (.15)
--------------
DISTRIBUTIONS
Dividends from Net Investment Income --
Distributions from Realized Capital Gains --
--------------
Total Distributions --
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.85
================================================================================
TOTAL RETURN -1.50%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $21
Ratio of Total Expenses to Average Net Assets 0.27%**
Ratio of Net Investment Income to Average Net Assets 6.26%**
Portfolio Turnover Rate 4%
================================================================================
*Initial share purchase date. All assets were held in money market instruments
until February 9, 1999, when performance measurement begins.
**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.

"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>

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>

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 the
fund has sold at a profit, minus any realized losses.

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

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

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
fund's investments.

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

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

FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not hurt badly by the
poor performance of a single security, 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)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.

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

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

VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.

YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.

<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK.)

<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 REPORT TO
SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders. In these
reports, you will find a discussion
of the market conditions and
investment strategies that
significantly affected the Fund's
performance during the most recent
fiscal year.

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

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

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

VANGUARD VARIABLE
INSURANCE FUND
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600

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 1-800-SEC-0330. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-6009.

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

P064N-01/21/2000

<PAGE>

PART B

VANGUARD/(R)/ VARIABLE INSURANCE FUND (THE FUND)

STATEMENT OF ADDITIONAL INFORMATION
JANUARY 21, 2000

This Statement is not a prospectus, but should be read in conjunction with the
Fund's current Prospectus (dated January 21, 2000). To obtain the Prospectus and
the 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-13
INVESTMENT ADVISORY SERVICES.....................................B-17
PORTFOLIO TRANSACTIONS...........................................B-25
COMPARATIVE INDEXES..............................................B-26
FINANCIAL STATEMENTS.............................................B-28
APPENDIX--DESCRIPTION OF SECURITIES AND RATINGS..................B-29

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,
Massachusetts 02109 (for International Portfolio); First Union National Bank,
PA4943, 530 Walnut Street, Philadelphia, Pennsylvania 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, Massachusetts 02110
(for Equity Income and Growth Portfolios); and The Bank of New York, One Wall
Street, New York, New York 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, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, 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, Pennsylvania 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. 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

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less than 100% of the value of the securities loaned, (b) the borrower add to
such collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks to the market" on a daily basis), (c) the loan be made subject
to termination by the Portfolio at any time, and (d) the Portfolio 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

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possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect U.S. investments in
those countries.

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

Certain foreign governments levy withholding taxes against dividend and
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

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the particular CMO issuance. The "fastest-pay" group of bonds, as specified in
the prospectus for the issuance, 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. 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

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profits from fluctuations in the prices of underlying securities. The Portfolios
of the Fund intend to use futures contracts only for bona fide hedging purposes.

Regulations of the CFTC applicable to the Portfolios of the Fund require
that all of its futures transactions constitute bona fide hedging transactions
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

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up or down from the previous day's settlement price at the end of a trading
session. Once the daily limit has been reached in a particular type of contract,
no trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
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 shares representing the lesser of: (i)
67% or more of the votes cast, so long as shares representing more than 50% of
the Portfolios' net asset value are present or represented by proxy; or (ii)
shares representing more than 50% of the Portfolios' net asset value.

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. 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.

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

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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 investment policies relating to commodities.

REAL ESTATE. Each Portfolio may not invest directly in real estate,
although it may invest in securities of companies that deal in real estate and
bonds secured by real estate.

SENIOR SECURITIES. Each Portfolio may not issue senior securities, 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 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 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

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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 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, 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.

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, 1999.

MONEY MARKET PORTFOLIO
9/30/1999
---------
Value of account at beginning of period .........$1.00000
Value of same account at end of period* .........$1.00101
========
Net change in account value .....................$0.00101
Annualized current net yield
(Net change X/ 365//\\7\\) / average net
asset value ................................... 5.26%
=====
Effective Yield
[(Net change) + 1]/365/7 /- 1 ................... 5.40%
=====
Average weighted maturity of investments ........ 63 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 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

B-11
<PAGE>

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, 1999, is set forth below. Yields are
calculated daily for each Portfolio. Premiums and discounts on asset-backed
securities are not amortized.

Balanced Portfolio .......................... 4.32%
Diversified Value ........................... 3.00%
Equity Income Portfolio ..................... 2.89%
Equity Index Portfolio ...................... 1.53%
Growth Portfolio ............................ 0.84%
High Yield Bond Portfolio ................... 9.71%
High-Grade Bond Portfolio ................... 6.71%
International Portfolio ..................... N/A
Mid-Cap Index Portfolio ..................... 1.41%
REIT Index .................................. N/A
Short-Term Corporate Portfolio .............. 6.71%
Small Company Growth Portfolio .............. 0.99%

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
9/30/1999 9/30/1999 9/30/1999
--------- --------- ---------
Balanced Portfolio 9.44% 16.38% 13.24%*
Diversified Value Portfolio N/A N/A (6.90)%*
Equity Income Portfolio 20.45% N/A 10.36%
Equity Index Portfolio 27.84% 24.92% 18.27%*
Growth Portfolio 27.27% 26.54% 22.08%*
High Yield Bond Portfolio 7.52%* N/A 2.68%
High-Grade Bond Portfolio 7.70% 7.27%* (0.49)%
International Portfolio 10.72% 10.66%* 21.97%
Mid-Cap Index Portfolio N/A N/A 6.50%*
REIT Index Portfolio (1.50)%* N/A N/A
Short-Term Corporate
Portfolio N/A N/A 1.08%*
Small Company Growth
Portfolio 35.98% 8.36%* N/A
- ---------
* Since Inception:
Balanced Portfolio--May 23, 1991
Diversified Value Portfolio--February 9, 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--April 29,
1996
International Portfolio--June 3, 1994
Mid-Cap Index Portfolio--February 9, 1999
REIT Index Portfolio--February 9, 1999
Short-Term Corporate 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.

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

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

B-13
<PAGE>

of the Fund. Each Trustee also serves as a Director of The Vanguard Group, Inc.,
and as a Trustee of each of the 103 investment companies administered by
Vanguard (102 in the case of Mr. Malkiel and 93 in the case of Mr. MacLaury).
The mailing address of the Trustees and officers of the Fund is Post Office Box
876, Valley Forge, Pennsylvania 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 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 Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), 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).

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

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 of Rohm & Haas Co. (Chemicals); Director of Cummins Engine Co.
(Diesel Engine Company), and The Mead Corp. (Paper Products); and Trustee of
Vanderbilt University.

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

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

ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- ---------
*Officers of the Trust are "interested persons" as defined in the 1940 Act.

THE VANGUARD GROUP

Vanguard Variable Insurance Fund is a member of The Vanguard Group of Investment
Companies, which consists of more than 100 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.

B-14

<PAGE>

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, 1999,
each Portfolio had contributed capital to Vanguard (included in other assets)
representing 0.02% (0.03% for the Short-Term Corporate Portfolio) of each
Portfolio's net assets. The total amount contributed by the Fund was $1,100,000,
which represented 1.11% 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.

During the fiscal years ended September 30, 1997, 1998, and 1999, the
Portfolios incurred the following approximate amounts of Vanguard's management
(including transfer agency), distribution, and marketing expenses:

B-15
<PAGE>

PORTFOLIO 1997 1998 1999
--------- ---- ---- ----
Balanced Portfolio $ 824,000 $1,126,000 $1,240,000
Diversified Value Portfolio N/A N/A 42,000
Equity Income Portfolio 482,000 872,000 952,000
Equity Index Portfolio 1,189,000 1,653,000 2,111,000
Growth Portfolio 820,000 1,262,000 1,680,000
High Yield Bond Portfolio 114,000 288,000 314,000
High-Grade Bond Portfolio 364,000 555,000 663,000
International Portfolio 479,000 591,000 656,000
Mid-Cap Index Portfolio N/A N/A 32,000
Money Market Portfolio 629,000 810,000 1,082,000
REIT Index Portfolio N/A N/A 8,000
Short-Term Corporate Portfolio N/A N/A 21,000
Small Company Growth Portfolio 168,000 372,000 445,000

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. The funds' interested Trustee--Mr.Brennan--receives
no compensation for his service in that capacity. However, he is 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. All information shown is for the
fiscal year ended September 30, 1999:

B-16
<PAGE>

VANGUARD VARIABLE INSURANCE FUND COMPENSATION TABLE

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS FROM ALL VANGUARD
COMPENSATION ACCRUED AS PART OF ESTIMATED ANNUAL FUNDS PAID TO
FROM THIS FUND'S BENEFITS UPON TRUSTEES
NAMES OF TRUSTEES THIS FUND EXPENSES RETIREMENT /(1)/
- ---------------------------------------------------------------------------------------------------------------------
John C. Bogle/(2)/ None None None None
John J. Brennan. None None None None
Barbara Barnes Hauptfuhrer/(2)/ $223 $28 $15,000 $0
JoAnn Heffernan Heisen $892 $49 $15,000 $80,000
Bruce K. MacLaury $922 $84 $12,000 $75,000
Burton G. Malkiel $898 $81 $15,000 $80,000
Alfred M. Rankin, Jr $892 $59 $15,000 $80,000
John C. Sawhill $892 $75 $15,000 $80,000
James O. Welch, Jr $892 $87 $15,000 $80,000
J. Lawrence Wilson $892 $63 $15,000 $80,000
</TABLE>
- ---------
/(1)/The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Trustee of 103 Vanguard funds (102 in the
case of Mr. Malkiel; 93 in the case of Mr. MacLaury).
/(2)/Mrs. Hauptfuhrer and Mr. Bogle have retired from the Fund's Board,
effective December 31, 1998 and December 31, 1999, respectively.

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

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%

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

B-17
<PAGE>

The following table sets forth the adjustment factors to the base advisory
fee payable by the Fund to Wellington Management with respect to the Balanced
Portfolio under this investment advisory agreement.

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

Under the rules of the Commission, the incentive/penalty fee was not fully
operable until the quarter ended June 30, 1999. Until that date, a "blended" fee
rate consisting of varying percentages of (i) the performance adjustment based
on the schedule set forth above (the new rate/1/), and (ii) the performance
adjustment based on the schedule set forth in the Fund's previous investment
advisory agreement with the adviser (the previous rate/2/) was used as follows:

1. QUARTER ENDED SEPTEMBER 30, 1996. The incentive/penalty fee was
calculated as the sum of 8.3% (e.g., one of 12 quarters) of the fee payable
under the new rate plus 91.7% (e.g., 11 of 12 quarters) of the fee payable under
the previous rate.

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

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

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

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

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

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

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

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

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

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

12. QUARTER ENDED JUNE 30, 1999. New rate became fully operable.

- ---------
/1/ The benchmark used for the new rate calculation consists of linking the
return of the new benchmark (Lehman Long-Term Corporate AA or Better Bond
Index) to the return of the previous benchmark (Salomon Brothers High-Grade
Corporate Bond Index) in the same varying percentages that are listed
below.
/2/ The previous incentive/penalty fee structure provided that the Basic Fee be
increased or decreased by an amount equal to 0.015% per annum (0.00375% per
quarter) of the first $500 million of the average month-end assets of the
Portfolio and 0.010% per annum (0.0025% per quarter) of the average
month-end assets of the Portfolio over $500 million if the Portfolio's
investment performance for the thirty-six months preceding the end of the
quarter was six percentage points or more above or below, respectively, the
investment record of a "Combined Index" which included the Salomon Brothers
High-Grade Corporate Bond Index for the debt portion of the Combined Index.

B-18
<PAGE>

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

The "investment record" of the Stock Index for the period, expressed as a
percentage of the Stock Index level at the beginning of the period, shall be the
sum of (i) the change in the level of the Stock Index during the period and (ii)
the value, computed consistently with the Stock Index, of cash 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. Computation of these two components as the
Composite Index shall be made on the basis of 65% in the Stock Index and 35% in
the Bond Index at the beginning of each quarter.

During the fiscal years ended September 30, 1997, 1998, and 1999, the Fund
incurred investment advisory fees with respect to the Balanced Portfolio of
approximately $397,000 (before a decrease of $6,000 based on performance),
$514,000 (before a decrease of $68,000 based on performance), and $556,000
(before a decrease of $93,000 based on performance), respectively, to Wellington
Management.

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, 1997, 1998, and 1999, the Fund
incurred investment advisory fees with respect to the High Yield Bond Portfolio
of approximately $34,000, $74,000, and $90,000, respectively, to Wellington
Management.

The present agreement with Wellington Management is renewable for
successive one-year periods, only if each renewal is specifically approved at
least annually by a vote of the Fund's Board of Trustees, including the
affirmative votes of a majority of those 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 voting such
approval. The agreement is automatically terminated if assigned, and may be
terminated by the Fund at any time, without penalty, by vote of the Board of
Trustees of the Fund on 60 days' written notice to Wellington Management, or by
Wellington Management on 90 days' written notice to the Fund. The agreement will
automatically terminate in the event of its assignment.

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.

B-19
<PAGE>

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.

The basic advisory fee may be increased or decreased by applying an
incentive/penalty 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. DECEMBER 29, 1998 THROUGH SEPTEMBER 30, 1999. The incentive/penalty fee
adjustment was not operable, and Barrow, Hanley was paid the Basic Fee set forth
above.

2. QUARTER ENDING DECEMBER 31, 1999 THROUGH QUARTER ENDING DECEMBER 31,
2001. The incentive penalty 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 December 31, 1998 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 December 31, 1999
to 9 percentage points and 6 percentage points, respectively, for the thirty-six
months ending December 31, 2001.

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, the Fund incurred investment advisory fees of
approximately $28,000 to Barrow, Hanley.

DESCRIPTION OF BARROW, HANLEY

Barrow, Hanley is a Nevada corporation controlled by the following officers of
Barrow, Hanley: James Purdy Barrow, Principal; Bryant Miller Hanley, Jr.,
President, Secretary, and Treasurer; Richard Albert Englander, Principal; and
Joseph Ray Nixon, Jr., 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.

The agreement is renewable for successive one-year periods, only if each
renewal is specifically approved by a vote of the Fund's Board of Trustees,
including the affirmative votes of a majority of the Trustees who are not
parties to the contract 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. The agreement is automatically terminated if

B-20
<PAGE>

assigned, and may be terminated without penalty at any time (1) either by vote
of the Board of Trustees of the Fund on 60 days' written notice to the Adviser,
or (2) by the Adviser upon 90 days' written notice to the Fund.

During the fiscal years ended September 30, 1997, 1998, and 1999, the Fund
incurred investment advisory fees of approximately $203,000, $357,000, and
$436,000, respectively, to Newell.

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 an advisory
fee at the end of each fiscal quarter, calculated by applying a quarterly rate,
based on an annual rate of 0.15% to the Portfolio's average month-end net assets
for the quarter.

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

During the fiscal years ended September 30, 1997, 1998, and 1999, the Fund
incurred investment advisory fees of approximately $575,000, $859,000, and
$1,362,000, respectively, to Lincoln.

DESCRIPTION OF LINCOLN

Lincoln is an Illinois corporation in which a controlling interest is held by
the following persons: Timothy H. Ubben, Chairman; J. Parker Hall III, Chief
Executive Officer; Kenneth R. Meyer, President; David M. Fowler, Executive Vice
President; Richard W. Knee, Executive Vice President; and Jay H. Freedman,
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.

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:

B-21
<PAGE>

THREE YEAR PERFORMANCE ANNUAL INCENTIVE (+)/
DIFFERENTIAL VS. EAFE PENALTY (-) 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%

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

For the purpose of determining the fee adjustment for investment
performance, as described above, the net assets of the International Portfolio
are averaged over the same period as the investment performance of the
International 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.

The agreement with Schroder may be continued in accordance with the same
provisions applicable to the Fund's agreement with Lincoln. During the fiscal
years ended September 30, 1997, 1998, and 1999, the Fund incurred investment
advisory fees of approximately $315,000 (including an increase of $60,000 based
on performance), $351,000 (including an increase of $62,000 based on
performance), and $332,000 (including an increase of $13,000 based on
performance), respectively, to Schroder.

DESCRIPTION OF SCHRODER

Schroder is the London branch office of Schroder Investment Management North
America Inc. Schroder is a wholly-owned subsidiary of Schroder US Holdings Inc.
which is a wholly-owned subsidiary of Schroders PLC. Schroders PLC specializes
in providing investment management services, with funds under management

B-22
<PAGE>

currently in excess of $190 billion. Schroder's London branch was established in
1979 to manage international portfolios for U.S. institutions.

THE SMALL COMPANY GROWTH PORTFOLIO INVESTMENT ADVISORY AGREEMENT

The Fund entered into an investment advisory agreement with Granahan Investment
Management, Inc. (Granahan) under which Granahan manages the investment and
reinvestment of the Small Company Growth 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 Portfolio for the quarter.

The basic advisory fee may be increased or decreased by applying an
incentive/penalty adjustment to the basic fee reflecting the investment
performance of the Portfolio relative to the investment record of the Small
Company Growth Fund Stock Index (the Index) over the same 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.

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

1. QUARTER ENDED MARCH 31, 1998. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for the
eleven quarters ended December 31, 1997 with that of the Index for the quarter
ended March 31, 1998.

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

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

4. QUARTER ENDED DECEMBER 31, 1998. Granahan's performance fee adjustment
was determined by linking the investment performance of the Russell 2000 for the
eight quarters ended December 31, 1997 with that of the Index for the four
quarters ended December 31, 1998.

5. QUARTER ENDED MARCH 31, 1999. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for the
seven quarters ended December 31, 1997 with that of the Index for the five
quarters ended March 31, 1999.

6. QUARTER ENDED JUNE 30, 1999. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for the six
quarters ended December 31, 1997 with that of the Index for the six quarters
ended June 30, 1999.

7. QUARTER ENDED SEPTEMBER 30, 1999. Granahan's performance fee adjustment
was determined by linking the investment performance of the Russell 2000 for the
five quarters ended December 31, 1997 with that of the Index for the seven
quarters ended September 30, 1999.

B-23
<PAGE>

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

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

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

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

12. QUARTER ENDING DECEMBER 31, 2000. The performance adjustment rate shall
be fully operable.

The agreement is renewable thereafter for successive one-year periods, only
if each renewal is specifically approved by a vote of the Fund's Board of
Trustees, including the affirmative votes of a majority of the Trustees who are
not parties to the contract or "interested persons" (as defined in the
Investment Company Act of 1940) of any such party, cast in person at a meeting
called for the purpose of considering such approval. The agreement is
automatically terminated if assigned, and may be terminated without penalty at
any time (1) either by vote of the Board of Trustees of the Fund on 60 days'
written notice to Granahan, or (2) by Granahan upon 90 days' written notice to
the Fund. During the fiscal years ended September 30, 1997, 1998, and 1999, the
Fund incurred investment advisory fees of approximately $107,000 (before a
decrease of $22,000 based on performance), $196,000 (before a decrease of
$55,000 based on performance), and $229,000 (after an increase of $9,000 based
on performance), respectively, to Granahan.

DESCRIPTION OF GRANAHAN

Granahan is a professional investment advisory firm founded in 1985. As of
September 30, 1999, Granahan held discretionary management authority with
respect to approximately $1.3 billion in assets. John J. Granahan is portfolio
manager of the assets of the Small Company Growth Portfolio, and Gary C. Hatton
and Jane M. White are assistant portfolio managers.

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 Core Management 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,

B-24
<PAGE>

and operational capabilities of competing broker-dealers; and the brokerage and
research services provided to the Fund.

During the fiscal years ended September 30, 1997, 1998, and 1999, the
Portfolios managed by Vanguard incurred expenses for investment advisory
services in the following amounts:

PORTFOLIO 1997 1998 1999
--------- ---- ---- ----
Equity Index Portfolio $12,000 $22,000 $93,000
High-Grade Bond Portfolio 24,000 30,000 42,000
Mid-Cap Index Portfolio N/A N/A 7,000
Money Market Portfolio 53,000 58,000 74,000
REIT Index Portfolio N/A N/A 7,000
Short-Term Corporate Portfolio N/A N/A 1,000

PORTFOLIO TRANSACTIONS

The investment advisory agreements authorize Wellington Management, Lincoln,
Newell, Granahan, Schroder, Barrow, Hanley, Vanguard's Core Management 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
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,

B-25
<PAGE>

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, 1997, 1998, and 1999, the
Portfolios paid brokerage commissions in the following amounts:

PORTFOLIO 1997 1998 1999
--------- ---- ---- ----
Balanced Portfolio $116,000 $165,000 $155,000
Diversified Value Portfolio N/A N/A 54,000
Equity Income Portfolio 112,000 135,000 105,000
Equity Index Portfolio 40,000 42,000 65,000
Growth Portfolio 266,000 437,000 736,000
High Yield Bond Portfolio 0 0 0
High-Grade Bond Portfolio 0 0 0
International Portfolio 322,000 341,000 417,000
Mid-Cap Index Portfolio N/A N/A 17,000
Money Market Portfolio 0 0 0
REIT Index Portfolio N/A N/A 12,000
Short-Term Corporate Portfolio N/A N/A 0
Small Company Growth Portfolio 126,000 215,000 219,000

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.

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.

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

WILSHIRE 4500 EQUITY INDEX--consists of all stocks in the Wilshire 5000 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.

B-26
<PAGE>

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.

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 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 CORPORATE 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.

LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $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).

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

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

B-27
<PAGE>

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

LIPPER 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, 1999, appearing in the Vanguard Variable Insurance Fund
Annual Report to Shareholders, and the report thereon of PricewaterhouseCoopers
LLP, independent accountants, also appearing therein, are incorporated by
reference in this Statement of Additional Information. For a more complete
discussion of the performance, please see the Fund's Annual Report to
Shareholders, which may be obtained without charge.

B-28
<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-29
<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.

SAI064-01/21/2000

<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

-------------------
* Filed herewith
** Filed previously
+ Filed herewith for the International and Money Market Portfolios; filed
previously for all other Portfolios

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.

Investment advisory services are provided to the HIGH YIELD BOND and
BALANCED PORTFOLIOS by Wellington Management Company, LLP (Wellington
Management). Wellington Management is an investment adviser registered under the
Investment Advisers Act of 1940, as amended (the Advisers Act). The list
required by this Item 26 of officers and partners of Wellington Management,
together with any information as to

C-1
<PAGE>

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 Management 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 Dof 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 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

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., Valley Forge, Pennsylvania; and the Registrant's
Custodians, Brown Brothers Harriman & Co., Boston, Massachusetts, First Union
National Bank, Philadelphia, Pennsylvania, State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts, and The Bank of New York, One Wall
Street, New York, New York.

C-2
<PAGE>

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 for effectiveness 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 Valley Forge and the Commonwealth of Pennsylvania, on
the 3rd day of January, 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 January 3, 2000
---------------------------Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*

By:/S/ JOANN HEFFERNAN HEISEN Trustee January 3, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*

By:/S/ BRUCE K. MACLAURY Trustee January 3, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*

By:/S/ BURTON G. MALKIEL Trustee January 3, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*

By:/S/ ALFRED M. RANKIN, JR. Trustee January 3, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*

By:/S/ JOHN C. SAWHILL Trustee January 3, 2000
---------------------------
(Heidi Stam)
John C. Sawhill*

By:/S/ JAMES O. WELCH, JR. Trustee January 3, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*

By:/S/ J. LAWRENCE WILSON Trustee January 3, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*

By:/S/ THOMAS J. HIGGINS Treasurer and Principal January 3, 2000
--------------------------- Financial Officer and
(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

Custodian Agreements. . . . . . . . . . . . . . . . . .Ex-99.BG

Consent of Independent Accountants. . . . . . . . . . .Ex-99.BJ

EX-99.BG

CUSTODY AGREEMENT

AGREEMENT, dated as of October 22, 1999 between each open-end management
investment company listed on Appendix A hereto as amended from time to time
(each such investment company, a "Fund") organized and existing under the laws
of the State of Delaware and registered with the U.S. Securities and Exchange
Commission under the Investment Company Act of 1940, as amended (the "1940
Act"), on behalf of certain of their series (each such series, a "Series") and
The Bank of New York Company, Inc., a New York corporation authorized to do a
banking business ("Custodian"). The Funds' principal office and place of
business is P.O. Box 2600, Valley Forge, PA 19482. The Custodian's principal
office and place of business is One Wall Street, New York, New York 10286.

WITNESSETH:

that for and in consideration of the mutual premises hereinafter set forth, each
Fund and Custodian agree as follows:

ARTICLE I
DEFINITIONS

Whenever used in this Agreement, the following words shall have the
meanings set forth below:

1. "AUTHORIZED PERSON" shall be any person duly authorized by a Fund's
Board of Trustees to execute any Certificate or to give Oral Instructions with
respect to one or more Accounts, such persons to be designated in a Certificate
annexed hereto as Appendix B or such other Certificate as may be received by
Custodian from time to time.

2. "AUTOFAX" shall mean an unsigned hard copy facsimile generated by a
Fund's computer system and transmitted to Custodian.

3. "BNY AFFILIATE" shall mean any office, branch or subsidiary of The Bank
of New York Company, Inc.

4. "BOOK-ENTRY SYSTEM" shall mean the Federal Reserve/Treasury book-entry
system for receiving and delivering securities, its successors and nominees.

5. "BUSINESS DAY" shall mean any day on which Custodian, Book-Entry System
and relevant Depositories are open for business.

6. "CERTIFICATE" shall mean any notice, instruction, or other instrument in
writing, authorized or required by this Agreement to be given to Custodian,
which is actually received by Custodian by letter or facsimile transmission and
signed on behalf of a Fund by an Authorized Person of the Fund or a person
reasonably believed by Custodian to be an Authorized Person.

7. "DEPOSITORY" shall include the Book-Entry System, the Depository Trust
Company, the Participants Trust Company, and any other securities depository,
book-entry system or clearing agency (and their respective successors and
nominees) authorized to act as a securities depository, book-entry system or
clearing agency pursuant to applicable law and identified to a Fund.

8. "INSTRUCTIONS" shall mean communications and facsimiles transmitted by a
Fund by electronic or telecommunications media, including S.W.I.F.T.,
computer-to-computer interface, dedicated transmission lines, telex or Autofax,
none of which are manually signed by a representative of a Fund.

9. "ORAL INSTRUCTIONS" shall mean verbal instructions received by Custodian
from an Authorized Person or from a person reasonably believed by Custodian to
be an Authorized Person.

10. "SECURITIES" shall include, without limitation, any common stock and
other equity securities, bonds, debentures and other debt securities, notes,
mortgages or other obligations, and any instruments representing rights to
receive, purchase, or subscribe for the same, or representing

<PAGE>

any other rights or interests therein (whether represented by a certificate or
held in a Depository or by a Subcustodian).

11. "SERIES" shall mean such of the various portfolios, if any, of a Fund,
as are listed on Appendix A hereto.

12. "SHARES" shall mean the shares of beneficial interest of a Fund, each
of which is, in the case of a Fund having Series, allocated to a particular
Series.

13. "SUBCUSTODIAN" shall mean a "bank" as defined in Section 2(a)(5) of the
1940 Act, which is identified to a Fund and which Custodian is required to use
to hold Securities purchased by a Fund from time to time.

ARTICLE II
APPOINTMENT OF CUSTODIAN; ACCOUNTS

1. (a) The Fund hereby appoints Custodian as custodian of all Securities
and cash at any time delivered to Custodian during the term of this Agreement,
and authorizes Custodian to hold Securities in registered form in its name or
the name of its nominees. Custodian hereby accepts such appointment and agrees
to establish and maintain one or more securities accounts and cash accounts for
each Series in which Custodian will hold Securities and cash as provided herein.
Custodian shall maintain books and records segregating the assets of each Series
from the assets of any other Series. Such accounts (each, an "Account";
collectively, the "Accounts") shall be in the name of the Series.

(b) Custodian may from time to time establish on its books and records such
sub-accounts within each Account as a Fund may reasonably request in a
Certificate or Instructions (each, a "Special Account") and Custodian shall find
reasonably acceptable, and shall reflect therein such assets as the Fund may
specify in a Certificate or Instructions.

(c) Custodian may from time to time establish pursuant to a written
agreement with and for the benefit of a broker, dealer, futures commission
merchant or other third party identified in a Certificate or Instructions such
accounts on such terms and conditions as a Fund may reasonably request and
Custodian shall find reasonably acceptable, and shall hold in such accounts such
Securities and cash as the Fund may specify in a Certificate or Instructions.

2. Except as otherwise provided by law, a cash account shall constitute one
single and indivisible current Account.

ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS

1. Each Fund hereby represents and warrants, which representations and
warranties shall be continuing and shall be deemed to be reaffirmed upon each
delivery of a Certificate or each giving of Oral Instructions or Instructions by
such Fund, that

(a) It is duly organized and existing under the laws of the jurisdiction of
its organization, with full power to carry on its business as now conducted, to
enter into this Agreement and to perform its obligations hereunder;

(b) This Agreement has been duly authorized, executed and delivered by such
Fund, approved by a resolution of its Board of Trustees, constitutes a valid and
legally binding obligation of such Fund, enforceable in accordance with its
terms, except as may be limited by bankruptcy, insolvency or other laws
affecting generally the enforceability of creditors' rights or by equitable
principles generally applied, and no statute, regulation or rule, applicable
solely to a Fund and not to Custodian, nor any order, judgment or contract
binding on such Fund prohibits such Fund's execution or performance of this
Agreement;

(c) It is conducting its business in substantial compliance with all
applicable laws and requirements, both state and federal, and has obtained all
regulatory licenses, approvals and consents necessary to carry on its business
as now conducted; there is no provision of its charter or by-laws, nor of any
mortgage, indenture, credit agreement or other contract binding on it or
affecting its property which would prohibit its execution or performance of this
Agreement;

<PAGE>

(d) It will not use the services provided by Custodian hereunder in any
manner that is, or will result in, a violation of any law, rule or regulation
applicable solely to such Fund, and not to Custodian;

(e) It is fully informed of the protections and risks associated with
various methods of transmitting Instructions and Oral Instructions and
delivering Certificates to Custodian, understands that there may be more secure
methods of transmitting Instructions and Oral Instructions and delivering
Certificates than the methods selected by Custodian, agrees that the security
procedures (if any) to be utilized provide a commercially reasonable degree of
protection in light of its particular needs and circumstances, and will cause
each person transmitting Instructions to treat applicable user and authorization
codes, passwords and authentication keys with extreme care, and has established
internal control and safekeeping procedures to restrict the availability of the
same to persons duly authorized to give Instructions;

(f) It shall insure, and agrees it is solely its responsibility, that only
persons(s) duly authorized by such Fund transmit Instructions and agrees that
Custodian may presume that an Instruction including an Account number of a Fund
has been given by person(s) duly authorized to transmit Instructions and need
not review any Instruction other than an Autofax;

(g) It shall manage its borrowings, including, without limitation, any
advance or overdraft (including any day-light overdraft) in the Accounts, so
that the aggregate of its total borrowings for each Series does not exceed the
amount such Series is permitted to borrow under the 1940 Act;

(h) Its transmission or giving of Instructions pursuant to this Agreement
shall at all times comply with the 1940 Act;

(i) It shall only instruct Custodian, whether by a Certificate, Instruction
or Oral Instruction, to disburse cash (i) as hereinafter provided, (ii) for the
payment of dividends or distributions on, or redemptions of, Shares or (iii) for
other proper purposes;

(j) It shall impose and maintain limitations on the destinations to which
cash may be disbursed by Instructions to ensure that each disbursement is in
accordance with the immediately preceding representation and warranty; and

(k) It has the right to make the pledge and grant the security interest and
security entitlement to Custodian contained in paragraph 1 of Article VII
hereof, free of any right or prior claim of any other person or entity (except
as otherwise provided by law), such pledge and grants shall have a first
priority subject to no setoffs, counterclaims, or other liens or grants prior to
or on a parity therewith (except as otherwise provided by law).

2. Custodian hereby represents and warrants, which representations and
warranties shall be continuing and shall be deemed to be reaffirmed upon each
receipt of a Certificate or each receipt of Oral Instructions or Instructions by
the Custodian, that:

(b) This Agreement has been duly authorized, executed and delivered by
Custodian, constitutes a valid and legally binding obligation of Custodian,
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency or other laws affecting generally the enforceability of
creditors' rights or by equitable principles generally applied, and no statute,
regulation or rule, applicable solely to Custodian, and not to any Fund, nor any
order, judgment or contract binding on Custodian prohibits Custodian's execution
or performance of this Agreement;

(c) Custodian is conducting its business in substantial compliance with all
applicable laws and requirements, both state and federal, and has obtained all
regulatory licenses, approvals and consents necessary to carry on its business
as now conducted; there is no provision of its charter or by-laws, nor of any
mortgage, indenture, credit agreement or other contract binding on it or
affecting its property which would prohibit its execution or performance of this
Agreement;

(d) Custodian will not provide services hereunder in any manner that is, or
will result in, a violation of any law, rule or regulation applicable solely to
Custodian, and not to the Funds;

<PAGE>

(e) Custodian will submit to the Funds on an annual basis a copy of its
report prepared in compliance with the requirements of Statement of Auditing
Standards No. 70 issued by the American Institute of Certified Public
Accountants, as it may be amended from time to time; and

(f) Custodian shall maintain, directly or through a third-party selected
with reasonable care, adequate back-up computer and communication lines.

ARTICLE IV
CUSTODY AND RELATED SERVICES

1. (a) Subject to the terms hereof, each Fund hereby authorizes Custodian
to hold any Securities received by it from time to time for such Fund's account.
Custodian shall be entitled to utilize Depositories to the extent possible in
connection with its performance hereunder, and Subcustodians as defined in
Article I of this Agreement. Securities and cash held in a Depository will be
held subject to the rules, terms and conditions of such entity. Securities and
cash held through Subcustodians shall be held subject to the terms and
conditions of Custodian's agreements with such Subcustodians. Subcustodians may
be authorized to hold Securities in Depositories in which such Subcustodians
participate. Unless otherwise required by local law or practice or a particular
subcustodian agreement, Securities deposited with Subcustodians will be held in
a commingled account in the name of Custodian as custodian for the Funds.
Custodian shall identify on its books and records the Securities and cash
belonging to each Fund and Series, whether held directly or indirectly through
Depositories or Subcustodians.

(b) Unless Custodian has received a Certificate or Instructions to the
contrary or applicable law or the rules of a particular Depository otherwise
require, Custodian shall hold Securities indirectly through a Subcustodian or a
Depository only if (i) the Securities are not subject to any right, charge,
security interest, lien or claim of any kind in favor of such Subcustodian or
such Depository or the creditors or operators of any of them, including a
receiver or trustee in bankruptcy or similar authority, except for a claim of
payment for the safe custody or administration of Securities or for funds
advanced on behalf of a Fund by such Subcustodian or Depository, and (ii)
beneficial ownership of the Securities is freely transferable without the
payment of cash or value other than for safe custody or administration.

2. Promptly after the close of business on each Business Day, Custodian
shall furnish each Fund with confirmations and a summary, on a per Series basis,
of all transfers to or from the Accounts, either hereunder or with any
Subcustodian appointed in accordance with this Agreement during said day. Where
Securities are transferred to an Account for a Series, Custodian shall also by
book-entry or otherwise identify as belonging to such Series a quantity of
Securities in a fungible bulk of Securities registered in the name of Custodian
(or its nominee) or shown on Custodian's account on the books of the Book-Entry
System or a Depository. At least monthly and from time to time, Custodian shall
furnish each Fund with a detailed statement, on a per Series basis, of the
Securities and cash held by Custodian for such Fund.

3. With respect to all Securities held hereunder, Custodian shall, unless
otherwise instructed to the contrary:

(a) Collect and receive all income, dividends, distributions and other
payments and promptly advise each Fund of any such amounts due but not paid;

(b) Give notice to each Fund and present payment and collect the amount
payable upon such Securities which are called, but only if either (i) the
Custodian receives a written notice of such call, or (ii) notice of such call
appears in or is received from a nationally or internationally recognized bond
or corporate action service to which Custodian subscribes;

(c) Unless otherwise instructed by a Fund, Custodian shall retain in the
appropriate account any stock dividends, subscription rights and other non-cash
distributions on the Securities, or the proceeds from the sale of any
distributions. Custodian shall notify a Fund upon the receipt of any non-cash
item;

(d) Present for payment and collect the amount payable upon all Securities
which mature, promptly deposit or withdraw such proceeds as designated therein
and advise each Fund as promptly as practicable of any such amounts due but not
paid;

(e) Surrender Securities in temporary form for definitive Securities;

<PAGE>

(f) Promptly forward to each Fund all notices, proxies, proxy soliciting
materials, consents and other written information (including, without
limitation, notices of tender offers and exchange offers, pendency of calls,
maturities of Securities and expiration of rights) relating to Securities held
pursuant to this Agreement which are actually received by the Custodian, but
without indicating the manner in which such proxies or consents are to be voted;

(g) Execute, as custodian, any certificates of ownership, affidavits,
declarations or other certificates under any tax laws now or hereafter in
effect;

(h) Hold directly or through the Book-Entry System or a Depository or
through a Subcustodian for the account of a Series, all rights and similar
Securities issued with respect to any Securities credited to an Account
hereunder; and

(i) Endorse for collection checks, drafts or other negotiable instruments.

4. (a) Whenever Securities (including, but not limited to, warrants,
options, tenders, options to tender or non-mandatory puts or calls) confer
optional rights on a Fund or provide for discretionary action or alternative
courses of action by a Fund, such Fund shall be responsible for making any
decisions relating thereto and for directing Custodian to act. In order for
Custodian to act, it must receive such Fund's Certificate or Instructions at
Custodian's offices, addressed as Custodian may from time to time request, not
later than noon (New York time) at least two (2) Business Days prior to the last
scheduled date to act with respect to such Securities (or such earlier date or
time as Custodian may notify such Fund). Absent Custodian's timely receipt of
such Certificate or Instructions, Custodian shall not be liable for failure to
take any action relating to or to exercise any rights conferred by such
Securities, unless Custodian has failed to act under sub-paragraph (b) of this
paragraph 4 and such failure constitutes negligence, bad faith or willful
misconduct.

(b) Custodian shall notify each Fund of such rights or discretionary
actions or of the date or dates by when such rights must be exercised or such
action must be taken provided that Custodian has actually received, from the
issuer or the relevant Depository (with respect to Securities issued in the
United States) or from the relevant Subcustodian, Depository or from a
nationally or internationally recognized bond or corporate action service to
which Custodian subscribes, timely notice of such rights or discretionary
corporate action or of the date or dates such rights must be exercised or such
action must be taken. Absent actual receipt of such notice, Custodian shall have
no liability for failing to so notify a Fund.

5. Upon receipt of a Certificate and not otherwise, the Custodian, directly
or through the use of the Book-Entry System or a Depository shall:

(a) Execute and deliver to such persons as may be designated in a
Certificate proxies, consents, authorizations, and any other instruments whereby
the authority of a Fund as owner of any Securities held by the Custodian
hereunder for the Series specified in the Certificate may be exercised;

(b) Deliver any Securities held by the Custodian hereunder for the Series
specified in such Certificate in exchange for other Securities or cash issued or
paid in connection with the liquidation, reorganization, refinancing, merger,
consolidation or recapitalization of any corporation, or the exercise of any
conversion privilege and receive and hold hereunder specifically allocated to
such Series any cash or other Securities received in exchange;

(c) Deliver any Securities held by the Custodian hereunder for the Series
specified in such Certificate to any protective committee, reorganization
committee or other person in connection with the reorganization, refinancing,
merger, consolidation, recapitalization or sale of assets of any corporation,
and receive and hold hereunder specifically allocated to such Series such
certificates of deposit, interim receipts or other instruments or documents as
may be issued to it to evidence such delivery;

(d) Make such transfers or exchanges of the assets of the Series specified
in such Certificate, and take such other steps as shall be stated in such
Certificate to be for the purpose of effectuating any duly authorized plan of
liquidation, reorganization, merger, consolidation or recapitalization of a
Fund; and

(e) Present for payment and collect the amount payable upon Securities not
described elsewhere in this Agreement which may be called as specified in the
Certificate.

<PAGE>

6. All voting rights with respect to Securities, however registered, shall
be exercised by a Fund or its designee. For Securities issued in the United
States, Custodian's only duty shall be to mail to the Funds any documents
(including proxy statements, annual reports and signed proxies) actually
received by Custodian relating to the exercise of such voting rights. With
respect to Securities issued outside of the United States, Custodian's only duty
shall be to provide the appropriate Fund with access to a provider of global
proxy services at such Fund's request. The Fund shall be responsible for all
costs associated with its use of such services.

7. Custodian shall promptly advise a Fund upon Custodian's actual receipt
of notification of the partial redemption, partial payment or other action
affecting less than all Securities of the relevant class. If Custodian, any
Subcustodian, or any Depository holds any Securities in which a Fund has an
interest as part of a fungible mass, Custodian, such Subcustodian or Depository
may select the Securities to participate in such partial redemption, partial
payment or other action in any non-discriminatory manner that it customarily
uses to make such selection.

8. Custodian shall not under any circumstances accept bearer interest
coupons which have been stripped from United States federal, state or local
government or agency securities unless explicitly agreed to by Custodian in
writing.

9. Each Fund shall be liable for all taxes, assessments, duties and other
governmental charges, including any interest or penalty thereto, with respect to
any cash or Securities held on behalf of such Fund or any transaction related
thereto.

ARTICLE V
SETTLEMENT OF SECURITIES TRANSACTIONS

1. For the purpose of settling Securities and transactions, a Fund shall
provide Custodian with sufficient immediately available funds for all
transactions by such time and date as conditions in the relevant market dictate.
As used herein, "sufficient immediately available funds" shall mean sufficient
cash. Custodian shall provide each Fund with immediately available funds each
day which result from the actual settlement of all sale transactions, based upon
advices received by Custodian from its Subcustodians and Depositories. Such
funds shall be in U.S. dollars.

ARTICLE VI
PURCHASE AND SALE OF SECURITIES;
CREDITS TO ACCOUNT

1. Promptly after each purchase or sale of Securities by a Fund, such Fund
shall deliver to Custodian a Certificate or Instructions, or with respect to a
purchase or sale of a Security generally required to be settled on the same day
the purchase or sale is made, Oral Instructions, specifying all information
Custodian may reasonably request to settle such purchase or sale. Custodian
shall account for all purchases and sales of Securities on the actual settlement
date unless otherwise agreed by Custodian.

2. Each Fund understands that when Custodian is instructed to deliver
Securities against payment, delivery of such Securities and receipt of payment
therefor may not be completed simultaneously. Notwithstanding any provision in
this Agreement to the contrary, settlements, payments and deliveries of
Securities may be effected by Custodian or any Subcustodian in accordance with
the customary or established securities trading or securities processing
practices and procedures in the jurisdiction in which the transaction occurs,
including, without limitations, delivery to a purchaser or dealer therefor (or
agent) against receipt with the expectation of receiving later payment for such
Securities. Each Fund assumes full responsibility for all risks, including,
without limitation, credit risks, involved in connection with such delivery of
Securities by Custodian, except the foregoing shall not excuse Custodian's
acting in accordance with such practices or procedures in a manner which
constitutes negligence, bad faith or willful misconduct.

3. Custodian may, as a matter of bookkeeping convenience or by separate
agreement with a Fund, credit the Account with the proceeds from the sale,
redemption or other disposition of Securities or interest, dividends or other
distributions payable on Securities prior to its actual receipt of final payment
therefor. All such credits shall be conditional until Custodian's actual receipt
of final payment and may be reversed by Custodian to the extent that final
payment is not received. Custodian shall notify the appropriate Fund at least 48
hours prior to any such reversal,

<PAGE>

but such reversal shall be made as of the date Custodian determines it has not
received final payment. Payment with respect to a transaction will not be
"final" until Custodian shall have received immediately available funds which
under applicable local law, rule and/or practice are irreversible and not
subject to any security interest, levy or other encumbrance, and which are
specifically applicable to such transaction.

ARTICLE VII
OVERDRAFTS OR INDEBTEDNESS

1. If Custodian should in its sole discretion advance funds on behalf of
any Series which results in an overdraft (including, without any limitations,
any day-light overdraft) because the cash held by Custodian in an Account for
such Series shall be insufficient to pay the total amount payable upon the
purchase of Securities specifically allocated to such Series, as set forth in a
Certificate, Instructions or Oral Instructions, or if an overdraft arises in the
separate Account of a Series for some other reason, including, without
limitation, because of a reversal of a conditional credit, Custodian shall
promptly notify the appropriate Fund of any such advance and the time at which
such advance or overdraft must be paid. Such advance, overdraft or indebtedness
shall be deemed to be a loan made by Custodian to such Fund for such Series
payable on demand and shall bear interest from the date incurred at a rate per
annum agreed by such Fund and Custodian from time to time, or, in the absence of
an agreement, at the rate ordinarily charged by Custodian to its institutional
customers. In addition, each Fund hereby agrees that Custodian shall, to the
maximum extent permitted by law, have a continuing lien, security interest and
security entitlement in and to such Securities of such Series as shall from time
to time have a fair market value equal to the aggregate amount of all overdrafts
of, and advances to, such Series, together with accrued interest, such lien,
security interest and security entitlement to be effective only as long as such
advance, overdraft, or accrued interest thereon remains outstanding. Each Fund
authorizes Custodian to charge any such overdraft or indebtedness, together with
interest due thereon, against any balance of account standing to such Series'
credit on Custodian's books.

ARTICLE VIII
SALE AND REDEMPTION OF SHARES

1. Whenever a Fund shall sell any Shares, it shall deliver to Custodian a
Certificate, Oral Instructions, or Instructions specifying the amount of cash to
be received by Custodian for the sale of such Shares and specifically allocated
to an Account for such Series.

2. Upon receipt of such cash from such Fund's transfer agent, Custodian
shall credit such cash to the Account in the name of the Series for which such
cash was received.

3. Except as provided hereinafter, whenever a Fund desires Custodian to
make payment out of the cash held by Custodian hereunder in connection with a
redemption of any Shares, it shall furnish to Custodian a Certificate, Oral
Instructions, or Instructions specifying the amount to be paid for such Shares,
and Custodian shall make payment to the transfer agent out of the cash held in
the Account of the Series the total amount specified in such Certificate, Oral
Instructions, or Instructions.

4. Notwithstanding the above provisions regarding the redemption of any
Shares, whenever any Shares are redeemed pursuant to any check redemption
privilege which may from time to time be offered by a Fund, Custodian, unless
otherwise instructed by a Certificate, Oral Instructions or Instructions, shall,
upon request of such Fund's transfer agent, charge the amount thereof against
the cash held in the Account of the Series of the Shares being redeemed.

ARTICLE IX
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS

1. Each Fund shall furnish to Custodian a Certificate, Oral Instructions,
or Instructions setting forth with respect to the Series specified therein the
date of the declaration of a dividend or distribution, the total amount payable
and the payable date.

2. Upon the payment date specified in such Certificate, Oral Instructions
or Instructions, Custodian shall pay out of the cash held for the account of
each Series the total amount payable to

<PAGE>

the dividend agent and any sub-dividend agent or co-dividend agent of the
appropriate Fund with respect to such Series specified therein.

ARTICLE X
CONCERNING CUSTODIAN

1. (a) Except as otherwise expressly provided herein, Custodian shall not
be liable for any costs, expenses, damages, liabilities or claims, including
attorneys' and accountants' fees (collectively, "Losses"), incurred by or
asserted against a Fund, except those Losses arising out of the negligence, bad
faith or willful misconduct of Custodian.

(b) With respect to any Losses incurred by a Fund as a result of the acts
or the failure to act by any Depository or any Subcustodian (other than a BNY
Affiliate), Custodian shall take appropriate action to recover such Losses from
such Depository or such Subcustodian; and Custodian's sole responsibility and
liability to such Fund shall be limited to amounts so received from such
Depository or such Subcustodian (exclusive of costs and expenses incurred by
Custodian), except to the extent that (A) any such Subcustodian is a parent,
subsidiary or otherwise affiliated with Custodian, (B) Custodian's negligence,
bad faith or willful misconduct is the direct cause of such Depository or such
Subcustodian's act or omission (it being agreed that Custodian's decision to use
any Subcustodian or any Depository shall not constitute negligence, bad faith,
or willful misconduct), or (C) a transaction or other matter between Custodian
and such Depository or such Subcustodian unrelated to the Funds was the cause of
the loss or damage, in each of which events, Custodian shall be liable for such
Losses.

(c) Custodian shall not be liable to a Fund or any third party for special,
indirect or consequential damages, or lost profits or loss of business, arising
in connection with this Agreement, nor shall BNY or any Subcustodian be liable:
(i) for acting in accordance with any Certificate or Oral Instructions from a
Fund, or any Authorized Person of a Fund, or any Instructions; (ii) for the acts
or omissions of its nominees, correspondents, agents (other than as specified
herein), any brokers or dealers, except to the extent that (A) any such nominee,
correspondent, agent, broker or dealer is a parent, subsidiary or otherwise
affiliated with Custodian, (B) Custodian's negligence, bad faith or willful
misconduct is the direct cause of such nominee's, correspondent's, agent's,
broker's or dealer's act or omission or (C) a transaction or other matter
between Custodian and such nominee, correspondent, agent, broker or dealer
unrelated to the Funds was the cause of the loss or damage, in each of which
events, Custodian shall be liable; (iii) for holding property in any particular
country, including, but not limited to, Losses resulting from nationalization,
expropriation or other governmental actions; regulation of the banking or
securities industry; availability of cash or Securities or market conditions
which prevent the transfer of property or execution of Securities transactions
or affect the value of property; or (iv) for any Losses due to forces beyond the
control of Custodian, including without limitation strikes, work stoppages, acts
of war or terrorism, insurrection, revolution, nuclear or natural catastrophes
or acts of God, or interruptions, loss or malfunctions of utilities,
communications or computer (hardware and software) services caused by any of the
foregoing, or the insolvency of any Subcustodian or of any Depository. Custodian
shall endeavor to promptly notify the Funds when it becomes aware of any
situation outlined above, but shall not be liable for a failure to do so. The
Funds shall not be responsible for temporary delays in the performance of their
duties and obligations hereunder and correspondingly shall not be liable for any
Losses attributable to such delay in consequence of an event as described above
affecting the Funds' principal place of business operations or administration.
For the avoidance of doubt, Custodian shall have no liability for any Losses
arising from the applicability of any law or regulation now or hereafter in
effect, or from the occurrence of any event, which may affect, limit or prevent
the transferability or availability of any cash in the countries in which such
cash is held, except that the foregoing shall not excuse Custodian's acting or
not acting in accordance with any Certificate, Oral Instructions, or
Instructions in a manner which constitutes negligence, bad-faith, or willful
misconduct.

(d) Custodian may enter into subcontracts, agreements and understandings
with any BNY Affiliate, whenever and on such terms and conditions as it deems
necessary or appropriate to perform its services hereunder. No such subcontract,
agreement or understanding shall discharge Custodian from its obligations and
liabilities hereunder.

<PAGE>

(e) Each Fund agrees to indemnify Custodian against and hold Custodian
harmless from any and all Losses sustained or incurred because of or in
connection with this Agreement, including reasonable fees and expenses of
counsel incurred by Custodian in a successful defense of claims by such Fund;
provided, however, that the Funds shall not indemnify Custodian for those Losses
- -------- -------
arising out of Custodian's negligence, bad faith or willful misconduct. This
indemnity shall be a continuing obligation of each Fund, its respective
successors and assigns, notwithstanding the termination of this Agreement.

(f) Custodian agrees to indemnify each Fund against and hold each Fund
harmless from any and all Losses sustained or incurred because of or in
connection with this Agreement, including reasonable fees and expenses of
counsel incurred by the Funds in a successful defense of claims by Custodian,
provided, however, that Custodian shall only indemnify the Funds for those
- -------- -------
Losses arising out of Custodian's negligence, bad faith or willful misconduct,
and provided further, that Custodian shall not be liable to any Fund for
-------- -------
special, indirect or consequential damages, lost profits or loss of business.
This indemnity shall be a continuing obligation of Custodian, its successors and
assigns, notwithstanding the termination of this Agreement.

2. Without limiting the generality of the foregoing, Custodian shall be
under no obligation to inquire into, and shall not be liable (except to the
extent that either of (a) or (b) involves Custodian's negligence, bad faith or
willful misconduct) for:

(a) Any Losses incurred by a Fund or any other person as a result of the
receipt or acceptance of fraudulent, forged or invalid Securities, or Securities
which are otherwise not freely transferable or deliverable without encumbrance
in any relevant market;

(b) The validity of the issue of any Securities purchased or sold by or for
a Fund;

(c) The legality of the purchase, sale or writing of Securities by or for a
Fund, or the propriety of the amount paid or received therefor;

(d) The legality of the sale or redemption of any Shares, or the propriety
of the amount to be received or paid therefor;

(e) The legality of the declaration or payment of any dividend by a Fund;

(f) The legality of any borrowing by a Fund using Securities as collateral;

(g) The legality of any loan of portfolio Securities, nor shall Custodian
be under any duty or obligation to see to it that any cash collateral delivered
to it by a broker, dealer, or financial institution or held by it at any time as
a result of such loan of portfolio Securities of a Fund is adequate collateral
for such Fund against any loss it might sustain as a result of such loan.
Custodian specifically, but not by way of limitation, shall not be under any
duty or obligation periodically to check or notify a Fund that the amount of
such cash collateral held by it for such Fund is sufficient collateral for such
Fund, but such duty or obligation shall be the sole responsibility of such Fund.
In addition, Custodian shall be under no duty or obligation to see that any
broker, dealer or financial institution to which portfolio Securities of a Fund
are lent makes payment to it of any dividends or interest which are payable to
or for the account of such Fund during the period of such loan or at the
termination of such loan, provided, however that Custodian shall promptly notify
such Fund in the event that such dividends or interest are not paid and received
when due;

(h) The sufficiency or value of any amounts of cash and/or Securities held
in any Special Account in connection with transactions by a Fund; whether any
broker, dealer, futures commission merchant or clearing member makes payment to
a Fund of any variation margin payment or similar payment which such Fund may be
entitled to receive from such broker, dealer, futures commission merchant or
clearing member, or whether any payment received by Custodian from any broker,
dealer, futures commission merchant or clearing member is the amount a Fund is
entitled to receive, or to notify such Fund of Custodian's receipt or
non-receipt of any such payment; or

(i) Whether any Securities at any time delivered to, or held by it or by
any Subcustodian, for the account of a Fund and specifically allocated to a
Series are such as properly may be held by such Fund or such Series under the
provisions of its then current prospectus and statement of additional
information or (b) to ascertain whether any transactions by a Fund, whether or
not involving the Custodian, are such transactions as may properly be engaged in
by such Fund.

<PAGE>

3. Custodian may, with respect to questions of law specifically regarding
an Account, obtain the advice of counsel and shall be fully protected with
respect to anything done or omitted by it in good faith in conformity with such
advice.

4. Custodian shall be under no obligation to take action to collect any
amount payable on Securities in default, or if payment is refused after due
demand and presentment, unless and until (i) it shall be directed to take such
action by a Certificate or Instructions and (ii) it shall be assured to its
satisfaction of reimbursement of its reasonable costs and expenses in connection
with any such action.

5. Custodian shall have no duty or responsibility to inquire into, make
recommendations, supervise, or determine the suitability of any transactions
affecting any Account.

6. The Funds shall pay to Custodian the fees and charges as may be
specifically agreed upon from time to time and such other fees and charges at
agreed rates for such services as may be applicable.

7. Custodian has the right to debit a cash Account (or any subaccount
thereof) as agreed upon by Custodian and each Fund in advance for any amount
payable by a Fund in connection with any and all obligations of such Fund to
Custodian.

8. Custodian shall be entitled to rely upon any Certificate or Oral
Instructions actually received by Custodian and reasonably believed by Custodian
to be duly authorized and delivered by an Authorized Person. Each Fund agrees to
forward to Custodian a Certificate or Instructions confirming Oral Instructions
by the close of business of the same day that such Oral Instructions are given
to Custodian. Each Fund agrees that the fact that such confirming Certificate or
Instructions are not received or that a contrary Certificate or contrary
Instructions are received by Custodian shall in no way affect the validity or
enforceability of transactions authorized by such Oral Instructions and effected
by Custodian and under either of the two foregoing circumstances, Custodian
shall promptly notify the Funds. If a Fund elects to transmit Instructions
through an on-line communications system offered by Custodian, such Fund's use
thereof shall be subject to the Terms and Conditions attached hereto as Appendix
I.

9. The books and records pertaining to a Fund which are in possession of
Custodian shall be the property of such Fund. Such books and records shall be
prepared and maintained as required by the 1940 Act and the rules thereunder and
other applicable securities laws and rules and regulations. Such Fund, or such
Fund's authorized representatives, shall have access to such books and records
during Custodian's normal business hours. Upon the reasonable request of a Fund,
copies of any such books and records shall be provided by Custodian to such Fund
or such Fund's authorized representative free of charge. Upon the reasonable
request of a Fund, Custodian shall provide in hard copy or on computer disc, any
records included in any such delivery which are maintained by Custodian on a
computer disc, or are similarly maintained.

10. It is understood that Custodian is authorized to supply any information
regarding the Accounts which is required by any law, regulation or rule now or
hereafter in effect. The Custodian shall provide each Fund with any report
obtained by the Custodian on the system of internal accounting control of a
Depository or OCC, and with such reports on its own systems of internal
accounting control as the Fund may reasonably request from time to time.

11. Neither Custodian nor any Fund shall have any duties or
responsibilities whatsoever except such duties and responsibilities as are
specifically set forth in this Agreement.

ARTICLE XI
TERMINATION

Either party may terminate this Agreement by giving to the other party a
notice in writing specifying the date of such termination, which shall be not
less than ninety (90) days after the date of such notice. In the event such
notice is given by a Fund, it shall be accompanied by a copy of the resolution
of the Board of Trustees of such Fund, certified by the Secretary or any
Assistant Secretary, electing to terminate this Agreement and designating a
successor custodian or custodians, each of which shall be a bank or trust
company having not less than $2,000,000 aggregate capital, surplus and undivided
profits. In the event such notice is given by Custodian, the Fund shall, on or
before the termination date, deliver to Custodian a copy of a resolution of the

<PAGE>

Boards of Trustees of the Fund, certified by the Secretary or any Assistant
Secretary, designating a successor custodian or custodians. In the absence of
such designation by the Fund, Custodian shall designate a successor custodian
which shall be a bank or trust company having not less than $2,000,000 aggregate
capital, surplus and undivided profits, and which shall be satisfactory to the
Funds. Upon the date set forth in such notice, this Agreement shall terminate
with respect to the affected Fund(s), and the Custodian shall upon receipt of a
notice of acceptance by the successor custodian on that date deliver directly to
the successor custodian all Securities and cash then owned by the Fund(s) and
held by it as custodian, after deducting all agreed upon fees, expenses and
other amounts for the payment of reimbursement of which it shall then be
entitled.

If a successor custodian is not designated by the Fund or Custodian in
accordance with the preceding paragraph, the Fund shall upon the date specified
in the notice of termination of this Agreement and upon the delivery by
Custodian of all Securities (other than Securities which cannot be delivered to
the Fund) and cash then owned by the Fund be deemed to be its own custodian and
Custodian shall thereby be relieved of all duties and responsibilities pursuant
to this Agreement, other than the duty with respect to Securities which cannot
be delivered to the Fund to hold such Securities hereunder in accordance with
this Agreement.

ARTICLE XII
MISCELLANEOUS

1. Each Fund agrees to furnish to Custodian a new Certificate of Authorized
Persons in the event of any change in the then present Authorized Persons. Until
such new Certificate is received, Custodian shall be fully protected in acting
upon Certificates or Oral Instructions of such present Authorized Persons.

2. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to Custodian, shall be sufficiently given if
addressed to Custodian and received by it at its offices at One Wall Street, New
York, New York 10286, or at such other place as Custodian may from time to time
designate in writing.

3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to a Fund shall be sufficiently given if addressed to
the Fund and received by it at its offices at P.O. Box 2600, Valley Forge, PA
19482, Attn.: Controller, or at such other place as the Fund may from time to
time designate in writing.

4. Each and every right granted to either party hereunder or under any
other document delivered hereunder or in connection herewith, or allowed it by
law or equity, shall be cumulative and may be exercised from time to time. No
failure on the part of any party to exercise, and no delay in exercising, any
right will operate as a waiver thereof, nor will any single or partial exercise
by either party of any right preclude any other or future exercise thereof or
the exercise of any other right.

5. In case any provision in or obligation under this Agreement shall be
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
thereby. This Agreement, other than the Appendix B hereto, may not be amended or
modified in any manner except by a written agreement executed by both parties.
This Agreement shall extend to and shall be binding upon the parties hereto, and
their respective successors and assigns; provided, however, that this Agreement
-------- -------
shall not be assignable by either party without the written consent of the
other.

6. This Agreement shall be construed in accordance with the substantive
laws of the State of New York, without regard to conflicts of laws principles
thereof. Each Fund and Custodian hereby consent to the jurisdiction of a federal
court situated in New York City, New York in connection with any dispute arising
hereunder. Each Fund hereby irrevocably waives, to the fullest extent permitted
by applicable law, any objection which it may now or hereafter have to the
laying of venue of any such proceeding brought in such a court and any claim
that such proceeding brought in such a court has been brought in an inconvenient
forum. Each Fund and Custodian hereby each irrevocably waives any and all rights
to trial by jury in any legal proceeding arising out of or relating to this
Agreement.

7. Notwithstanding the fact that Custodian may from time to time maintain
an Account in the name of a third party, the parties hereto agree that in
performing hereunder, Custodian is acting

<PAGE>

solely on behalf of the Funds and no contractual or service relationship shall
be deemed to be established hereby between Custodian and any such third party or
any other person.

8. This Agreement is executed on behalf of the Board of Trustees of each
Fund as Trustees and not individually and the obligations of this Agreement are
not binding upon any of the Trustees or shareholders individually but are
binding only upon the assets and property of such Funds; further, the assets of
a particular Series of such Fund shall under no circumstances be charged with
liabilities attributable to any other Series of such Fund and that all persons
extending credit to, or contracting with or having any claim against a
particular Series of such Fund shall look only to the assets of that particular
Series for payment of such credit, contract or claim.

9. The parties hereto agree that each shall treat confidentially the terms
and conditions of this Agreement and all information provided by each party to
the other regarding its business and operations. All confidential information
provided by a party hereto shall be used by any other party hereto solely for
the purpose of rendering or obtaining services pursuant to this Agreement and,
except as may be required in carrying out this Agreement, shall not be disclosed
to any third party without the prior consent of such providing party. The
foregoing shall not be applicable to any information that is publicly available
when provided or thereafter becomes publicly available other than through a
breach of this Agreement, or that is required to be disclosed by or to any
regulatory authority, any external or internal accountant, auditor or counsels
of the parties hereto, by judicial or administration process or otherwise by
applicable law, or to any disclosure made by a party if such party's counsel has
advised that such party could be liable under any applicable law or any judicial
or administrative order or process for a failure to make such disclosure.

10. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.

<PAGE>

IN WITNESS WHEREOF, each Fund and Custodian have caused this Agreement to
be executed by their respective officers, thereunto duly authorized, as of the
day and year first above written.

Each Fund Listed on Appendix A

________________________________

By:_____________________________

Title:__________________________

THE BANK OF NEW YORK COMPANY, INC.

By:______________________________

Title:___________________________

<PAGE>

APPENDIX I

THE BANK OF NEW YORK
ON-LINE COMMUNICATIONS SYSTEM (THE "SYSTEM")

TERMS AND CONDITIONS

1. License; Use. Upon delivery to the Funds of software enabling the Funds
-------------
to obtain access to the System (the "Software"), Custodian grants to each Fund a
personal, nontransferable and nonexclusive license to use the Software solely
for the purpose of transmitting Instructions, receiving reports, making
inquiries or otherwise communicating with Custodian in connection with the
Account(s). Each Fund shall use the Software solely for its own internal and
proper business purposes and not in the operation of a service bureau. Except as
set forth herein, no license or right of any kind is granted to a Fund with
respect to the Software. Each Fund acknowledges that Custodian and its suppliers
retain and have title and exclusive proprietary rights to the Software,
including any trade secrets or other ideas, concepts, know-how, methodologies or
information incorporated therein and the exclusive rights to any copyrights,
trademarks and patents (including registrations and applications for
registration of either), or other statutory or legal protections available in
respect thereof. Each Fund further acknowledges that all or a part of the
Software may be copyrighted or trademarked (or a registration or claim made
therefor) by Custodian or its suppliers. No Fund shall take any action with
respect to the Software inconsistent with the foregoing acknowledgements, nor
shall any Fund attempt to decompile, reverse engineer or modify the Software. No
Fund may copy, sell, lease or provide, directly or indirectly, any of the
Software or any portion thereof to any other person or entity without
Custodian's prior written consent. No Fund may remove any statutory copyright
notice or other notice included in the Software or on any media containing the
Software. Each Fund shall reproduce any such notice on any reproduction of the
Software and shall add statutory copyright notice or other notice to the
Software or media upon Custodian's request. Custodian agrees to provide
reasonable training, instruction manuals and access to Custodian's "help desk"
in connection with each Fund's user support necessary to use the Software. At a
Fund's request, Custodian agrees to permit reasonable testing of the Software by
any Fund.

2. Proprietary Information. The Software, any data base (other than
------------------------
databases relating solely to the assets of a Fund and transactions with respect
thereto) and any proprietary data, processes, information and documentation made
available to the Fund (other than which are or become part of the public domain
or are legally required to be made available to the public) (collectively, the
"Information"), are the exclusive and confidential property of Custodian or its
suppliers. The Fund shall keep the Information confidential by using the same
care and discretion that the Fund uses with respect to its own confidential
property and trade secrets, but not less than reasonable care. Upon termination
of the Agreement or the Software license granted herein for any reason, the Fund
shall return to Custodian any and all copies of the Information which are in its
possession or under its control.

3. Indemnification. Custodian will indemnify and hold harmless the Funds
---------------
with respect to any liability, damages, loss or claim incurred by or brought
against any Fund by reason of any claim or infringement against any patent,
copyright, license or other property right arising out or by reason of a Fund's
use of the Software in the form provided under this Appendix. Custodian at its
own expense will defend such action or claim brought against a Fund to the
extent that it is based on a claim that the Software in the form provided by
Custodian infringes any patents, copyrights, license or other property right,
provided that Custodian is provided with reasonable notice of such claim,
provided that the Fund has not settled, compromised or confessed any such claim
without the Custodian's written consent, in which event Custodian shall have no
liability or obligation hereunder, and provided Fund cooperates with and assists
Custodian in the defense of such claim. Custodian shall have the right to
control the defense of all such claims, lawsuits and other proceedings. If, as a
result of any claim of infringement against any patent, copyright, license or
other property right, Custodian is enjoined from using the Software, or if
Custodian believes that the System is likely to become the subject of a claim of
infringement, Custodian may in its sole discretion either (a) at its expense
procure the right for the Funds to continue to use the Software, or

<PAGE>

(b) replace or modify the Software so as to make it non-infringing, or (c) may
discontinue the license granted herein upon written notice to the Funds.

4. Modifications. Custodian reserves the right to modify the Software at
-------------
its own expense from time to time and a Fund shall install new releases of the
Software as Custodian may direct. Each Fund agrees not to modify or attempt to
modify the Software without Custodian's prior written consent. Each Fund
acknowledges that any modifications to the Software, whether by a Fund or
Custodian and whether with or without Custodian's consent, shall become the
property of Custodian.

5. NO REPRESENTATIONS OR WARRANTIES. CUSTODIAN AND ITS MANUFACTURERS AND
----------------------------------
SUPPLIERS MAKE NO WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE SOFTWARE,
SERVICES OR ANY DATABASE, EXPRESS OR IMPLIED, IN FACT OR IN LAW, INCLUDING BUT
NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE. EACH FUND ACKNOWLEDGES THAT THE SOFTWARE, SERVICES AND ANY DATABASE ARE
PROVIDED "AS IS." IN NO EVENT SHALL CUSTODIAN OR ANY SUPPLIER BE LIABLE FOR ANY
DAMAGES, WHETHER DIRECT, INDIRECT, SPECIAL OR CONSEQUENTIAL, WHICH A FUND MAY
INCUR IN CONNECTION WITH THE SOFTWARE, SERVICES OR ANY DATABASE, EVEN IF
CUSTODIAN OR SUCH SUPPLIER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
IN NO EVENT SHALL CUSTODIAN OR ANY SUPPLIER BE LIABLE FOR ACTS OF GOD, MACHINE
OR COMPUTER BREAKDOWN OR MALFUNCTION, INTERRUPTION OR MALFUNCTION OF
COMMUNICATION FACILITIES, LABOR DIFFICULTIES OR ANY OTHER SIMILAR OR DISSIMILAR
CAUSE BEYOND THEIR REASONABLE CONTROL.

6. Security; Reliance; Unauthorized Use. Each Fund will cause all persons
--------------------------------------
utilizing the Software and System to treat all applicable user and authorization
codes, passwords and authentication keys with extreme care. Custodian is hereby
irrevocably authorized to act in accordance with and rely on Instructions
received by it through the System. Each Fund acknowledges that it is its sole
responsibility to assure that only persons duly authorized by such Fund use the
System and that Custodian shall not be responsible or liable for any
unauthorized use thereof.

7. System Acknowledgements. Custodian shall acknowledge through the System
-----------------------
its receipt of each transmission communicated through the System, and in the
absence of such acknowledgement Custodian shall not be liable for any failure to
act in accordance with such transmission and the Fund may not claim that such
transmission was received by Custodian.

8. EXPORT RESTRICTIONS. EXPORT OF THE SOFTWARE IS PROHIBITED BY UNITED
--------------------
STATES LAW. THE FUNDS MAY NOT UNDER ANY CIRCUMSTANCES RESELL, DIVERT, TRANSFER,
TRANSSHIP OR OTHERWISE DISPOSE OF THE SOFTWARE (IN ANY FORM) IN OR TO ANY OTHER
COUNTRY. IF CUSTODIAN DELIVERED THE SOFTWARE TO THE FUND OUTSIDE OF THE UNITED
STATES, THE SOFTWARE WAS EXPORTED FROM THE UNITED STATES IN ACCORDANCE WITH THE
EXPORTER ADMINISTRATION REGULATIONS. DIVERSION CONTRARY TO U.S. LAW IS
PROHIBITED. Each Fund hereby authorizes Custodian to report its name and address
to government agencies to which Custodian is required to provide such
information by law.

9. ENCRYPTION. Each Fund acknowledges and agrees that encryption may not be
----------
available for every communication through the System, or for all data. Each Fund
agrees that Custodian may deactivate any encryption features at any time,
without prior or contemporaneous notice, or liability, to such Fund, for the
purpose of repairing or troubleshooting the System or the Software. Custodian
shall promptly advise each Fund whenever Custodian has deactivated any
encryption features. Custodian also may deactivate any encryption features,
without liability to a Fund, for the purpose of scheduled maintenance, so long
as it provides reasonable advance notice to the Fund.

<PAGE>

APPENDIX A

FUND: Vanguard Admiral Funds

SERIES/TAX IDENTIFICATION NO.: Vanguard Admiral Treasury Money Market
Fund/23-2696041

FUND: Vanguard Money Market Reserves

SERIES/TAX IDENTIFICATION NO.: Vanguard Prime Money Market Fund/23-6607979

Vanguard Federal Money Market Fund/23-2439136

FUND: Vanguard Treasury Fund

SERIES/TAX IDENTIFICATION NO.: Vanguard Treasury Money Market Fund/23-2439140

FUND: Vanguard Variable Insurance Funds

SERIES/TAX IDENTIFICATION NO.: Money Market Portfolio/23-2585135

<PAGE>

EX-99.BG

CUSTODIAN AGREEMENT

THIS AGREEMENT, dated as of July 20, 1999, between certain open-end
management investment companies (each investment company a "Fund") organized
under the laws of the State of Delaware and registered with the Securities and
Exchange Commission under the 1940 Act, on behalf of certain of their series
(each series a "Series"), and BROWN BROTHERS HARRIMAN & CO., a limited
partnership formed under the laws of the State of New York (BBH&CO. or the
CUSTODIAN),

W I T N E S S E T H:

WHEREAS, the Fund wishes to employ BBH&Co. to act as custodian for the Fund
and to provide related services, all as provided herein, and BBH&Co. is willing
to accept such employment, subject to the terms and conditions herein set forth;

NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the Fund and BBH&Co. hereby agree, as follows:

1. APPOINTMENT OF CUSTODIAN. The Fund hereby appoints BBH&Co. as the Fund's
custodian, and BBH&Co. hereby accepts such appointment. All Investments of the
Fund delivered to the Custodian or its agents or Subcustodians shall be dealt
with as provided in this Agreement. The duties of the Custodian with respect to
the Fund's Investments shall be set forth expressly in this Agreement and any
addenda thereto which duties are generally comprised of safekeeping and various
administrative duties that will be performed in accordance with Instructions and
as reasonably required to effect Instructions.

2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE FUND. The Fund hereby
represents, warrants and covenants each of the following:

2.1 This Agreement has been, and at the time of delivery of each
Instruction such Instruction will have been, duly authorized, executed and
delivered by the Fund. This Agreement does not violate any Applicable Law
or conflict with or constitute a default under the Fund's prospectus or
other organic document, agreement, judgment, order or decree to which the
Fund is a party or by which it or its Investments is bound. The Fund is and
will be in compliance with all laws and regulations applicable to its
operations, investments or activities.

2.2 By providing an Instruction with respect to the first acquisition
of an Investment in a jurisdiction other than the United States of America,
the Fund shall be deemed to have confirmed to the Custodian that the Fund
has (a) assessed and accepted all material Country or Sovereign Risks and
accepted responsibility for their occurrence, (b) made all determinations
required to be made by the Fund under the 1940 Act, and (iii) appropriately
and adequately disclosed to its shareholders, other investors and all
persons who have rights in or to such

<PAGE>

Investments, all material investment risks, including those relating to the
custody and settlement infrastructure or the servicing of securities in
such jurisdiction.

2.3 The Fund shall safeguard and shall solely be responsible for the
safekeeping of any testkeys, identification codes, passwords, other
security devices or statements of account with which the Custodian provides
it. In furtherance and not limitation of the foregoing, in the event the
Fund utilizes any on-line service offered by the Custodian, the Fund and
the Custodian shall be fully responsible for the security of each party's
connecting terminal, access thereto and the proper and authorized use
thereof and the initiation and application of continuing effective
safeguards in respect thereof. Additionally, if the Fund uses any on-line
or similar communications service made available by the Custodian, the Fund
shall be solely responsible for ensuring the security of its access to the
service and for the use of the service, and shall only attempt to access
the service and the Custodian's computer systems as directed by the
Custodian. If the Custodian provides any computer software to the Fund
relating to the services described in this Agreement, the Fund will only
use the software for the purposes for which the Custodian provided the
software to the Fund, and will abide by the license agreement accompanying
the software and any other security policies which the Custodian provides
to the Fund.

3. REPRESENTATION AND WARRANTY OF BBH&CO. BBH&Co. hereby represents and warrants
that this Agreement has been duly authorized, executed and delivered by BBH&Co.
and does not and will not violate any Applicable Law or conflict with or
constitute a default under BBH&Co.'s limited partnership agreement or any
agreement, instrument, judgment, order or decree to which BBH&Co. is a party or
by which it is bound. BBH&Co. also warrants that it will comply with all
applicable laws and regulations in performance of its duties under this
Agreement.

4. INSTRUCTIONS. Unless otherwise explicitly indicated herein, the Custodian
shall perform its duties pursuant to Instructions. As used herein, the term
INSTRUCTION shall mean a directive initiated by the Fund, acting directly or
through its board of directors, officers or other Authorized Persons, which
directive shall conform to the requirements of this Section 4.

4.1 AUTHORIZED PERSONS. For purposes hereof, an AUTHORIZED PERSON
shall be a person or entity authorized to give Instructions for or on
behalf of the Fund by written notices to the Custodian or otherwise in
accordance with procedures delivered to the Custodian. The Custodian may
treat any Authorized Person as having full authority of the Fund to issue
Instructions hereunder unless the notice of authorization contains explicit
limitations as to said authority. The Custodian shall be entitled to rely
upon the authority of Authorized Persons until it receives appropriate
written notice from the Fund to the contrary.

<PAGE>

4.2 FORM OF INSTRUCTION. Each Instruction shall be transmitted by such
secured or authenticated electro-mechanical means as the Custodian shall
make available to the Fund from time to time unless the Fund shall elect to
transmit such Instruction in accordance with Subsections 4.2.1 through
4.2.3 of this Section.

4.2.1 FUND DESIGNATED SECURED-TRANSMISSION METHOD. Instructions
may be transmitted through a secured or tested electro-mechanical
means identified by the Fund or by an Authorized Person entitled to
give Instruction and acknowledged and accepted by the Custodian; it
being understood that such acknowledgment shall authorize the
Custodian to receive and process such means of delivery but shall not
represent a judgment by the Custodian as to the reasonableness or
security of the method determined by the Authorized Person.

4.2.2 WRITTEN INSTRUCTIONS. Instructions may be transmitted in a
writing that bears the manual signature of Authorized Persons.

4.2.3 OTHER FORMS OF INSTRUCTION. Instructions may also be
transmitted by another means determined by the Fund or Authorized
Persons and acknowledged and accepted by the Custodian (subject to the
same limits as to acknowledgements as is contained in Subsection
4.2.1, above) including Instructions given orally or by SWIFT, telex
or telefax (whether tested or untested).

When an Instruction is given by means established under Subsections 4.2.1
through 4.2.3, it shall be the responsibility of the Custodian to use reasonable
care to adhere to any security or other procedures established in writing
between the Custodian and the Authorized Person with respect to such means of
Instruction, but such Authorized Person shall be solely responsible for
determining that the particular means chosen is reasonable under the
circumstances. If the Custodian believes that the means chosen are unreasonable,
it shall promptly notify an Authorized Person. Oral Instructions shall be
binding upon the Custodian only if and when an Authorized Person provides
Instructions that conform to the requirements of this Section 4. Any Oral
Instructions shall promptly thereafter be confirmed in writing by an Authorized
Person (which confirmation may bear the facsimile signature of such Person).
With respect to telefax Instructions, the parties agree and acknowledge that
receipt of legible Instructions cannot be assured and that the Custodian cannot
verify that authorized signatures on telefax Instructions are original or
properly affixed. If the Custodian determines that a telefax Instruction is
illegible, the Custodian shall promptly contact an Authorized Person and request
a legible telefax Instruction. Provided the Custodian has exercised the standard
of care required herein with respect to receipt of Proper Instructions including
but not limited to any applicable security or authorization procedures, the
Custodian shall not be liable for losses or expenses incurred through actions
taken in reliance on inaccurately stated or unauthorized telefax Instructions.
The provisions of Section 4A of the Uniform Commercial Code shall apply to Funds
Transfers performed in accordance with Instructions. In the event that a Funds
Transfer Services Agreement is executed between the Fund or an Authorized Person
and the Custodian, such an agreement shall comprise a designation of form of a
means of delivering Instructions for purposes of this Section 4.2.

4.3 COMPLETENESS AND CONTENTS OF INSTRUCTIONS. The Authorized Person
shall be responsible for assuring the adequacy and accuracy of
Instructions. Particularly, upon any acquisition or disposition or other
dealing in the Fund's Investments and upon any delivery and transfer of any
Investment or moneys, the person initiating such Instruction shall give the
Custodian an Instruction with appropriate detail, including, without
limitation:

<PAGE>

4.3.1 The transaction date and the date and location of
settlement;

4.3.2 The specification of the type of transaction;

4.3.4 A description of the Investments or moneys in question,
including, as appropriate, quantity, price per unit, amount of money
to be received or delivered and currency information. Where an
Instruction is communicated by electronic means, or otherwise where an
Instruction contains an identifying number such as a CUSIP, SEDOL or
ISIN number, the Custodian shall be entitled to rely on such number as
controlling notwithstanding any inconsistency contained in such
Instruction, particularly with respect to Investment description. If
the Custodian is aware of such an inconsistency in an Instruction, it
shall give prompt notice of such inconsistency to an Authorized
Person.

4.3.5 The name of the broker or similar entity concerned with
execution of the transaction.

If the Custodian shall reasonably determine that an Instruction, including a
telefax Instruction, is either unclear or incomplete, the Custodian shall give
prompt notice of such determination to the Fund, and the Fund shall thereupon
amend or otherwise reform such Instruction. In such event, the Custodian shall
have no obligation to take any action in response to the Instruction initially
delivered until the redelivery of an amended or reformed Instruction.

4.4 TIMELINESS OF INSTRUCTIONS. In giving an Instruction, the Fund
shall take into consideration delays which may occur due to the involvement
of a Subcustodian or agent, differences in time zones, and other factors
particular to a given market, exchange or issuer. When the Custodian has
established specific timing requirements or deadlines with respect to
particular classes of Instruction and the Custodian has notified the Fund
of such timing requirements and deadlines, or when an Instruction is
received by the Custodian at such a time that it could not reasonably be
expected to have acted on such Instruction due to time zone differences or
other factors beyond its reasonable control, the execution of any
Instruction received by the Custodian after such deadline or at such time
(including any modification or revocation of a previous Instruction) shall
be at the risk of the Fund.

5. SAFEKEEPING OF FUND ASSETS. The Custodian shall hold Investments
delivered to it or Subcustodians for the Fund in accordance with the provisions
of this Section. The Custodian will identify the Investments on its books as
belonging to each individual Series. The Custodian shall not be responsible for
(a) the safekeeping of Investments not delivered or that are not caused to be
issued to it or its Subcustodians; or, (b) pre-existing faults or defects in
Investments that are delivered to the Custodian, or its Subcustodians. The
Custodian or Subcustodian shall give prompt

<PAGE>

notice to the Fund of any pre-existing faults or defects that it is aware of.
The Custodian is hereby authorized to hold with itself or a Subcustodian, and to
record in one or more accounts, all Investments delivered to and accepted by the
Custodian, any Subcustodian or their respective agents pursuant to an
Instruction or in consequence of any corporate action. Each such account is a
"Securities Account" (as such term is defined in the Uniform Commercial Code as
in effect from time to time in the State of New York (the "UCC")). The Custodian
shall hold Investments for the account of the Fund and shall segregate
Investments from assets belonging to the Custodian and shall cause its
Subcustodians to segregate Investments from assets belonging to the Subcustodian
in an account held for the Fund or in an account maintained by the Subcustodian
generally for non-proprietary assets of the Custodian.

The parties acknowledge that the Custodian and Subcustodians each are
acting under this Agreement as a "Securities Intermediary" (as such term is used
and defined in the UCC). For the purposes of this Agreement, the parties hereto
acknowledge and agree that (i) any Investment held by the Custodian or any
Subcustodian shall constitute a "Financial Asset" (as such term is used and
defined in the UCC), (ii) the Fund may at any time issue one or more
"Entitlement Orders" (as such term is used and defined in the UCC) with respect
to the Fund's Investments, (iii) upon the Custodian's or Subcustodian's receipt
of an Investment for the benefit of the Fund, the Custodian or Subcustodian, as
the case may be, shall credit to the Fund a "Securitiy Entitlement" (as such
term is used and defined in the UCC), and (iv) the Fund shall have a Security
Entitlement with respect to all Investments held by the Custodian or
Subcustodian.

5.1 USE OF SECURITIES DEPOSITORIES. The Custodian may deposit and
maintain Investments in any Securities Depository, either directly or
through one or more Subcustodians

<PAGE>

appointed by the Custodian. Investments held in a Securities Depository
shall be held (a) subject to the agreement, rules, statement of terms and
conditions or other document or conditions effective between the Securities
Depository and the Custodian or the Subcustodian, as the case may be, and
(b) in an account for the Fund or in bulk segregation in an account
maintained for the non-proprietary assets of the entity holding such
Investments in the Depository. If market practice or the rules and
regulations of the Securities Depository prevent the Custodian, the
Subcustodian or (any agent of either) from holding its client assets in
such a separate account, the Custodian, the Subcustodian or other agent
shall as appropriate segregate such Investments for benefit of the Fund or
for benefit of clients of the Custodian generally on its own books.

5.2 CERTIFICATED ASSETS. Investments which are certificated may be
held in registered or bearer form: (a) in the Custodian's vault; (b) in the
vault of a Subcustodian or agent of the Custodian or a Subcustodian; or (c)
in an account maintained by the Custodian, Subcustodian or agent at a
Securities Depository; all in accordance with customary market practice in
the jurisdiction in which any Investments are held.

5.3 REGISTERED ASSETS. Investments which are registered may be
registered in the name of the Custodian, a Subcustodian, or in the name of
the Fund or a nominee for any of the foregoing, and may be held in any
manner set forth in paragraph 5.2 above with or without any identification
of fiduciary capacity in such registration.

5.4 BOOK ENTRY ASSETS. Investments which are represented by book-entry
may be so held in an account maintained by the Book-Entry Agent on behalf
of the Custodian, a Subcustodian or another agent of the Custodian, or a
Securities Depository.

5.5 REPLACEMENT OF LOST INVESTMENTS. In the event of a loss of
Investments for which the Custodian is responsible under the terms of this
Agreement, the Custodian shall promptly replace such Investment, or in the
event that such replacement cannot be effected, the Custodian shall pay to
the Fund the fair market value of such Investment based on the last
available price as of the close of business in the relevant market on the
date that a claim was first made to the Custodian with respect to such
loss.

6. ADMINISTRATIVE DUTIES OF THE CUSTODIAN. The Custodian shall perform the
following administrative duties with respect to Investments of the Fund.

6.1 PURCHASE OF INVESTMENTS. Pursuant to Instruction, Investments
purchased for the account of the Fund shall be paid for (a) against
delivery thereof to the Custodian or a Subcustodian, as the case may be,
either directly or through a Clearing Corporation or a Securities
Depository (in accordance with the rules of such Securities Depository or
such Clearing Corporation), or (b) otherwise in accordance with an
Instruction, Applicable Law, generally accepted trade practices, or the
terms of the instrument representing such Investment.

6.2 SALE OF INVESTMENTS. Pursuant to Instruction, Investments sold for
the account of the Fund shall be delivered (a) against payment therefor in
cash, by check or by bank wire

<PAGE>

transfer, (b) by credit to the account of the Custodian or the applicable
Subcustodian, as the case may be, with a Clearing Corporation or a
Securities Depository (in accordance with the rules of such Securities
Depository or such Clearing Corporation), or (c) otherwise in accordance
with an Instruction, Applicable Law, generally accepted trade practices, or
the terms of the instrument representing such Investment.

6.3 DELIVERY IN CONNECTION WITH BORROWINGS OF THE FUND OR OTHER
COLLATERAL AND MARGIN REQUIREMENTS. Pursuant to Instruction, the Custodian
may deliver Investments or cash of the Fund in connection with borrowings
and other collateral and margin requirements.

6.4 FUTURES AND OPTIONS. If, pursuant to an Instruction, the Custodian
shall become a party to an agreement with the Fund and a futures commission
merchant regarding margin (TRI-PARTY AGREEMENT), the Custodian shall (a)
receive and retain, to the extent the same are provided to the Custodian,
confirmations or other documents evidencing the purchase or sale by the
Fund of exchange-traded futures contracts and commodity options, (b) when
required by such Tri-Party Agreement, deposit and maintain in an account
opened pursuant to such Agreement (MARGIN ACCOUNT), segregated either
physically or by book-entry in a Securities Depository for the benefit of
any futures commission merchant, such Investments as the Fund shall have
designated as initial, maintenance or variation "margin" deposits or other
collateral intended to secure the Fund's performance of its obligations
under the terms of any exchange-traded futures contracts and commodity
options; and (c) thereafter pay, release or transfer Investments into or
out of the Margin Account in accordance with the provisions of the such
Agreement. Alternatively, the Custodian may deliver Investments, in
accordance with an Instruction, to a futures commission merchant for
purposes of margin requirements in accordance with Rule 17f-6. The
Custodian shall in no event be responsible for but shall give prompt notice
to the Fund in the event it becomes aware of the acts and omissions of any
futures commission merchant to whom Investments are delivered pursuant to
this Section; for the sufficiency of Investments held in any Margin
Account; or, for the performance of any terms of any exchange-traded
futures contracts and commodity options.

6.5 CONTRACTUAL OBLIGATIONS AND SIMILAR INVESTMENTS. From time to
time, the Fund's Investments may include Investments that are not ownership
interests as may be represented by certificate (whether registered or
bearer), by entry in a Securities Depository or by book entry agent,
registrar or similar agent for recording ownership interests in the
relevant Investment. If the Fund shall at any time acquire such
Investments, including without limitation deposit obligations, loan
participations, repurchase agreements and derivative arrangements, the
Custodian shall (a) receive and retain, to the extent the same are provided
to the Custodian, confirmations or other documents evidencing the
arrangement; and (b) perform on the Fund's account in accordance with the
terms of the applicable arrangement, but only to the extent directed to do
so by Instruction. The Custodian shall have no responsibility for
agreements running to the Fund as to which it is not a party other than to
retain, to the extent the same are provided to the Custodian, documents or
copies of documents evidencing the arrangement and, in accordance with
Instruction, to include such arrangements in reports made to the Fund.

6.6 EXCHANGE OF SECURITIES. Unless otherwise directed by Instruction,
the Custodian shall: (a) exchange securities held for the account of the
Fund for other securities in connection with any reorganization,
recapitalization, conversion, split-up, change of par value of shares or
similar event, and (b) deposit any such securities in accordance with the
terms of any reorganization or protective plan.

<PAGE>

6.7 SURRENDER OF SECURITIES. Unless otherwise directed by Instruction,
the Custodian may surrender securities: (a) in temporary form for
definitive securities; (b) for transfer into the name of an entity
allowable under Section 5.3; and (c) for a different number of certificates
or instruments representing the same number of shares or the same principal
amount of indebtedness.

6.8 RIGHTS, WARRANTS, ETC. Pursuant to Instruction, the Custodian
shall (a) deliver warrants, puts, calls, rights or similar securities to
the issuer or trustee thereof, or to any agent of such issuer or trustee,
for purposes of exercising such rights or selling such securities, and (b)
deposit securities in response to any invitation for the tender thereof.

6.9 MANDATORY CORPORATE ACTIONS. Unless otherwise directed by
Instruction, the Custodian shall: (a) comply with the terms of all
mandatory or compulsory exchanges, calls, tenders, redemptions or similar
rights of securities ownership affecting securities held on the Fund's
account and promptly notify the Fund of such action, and (b) collect all
stock dividends, rights and other items of like nature with respect to such
securities.

6.10 INCOME COLLECTION. Unless otherwise directed by Instruction, the
Custodian shall collect any amount due and payable to the Fund with respect
to Investments and promptly credit the amount collected to a Principal or
Agency Account; provided, however, that the Custodian shall not be
responsible for: (a) the collection of amounts due and payable with respect
to Investments that are in default, or (b) the collection of cash or share
entitlements with respect to Investments that are not registered in the
name of the Custodian or its Sub-custodians. The Custodian is hereby
authorized to endorse and deliver any instrument required to be so endorsed
and delivered to effect collection of any amount due and payable to the
Fund with respect to Investments.

6.11 OWNERSHIP CERTIFICATES AND DISCLOSURE OF THE FUND'S INTEREST. The
Custodian is hereby authorized to execute on behalf of the Fund ownership
certificates, affidavits or other disclosure required under Applicable Law
or established market practice in connection with the receipt of income,
capital gains or other payments by the Fund with respect to Investments, or
in connection with the sale, purchase or ownership of Investments.

6.12 PROXY MATERIALS. The Custodian shall deliver, or cause to be
delivered promptly, to the Fund proxy forms, notices of meeting, and any
other notices or announcements materially affecting or relating to
Investments received by the Custodian or any nominee.

6.13 TAX RECLAIM SERVICE. The Custodian will apply for a reduction of
withholding tax and any refund of any tax paid or tax credits which apply
in each applicable market in respect of income payments on Investments for
the benefit of the Fund which the Custodian believes may be available to
such Fund. Where such reports are available, the Custodian shall
periodically report to the Fund concerning the making of applications for a
reduction of withholding tax and refund of any tax paid or tax credits
which apply in each applicable market in respect of income payments on
Investments for the benefit of the Fund.

The provision of tax reclaim services by the Custodian is conditional
upon the Custodian receiving from the Fund or, where required, the
beneficial owner of Investments (a) a declaration of its identity and place
of residence and (b) certain other documentation (pro forma copies of which
are available from the Custodian). The Custodian shall use reasonable means
to

<PAGE>

advise the Fund of the declarations, documentation and information which
the Fund is to provide to the Custodian in order for the Custodian to
provide the tax reclaim services described herein. The Fund shall provide
to the Custodian such documentation and information as it may require in
connection with taxation, and warrants that, when given, this information
shall be true and correct in every respect, not misleading in any way, and
contain all material information. The Fund undertakes to notify the
Custodian immediately if any such information requires updating or
amendment. The Custodian shall perform tax reclaim services only with
respect to taxation by the revenue authorities of the countries notified to
the Fund.

The Fund confirms that the Custodian is authorized to deduct from any
cash received or credited to an account any taxes or levies required by any
revenue or governmental authority for whatever reasons in respect of the
accounts. The Custodian and the Fund shall promptly notify the other
regarding any change in the Fund's tax status with respect to withholding
taxes of which it becomes aware. It is acknowledged that the Custodian does
not offer tax advice and that the Fund should consult with its tax adviser
as to tax matters.

6.14 OTHER DEALINGS. The Custodian shall otherwise act as directed by
Instruction, including without limitation effecting the free payments of
moneys or the free delivery of securities, provided that such Instruction
shall indicate the purpose of such payment or delivery and that the
Custodian shall record the party to whom such payment or delivery is made.

The Custodian shall attend to all nondiscretionary details in
connection with the sale or purchase or other administration of
Investments, except as otherwise directed by an Instruction.

In fulfilling the duties set forth in Sections 6.6 through 6.10 above, the
Custodian shall provide promptly to the Fund all material information pertaining
to a corporate action which the Custodian actually receives. The Custodian shall
not be responsible for the completeness or accuracy of such information as long
as the Custodian has shown due diligence in attempting to receive complete and
accurate information. Any advance credit of cash or shares expected to be
received as a result of any corporate action shall be subject to actual
collection and may, when the Custodian deems collection unlikely, be reversed by
the Custodian. The Custodian shall notify the Fund at least 48 hours prior to
any such reversal.

The Custodian may at any time or times in its discretion appoint (and may
at any time remove) agents (other than Subcustodians) to carry out some or all
of the administrative provisions of this Agreement (AGENTS), provided, however,
that the appointment of such agent shall not relieve the

<PAGE>

Custodian of its administrative obligations under this Agreement.

7. CASH ACCOUNTS, DEPOSITS AND MONEY MOVEMENTS. Subject to the terms and
conditions set forth in this Section 7, the Fund hereby authorizes the Custodian
to open and maintain, with itself or with Subcustodians, cash accounts in United
States Dollars, in such other currencies as are the currencies of the countries
in which the Fund maintains Investments or in such other currencies as the Fund
shall from time to time request by Instruction.

7.1 TYPES OF CASH ACCOUNTS. Cash accounts opened on the books of the
Custodian (PRINCIPAL ACCOUNTS) shall be opened in the name of the Fund.
Such accounts collectively shall be a deposit obligation of the Custodian
and shall be subject to the terms of this Section 7 and the general
liability provisions contained in Section 9. Cash accounts opened on the
books of a Subcustodian may be opened in the name of the Fund or the
Custodian or in the name of the Custodian for its customers generally
(AGENCY ACCOUNTS). Such deposits shall be obligations of the Subcustodian
and shall be treated as an Investment of the Fund. Accordingly, the
Custodian shall be responsible for exercising reasonable care in the
administration of such accounts but shall not be liable for their repayment
in the event such Subcustodian, by reason of its bankruptcy, insolvency or
sovereign risk/force majeure, fails to make repayment unless (a) such
Subcustodian is a parent, subsidiary or otherwise affiliated with the
Custodian or (b) the Custodian's negligence, bad faith or willful
misconduct was the direct cause of the Subcustodian failing to make the
repayment or (c) a transaction or other matter between the Custodian and
Subcustodian unrelated to the Funds was the cause of the Subcustodian
failing to make repayment. Under (a), (b) or (c) the Custodian shall be
liable for the repayment.

7.2 PAYMENTS AND CREDITS WITH RESPECT TO THE CASH ACCOUNTS. The
Custodian shall make payments from or deposits to any of said accounts in
the course of carrying out its administrative duties, including but not
limited to income collection with respect to the Fund's Investments, and
otherwise in accordance with Instructions. The Custodian and its
Subcustodians shall be required to credit amounts to the cash accounts only
when moneys are actually received in cleared funds in accordance with
banking practice in the country and currency of deposit. Any credit made to
any Principal or Agency Account before actual receipt of cleared funds
shall be provisional and may be reversed by the Custodian in the event such
payment is not actually collected. The Custodian shall provide the Fund
with at least 48 hours notice prior to any such reversal. Unless otherwise
specifically agreed in writing by the Custodian or any Subcustodian, all
deposits shall be payable only at the branch of the Custodian or
Subcustodian where the deposit is made or carried.

7.3 CURRENCY AND RELATED RISKS. The Fund bears risks of holding or
transacting in any currency. The Custodian shall not be liable for any loss
or damage arising from the applicability of any law or regulation now or
hereafter in effect, or from the occurrence of any event, which may delay
or affect the transferability, convertibility or availability of any
currency in the country (a) in which such Principal or Agency Accounts are
maintained or (b) in which such currency is issued, and in no event shall
the Custodian be obligated to make payment of a deposit denominated in a
currency during the period during which its transferability, convertibility
or

<PAGE>

availability has been affected by any such law, regulation or event. The
Custodian shall notify the Fund in the event it is aware that the Fund is
entering into a transaction that is, to its knowledge, illegal under local
law. Without limiting the generality of the foregoing, neither the
Custodian nor any Subcustodian shall be required to repay any deposit made
at a foreign branch of either the Custodian or Subcustodian if such branch
cannot repay the deposit due to a cause for which the Custodian would not
be responsible in accordance with the terms of Section 9 of this Agreement
unless the Custodian or such Subcustodian expressly agrees in writing to
repay the deposit under such circumstances. All currency transactions in
any account opened pursuant to this Agreement are subject to exchange
control regulations of the United States and of the country where such
currency is the lawful currency or where the account is maintained. Any
taxes, costs, charges or fees imposed on the convertibility of a currency
held by the Fund shall be for the account of the Fund unless such taxes,
costs, charges or fees were due to an error by the Custodian or
Subcustodian.

7.4 FOREIGN EXCHANGE TRANSACTIONS. The Custodian shall, subject to the
terms of this Section, settle foreign exchange transactions (including
contracts, futures, options and options on futures) on behalf and for the
account of the Fund with such currency brokers or banking institutions,
including Subcustodians, as the Fund may direct pursuant to Instructions.
The Custodian may act as principal in any foreign exchange transaction with
the Fund in accordance with Section 7.4.2 of this Agreement. The
obligations of the Custodian in respect of all foreign exchange
transactions (whether or not the Custodian shall act as principal in such
transaction) shall be contingent on the free, unencumbered transferability
of the currency transacted on the actual settlement date of the
transaction.

7.4.1 THIRD PARTY FOREIGN EXCHANGE TRANSACTIONS. The Custodian
shall process foreign exchange transactions (including without
limitation contracts, futures, options, and options on futures), where
any third party acts as principal counterparty to the Fund on the same
basis it performs duties as agent for the Fund with respect to any
other of the Fund's Investments. Accordingly the Custodian shall only
be responsible for delivering or receiving currency on behalf of the
Fund in respect of such contracts pursuant to Instructions. The
Custodian shall not be responsible for the failure of any counterparty
(including any Subcustodian) in such agency transaction to perform its
obligations thereunder unless (a) such counterparty is a parent,
subsidiary or otherwise affiliated with the Custodian or (b) the
Custodian's negligence, bad faith or willful misconduct was the direct
cause of the counterparty failing to perform its obligations or (c) a
transaction or other matter between the Custodian and the counterparty
unrelated to the Funds was the cause of the counterparty's failure to
perform. Under (a), (b), or (c), the Custodian shall be liable. The
Custodian (a) shall transmit cash and Instructions to and from the
currency broker or banking institution with which a foreign exchange
contract or option has been executed pursuant hereto, (b) may make
free outgoing payments of cash in the form of Dollars or foreign
currency without receiving confirmation of a foreign exchange contract
or option or confirmation that the countervalue currency completing
the foreign exchange contract has been delivered or received or that
the option has been delivered or received, and (c) shall hold all
confirmations, certificates and other documents and agreements
received by the Custodian and evidencing or relating to such foreign
exchange transactions in safekeeping. The Fund accepts full
responsibility for its use of third-party foreign exchange dealers and
for execution of said foreign exchange contracts and options and
understands that the Fund shall be responsible for any and all costs
and interest charges which may be incurred by the Fund or the
Custodian as a result of the failure or delay of third parties to
deliver foreign exchange. The Custodian or Subcustodian shall
respectively be responsible for any failure or delay of third parties
to deliver foreign exchange when either of those parties respectively
is a parent, subsidiary or otherwise affiliated with such third party.

<PAGE>

7.4.2 FOREIGN EXCHANGE WITH THE CUSTODIAN AS PRINCIPAL. The
Custodian may undertake foreign exchange transactions with the Fund as
principal as the Custodian and the Fund may agree from time to time.
In such event, the foreign exchange transaction will be performed in
accordance with the particular agreement of the parties, or in the
event a principal foreign exchange transaction is initiated by
Instruction in the absence of specific agreement, such transaction
will be performed in accordance with the usual commercial terms of the
Custodian.

7.5 DELAYS. If no event of Force Majeure shall have occurred and be
continuing and in the event that a delay shall have been caused by the
negligence, bad faith or willful misconduct of the Custodian in carrying
out an Instruction to credit or transfer cash, the Custodian shall be
liable to the Fund: (a) with respect to Principal Accounts, for interest to
be calculated at the rate customarily paid on such deposit and currency by
the Custodian on overnight deposits at the time the delay occurs for the
period from the day when the transfer should have been effected until the
day it is in fact effected; and, (b) with respect to Agency Accounts, for
interest to be calculated at the rate customarily paid on such deposit and
currency by the Subcustodian on overnight deposits at the time the delay
occurs for the period from the day when the transfer should have been
effected until the day it is in fact effected. The Custodian shall not be
liable for delays in carrying out such Instructions to transfer cash which
are not due to the Custodian's own negligence, bad faith or willful
misconduct. The Custodian shall make reasonable attempts where possible to
mitigate any such delays.

7.6 ADVANCES. If, for any reason in the conduct of its safekeeping
duties pursuant to Section 5 hereof or its administration of the Fund's
assets pursuant to Section 6 hereof, the Custodian or any Subcustodian
advances monies to facilitate settlement or otherwise for benefit of the
Fund (whether or not any Principal or Agency Account shall be overdrawn
either during, or at the end of, any Business Day), Fund hereby does:

7.6.1 grant to the Custodian a continuing security interest in
certain Investments (as mutually agreed from time to time) as security
for such Advance such security interest to be effective only as long
as such Advance remain outstanding; and,

7.6.2 agree that the Custodian may secure the resulting Advance
by perfecting a security interest in such Investments under Applicable
Law.

The Custodian shall promptly notify the Fund of any such Advances and the
time at which such Advances must be repaid. Such Advances shall be deemed a
loan payable on demand, bearing interest at the rate customarily charged by
the Custodian on similar loans.

Neither the Custodian nor any Subcustodian shall be obligated to
advance monies to the Fund, and in the event that such Advance occurs, any
transaction giving rise to an Advance shall be for the account and risk of
the Fund and shall not be deemed to be a transaction undertaken by the
Custodian for its own account and risk. If such Advance shall have been
made by a Subcustodian or any other person, the Custodian may assign any
rights granted to the Custodian hereunder to such Subcustodian or other
person. If the Fund shall fail to repay when due the principal balance of
an Advance and accrued and unpaid interest thereon, the Custodian or its
assignee, as the case may be, shall be entitled to utilize the available
cash balance in the applicable Series Agency or Principal Account and to
dispose of any agreed upon Investments to the extent necessary to recover
payment of all principal of, and interest on, such

<PAGE>

Advance in full. The Custodian may assign any rights it has hereunder to a
Subcustodian or third party. Any security interest in Investments taken
hereunder shall be treated as Financial Assets credited to Securities
Accounts under Articles 8 and 9 of the UCC. Accordingly, the Custodian
shall have the rights and benefits of a secured creditor that is a
Securities Intermediary under such Articles 8 and 9.

7.7 INTEGRATED ACCOUNT. For purposes hereof, deposits maintained in
all Principal Accounts for each Series of each Fund (whether or not
denominated in Dollars) shall collectively constitute a single and
indivisible current account with respect to that series' obligations to the
Custodian, or its assignee, and balances in such Principal Accounts shall
be available for satisfaction of that series' obligations under this
Section 7. The Custodian shall further have a right of offset against the
balances in any Agency Account maintained hereunder to the extent that the
aggregate of all Principal Accounts is overdrawn.

8. SUBCUSTODIANS AND SECURITIES DEPOSITORIES. Subject to the provisions
hereinafter set forth in this Section 8, the Fund hereby authorizes the
Custodian to utilize Securities Depositories to act on behalf of the Fund and to
appoint from time to time and to utilize Subcustodians. With respect to
securities and funds held by a Subcustodian, either directly or indirectly
(including by a Securities Depository or Clearing Corporation), notwithstanding
any provisions of this Agreement to the contrary, payment for securities
purchased and delivery of securities sold may be made prior to receipt of
securities or payment, respectively, and securities or payment may be received
in a form, in accordance with (a) governmental regulations, (b) rules of
Securities Depositories and clearing agencies, (c) generally accepted trade
practice in the applicable local market, (d) the terms and characteristics of
the particular Investment, or (e) the terms of Instructions.

8.1 DOMESTIC SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian
may deposit and/or maintain, either directly or through one or more agents
appointed by the Custodian, Investments of the Fund in any Securities
Depository in the United States, including The Depository Trust Company,
provided such Depository meets applicable requirements of the Federal
Reserve Bank or of the Securities and Exchange Commission. The Custodian
may, at any time and from time to time, appoint any bank as defined in
Section 2(a)(5) of the 1940 Act meeting the requirements of a custodian
under Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act on behalf of the Fund as a Subcustodian for purposes of
holding Investments of the Fund in the United States.

8.2 FOREIGN SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian
may

<PAGE>

deposit and/or maintain non-U.S. Investments of the Fund in any non-U.S.
Securities Depository provided such Securities Depository meets the
requirements of an "eligible foreign custodian" under Rule 17f-5
promulgated under the 1940 Act, or any successor rule or regulation ("Rule
17f-5") or which by order of the Securities and Exchange Commission is
exempted therefrom. Additionally, the Custodian may, at any time and from
time to time, appoint (a) any bank, trust company or other entity meeting
the requirements of an ELIGIBLE FOREIGN CUSTODIAN under Rule 17f-5 or which
by order of the Securities and Exchange Commission is exempted therefrom,
or (b) any bank as defined in Section 2(a)(5) of the 1940 Act meeting the
requirements of a custodian under Section 17(f) of the 1940 Act and the
rules and regulations thereunder, to act on behalf of the Fund as a
Subcustodian for purposes of holding Investments of the Fund outside the
United States. Such appointment of foreign Subcustodians shall be subject
to approval of the Fund in accordance with Subsections 8.2.1 and 8.2.2.

8.2.1 BOARD APPROVAL OF FOREIGN SUBCUSTODIANS. Unless and except
to the extent that review of certain matters concerning the
appointment of Subcustodians shall have been delegated to the
Custodian pursuant to Subsection 8.2.2, the Custodian shall, prior to
the appointment of any Subcustodian for purposes of holding
Investments of the Fund outside the United States, obtain written
confirmation of the approval of the Board of Trustees or Directors of
the Fund with respect to (a) the identity of a Subcustodian, (b) the
country or countries in which, and the Securities Depositories, if
any, through which, any proposed Subcustodian is authorized to hold
Investments of the Fund, and (c) the Subcustodian agreement which
shall govern such appointment. Each such duly approved country,
Subcustodian and Securities Depository shall be listed on Appendix A
attached hereto as the same may from time to time be amended.

8.2.2 DELEGATION OF BOARD REVIEW OF SUBCUSTODIANS. From time to
time, the Custodian may offer to perform, and the Fund may accept that
the Custodian perform, certain reviews of Subcustodians and of
Subcustodian Contracts as delegate of the Fund's Board. In such event,
the Custodian's duties and obligations with respect to this delegated
review will be performed in accordance with the terms of Exhibit 2 of
this Agreement [the separate Delegation Agreement between the Fund and
the Custodian].

8.3 RESPONSIBILITY FOR SUBCUSTODIANS. The Custodian shall be liable to
the Fund for any loss or damage to the Fund caused by or resulting from the
acts or omissions of any Subcustodian to the extent that such acts or
omissions would be deemed to be negligence, gross negligence, willful
misconduct or bad faith in accordance with the terms of the relevant
subcustodian agreement under the laws, circumstances and practices
prevailing in the place where the act or omission occurred. In the
countries indicated in Appendix B to this Agreement, the liability of the
Custodian shall be subject to the additional condition that the Custodian
actually recovers such loss or damage from the Subcustodian.

8.4 NEW COUNTRIES. The Fund shall be responsible for informing the
Custodian sufficiently in advance of a proposed investment which is to be
held in a country in which no Subcustodian is authorized to act in order
that the Custodian shall, if it deems appropriate to do so, have sufficient
time to establish a subcustodial arrangement in accordance herewith. In the
event, however, the Custodian is unable to establish such arrangements
prior to the time such Investment is to be acquired, the Custodian is
authorized to designate at its discretion a local safekeeping agent, and
the use of such local safekeeping agent shall be at the sole risk of the
Fund, and accordingly the Custodian shall be responsible to the Fund for
the actions of such agent if and only to the extent the Custodian shall
have recovered from such agent for any

<PAGE>

damages caused the Fund by such agent. Notwithstanding the above, the
Custodian shall be liable to the extent that (a) such local safekeeping
agent is a parent, subsidiary or otherwise affiliated with the Custodian or
(b) the Custodian's negligence, bad faith or willful misconduct is the
direct cause of the local safekeeping agent failing to make the repayment
or (c) a transaction or other matter between the Custodian and the local
safekeeping agent unrelated to the Funds was the cause of the loss or
damage. Under (a), (b) or (c) the Custodian shall be liable.

9. RESPONSIBILITY OF THE CUSTODIAN. In performing its duties and obligations
hereunder, the Custodian shall use reasonable care under the facts and
circumstances prevailing in the market where performance is effected. Subject to
the specific provisions of this Section, the Custodian shall be liable for any
direct damage incurred by the Fund in consequence of the Custodian's negligence,
bad faith or willful misconduct. The Custodian hereby indemnifies the Fund and
agrees to hold the Fund harmless from and against all claims and liabilities,
including counsel fees and taxes, incurred or assessed against the Fund to the
extent that such claim or liability arises from the negligence, gross
negligence, bad faith or willful misconduct on the part of the Custodian itself.
If a Fund gives written notice of claim to the Custodian, the Custodian shall
promptly give a written response to the Fund. Not more than 30 days following
the date of such response, unless the Custodian shall not be liable, the
Custodian will pay the amount of such claim or reimburse the Fund for any
payment made by the Fund in respect thereof. In no event shall the Custodian be
liable hereunder for any special, indirect, punitive or consequential damages
arising out of, pursuant to or in connection with this Agreement even if the
Custodian has been advised of the possibility of such damages. It is agreed that
the Custodian shall have no duty to assess the risks inherent in the Fund's
Investments or to provide investment advice with respect to such Investments and
that the Fund as principal shall bear any risks attendant to particular
Investments such as failure of counterparty or issuer. The Custodian shall
provide the Fund with its Market Practice Reports in

<PAGE>

respect of any foreign market where a Series shall place and maintain
Investments. In addition, the Custodian shall provide the Fund with access to
its Global Updates which address topical "market" events.

9.1 FORCE MAJEURE. The Custodian shall not be responsible for any
failure to perform its duties and correspondingly, shall not be liable for
any loss, cost, damage or expense attributable to its failure to perform in
consequence of a force majeure event. FORCE MAJEURE shall mean any
circumstance or event which is beyond the reasonable control of the
Custodian, a Subcustodian or any agent of the Custodian or a Subcustodian
and which adversely affects the performance by the above parties, including
any event caused by, arising out of or involving (a) an act of God, (b)
accident, fire, water damage or explosion, (c) any third party computer,
system or other equipment failure or malfunction caused by any computer
virus or the malfunction or failure of any communications medium, (d) any
third party interruption of the power supply or other utility service, (e)
any strike or other work stoppage, whether partial or total, (f) any delay
or disruption resulting from or reflecting the occurrence of any Sovereign
Risk, (g) any disruption of, or suspension of trading in, the securities,
commodities or foreign exchange markets, whether or not resulting from or
reflecting the occurrence of any Sovereign Risk, (h) any encumbrance on the
transferability of a currency or a currency position on the actual
settlement date of a foreign exchange transaction, whether or not resulting
from or reflecting the occurrence of any Sovereign Risk, or (i) any other
cause similarly beyond the reasonable control of the Custodian, provided
always that this shall not affect the Custodian's duty to indemnify the
Fund for other losses, claims and liabilities for which the Custodian is
bound to indemnify the Fund pursuant to Section 9. The Custodian and the
Subcustodian shall take reasonable steps to mitigate additional damages.
The Custodian shall notify the Fund when it becomes aware of a situation
outlined above. The Fund shall not be responsible for temporary delays in
the performance of its duties and obligations and correspondingly shall not
be liable for any loss, cost, damage or expense attributable to such delay
in consequence of a Force Majeure event as described above affecting the
Fund's principal place of business operations or administration; provided
always that this shall not affect the Fund's duty to indemnify the
Custodian for losses, claims and liabilities for which the Fund is bound to
indemnify the Custodian pursuant to Section 10.

9.2 LIMITATIONS OF PERFORMANCE. The Custodian shall not be responsible
under this Agreement for any failure to perform its duties, and shall not
be liable hereunder for any loss or damage in association with such failure
to perform, for or in consequence of the following causes:

9.2.1 COUNTRY RISK. COUNTRY RISK shall mean, with respect to the
acquisition, ownership, settlement or custody of Investments in a
jurisdiction, all risks relating to, or arising in consequence of,
systemic and markets factors affecting the acquisition, payment for or
ownership of Investments including (a) the prevalence of crime and
corruption, (b) the inaccuracy or unreliability of business and
financial information, (c) the instability or volatility of banking
and financial systems, or the absence or inadequacy of an
infrastructure to support such systems, (d) custody and settlement
infrastructure of the market in which such Investments are transacted
and held, (e) the acts, omissions and operation of any Securities
Depository, (f) the risk of the bankruptcy or insolvency of banking
agents, counterparties to cash and securities transactions, registrars
or transfer agents, and (g) the existence of market conditions which
prevent the orderly execution or

<PAGE>

settlement of transactions or which affect the value of assets. The
Custodian shall provide the Fund with its Market Practice Reports in
respect of any foreign market where a Series shall place and maintain
Investments. Such Market Practice Report may describe some of the
Country Risks outlined above. In addition, the Custodian shall provide
the Fund with access to its Global Updates which may describe some
timely Country Risks outlined above.

9.2.2 SOVEREIGN RISK. SOVEREIGN RISK shall mean, in respect of
any jurisdiction, including the United States of America, where
Investments are acquired or held hereunder or under a Subcustody
Agreement, (a) any act of war, terrorism, riot, insurrection or civil
commotion, (b) the imposition of any investment, repatriation or
exchange control restrictions by any Governmental Authority, (c) the
confiscation, expropriation or nationalization of any Investments by
any Governmental Authority, whether de facto or de jure, (d) any
devaluation or revaluation of the currency, (e) the imposition of
taxes, levies or other charges affecting Investments, (f) any change
in the Applicable Law, or (g) any other economic or political risk
incurred or experienced. The Custodian shall provide the Fund with its
Market Practice Reports in respect of any foreign market where a
Series shall place and maintain Investments. Such Market Practice
Report may describe some of the Sovereign Risks outlined above. In
addition, the Custodian shall provide the Fund with access to its
Global Updates which may describe some timely Sovereign Risks outlined
above.

9.3 LIMITATIONS ON LIABILITY. The Custodian shall not be liable for
any loss, claim, damage or other liability arising from the following
causes:

9.3.1 FAILURE OF THIRD PARTIES. The failure of any third party
including: (a) any issuer of Investments or book-entry or other agent
of and issuer; (b) any counterparty with respect to any Investment,
including any issuer of exchange-traded or other futures, option,
derivative or commodities contract; (c) failure of an Investment
Advisor, Foreign Custody Manager or other agent of the Fund; or (d)
failure of other third parties similarly beyond the control or choice
of the Custodian unless: (a) any such third party is a parent,
subsidiary or otherwise affiliated with the Custodian or (b) the
Custodian's negligence, bad faith or willful misconduct was the direct
cause of the failure of the third party or (c) a transaction or other
matter between the Custodian and the third party unrelated to the
Funds was the cause of the failure of the third party. Under (a), (b),
or (c) the Custodian shall be liable for the failure of such third
party.

9.3.2 INFORMATION SOURCES. The Custodian may rely upon
information received from issuers of Investments or agents of such
issuers, information received from Subcustodians and from other
commercially reasonable sources such as commercial data bases and the
like, but shall not be responsible for specific inaccuracies in such
information, provided that the Custodian has relied upon such
information in good faith, or for the failure of any commercially
reasonable information provider.

9.3.3 RELIANCE ON INSTRUCTION. Action by the Custodian or the
Subcustodian in accordance with an Instruction, even when such action
conflicts with, or is contrary to any provision of, the Fund's
declaration of trust, certificate of incorporation or by-laws,
Applicable Law, or actions by the trustees, directors or shareholders
of the Fund. If the Custodian or Subcustodian is aware of any of the
above, it shall promptly contact an officer of the Fund.

<PAGE>

9.3.4 RESTRICTED SECURITIES. The limitations inherent in the
rights, transferability or similar investment characteristics of a
given Investment of the Fund.

10.INDEMNIFICATION. The Fund hereby indemnifies the Custodian and each
Subcustodian, and their respective agents, nominees and the partners, employees,
officers and directors, and agrees to hold each of them harmless from and
against all claims and liabilities, including counsel fees and taxes, incurred
or assessed against any of them in connection with the performance of this
Agreement and any Instruction except to the extent that such claim or liability
is the result of the negligence, bad faith or willful misconduct of the
Custodian or Subcustodian. If a Subcustodian or any other person indemnified
under the preceding sentence, gives written notice of claim to the Custodian,
the Custodian shall promptly give written notice to the Fund. Not more than
thirty days following the date of such notice, unless the Custodian shall be
liable under Section 8 hereof in respect of such claim, the Fund will pay the
amount of such claim or reimburse the Custodian for any payment made by the
Custodian in respect thereof.

11. REPORTS AND RECORDS. The Custodian shall:

11.1 create and maintain records relating to the performance of its
obligations under this Agreement;

11.2 make available to the Fund, its auditors, agents and employees,
upon reasonable request and during normal business hours of the Custodian,
all records maintained by the Custodian pursuant to Section 11.1 above,
subject, however, to all reasonable security requirements of the Custodian
then applicable to the records of its custody customers generally; and

11.3 make available to the Fund all Electronic Reports; it being
understood that the Custodian shall not be liable hereunder for the
inaccuracy or incompleteness thereof or for errors in any information
included therein except to the extent that such inaccuracy, incompleteness
or errors are the result of the Custodian's negligence, bad faith or
willful misconduct.

<PAGE>

All such reports and records shall, to the extent applicable, be maintained
and preserved in conformity with the 1940 Act and the rules and regulations
thereunder. The Fund shall examine all records, howsoever produced or
transmitted, promptly upon receipt thereof and notify the Custodian promptly of
any discrepancy or error therein. Unless the Fund delivers written notice of any
such discrepancy or error within a reasonable time after its receipt thereof,
such records shall be deemed to be true and accurate. It is understood that the
Custodian now obtains and will in the future obtain information on the value of
assets from outside sources which may be utilized in certain reports made
available to the Fund. The Custodian deems such sources to be reliable but it is
acknowledged and agreed that the Custodian does not verify nor represent nor
warrant as to the accuracy or completeness of such information and accordingly
shall be without liability in selecting and using such sources and furnishing
such information as long as the Custodian has shown due diligence in attempting
to receive complete and accurate information.

12. MISCELLANEOUS.

12.1 PROXIES, ETC. The Fund will promptly execute and deliver, upon
request, such proxies, powers of attorney or other instruments as may be
necessary or desirable for the Custodian to provide, or to cause any
Subcustodian to provide, custody services.

12.2 ENTIRE AGREEMENT. Except as specifically provided herein, this
Agreement constitutes the entire agreement between the Fund and the
Custodian with respect to the subject matter hereof. Accordingly, this
Agreement supersedes any custody agreement or other oral or written
agreements heretofore in effect between the Fund and the Custodian with
respect to the custody of the Fund's Investments.

12.3 WAIVER AND AMENDMENT. No provision of this Agreement may be
waived, amended or modified, and no addendum to this Agreement shall be or
become effective, or be waived, amended or modified, except by an
instrument in writing executed by the party against which enforcement of
such waiver, amendment or modification is sought; provided, however, that
an Instruction shall, whether or not such Instruction shall constitute a
waiver, amendment or modification for purposes hereof, shall be deemed to
have been accepted by the Custodian when it commences actions pursuant
thereto or in accordance therewith.

<PAGE>

12.4 GOVERNING LAW AND JURISDICTION. THIS AGREEMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH, AND BE GOVERNED BY THE LAWS OF, THE STATE OF NEW YORK,
WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW OF SUCH STATE.

12.5 NOTICES. Notices and other writings contemplated by this
Agreement, other than Instructions, shall be delivered (a) by hand, (b) by
first class registered or certified mail, postage prepaid, return receipt
requested, (c) by a nationally recognized overnight courier or (d) by
facsimile transmission, provided that any notice or other writing sent by
facsimile transmission shall also be mailed, postage prepaid, to the party
to whom such notice is addressed. All such notices shall be addressed, as
follows:

If to the Fund:

Vanguard Group

P.O. Box 2600

Valley Forge, PA 19482

Attn: Controller

Telephone: (610) 669-6106

Facsimile: (610) 669-6112

If to the Custodian:

Brown Brothers Harriman & Co.

40 Water Street

Boston, Massachusetts 02109

Attn: Manager, Investor Services Department

Telephone: (617) 772-1818

Facsimile: (617) 772-2263,

or such other address as the Fund or the Custodian may have designated in
writing to the other.

12.6 HEADINGS. Paragraph headings included herein are for convenience
of reference only and shall not modify, define, expand or limit any of the
terms or provisions hereof.

12.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement
shall become effective when one or more counterparts have been signed and
delivered by the Fund and the Custodian.

12.8 CONFIDENTIALITY. The parties hereto agree that each shall treat
confidentially the terms and conditions of this Agreement and all
information provided by each party to the other regarding its business and
operations. All confidential information provided by a party hereto shall
be used by any other party hereto solely for the purpose of rendering or
obtaining services pursuant to this Agreement and, except as may be
required in carrying out this Agreement, shall not be disclosed to any
third party without the prior consent of such providing party. The

<PAGE>

foregoing shall not be applicable to any information that is publicly
available when provided or thereafter becomes publicly available other than
through a breach of this Agreement, or that is required to be disclosed by
or to any bank examiner of the Custodian or any Subcustodian, any
Regulatory Authority, any auditor of the parties hereto, or by judicial or
administrative process or otherwise by Applicable Law.

12.9 COUNSEL. In fulfilling its duties hereunder, the Custodian shall
be entitled to receive and act upon the advice of (i) counsel regularly
retained by the Custodian in respect of such matters, (ii) counsel for the
Fund or (iii) such counsel as the Fund and the Custodian may agree upon,
with respect to all matters, and the Custodian shall be without liability
for any action reasonably taken or omitted pursuant to such advice (except
to the extent that such action was due to the Custodian's negligence, bad
faith or willful misconduct).

13. DEFINITIONS. The following defined terms will have the respective meanings
set forth below.

13.1 ADVANCE shall mean any extension of credit by or through the
Custodian or by or through any Subcustodian and shall include amounts paid
to third parties for the account of the Fund or in discharge of any
expense, tax or other item payable by the Fund.

13.2 AGENCY ACCOUNT shall mean any deposit account opened on the books
of a Subcustodian or other banking institution in accordance with Section
7.1.

13.3 AGENT shall have the meaning set forth in the last paragraph of
Section 6.

13.4 APPLICABLE LAW shall mean with respect to each jurisdiction, all
(a) laws, statutes, treaties, regulations, guidelines (or their
equivalents); (b) orders, interpretations licenses and permits; and (c)
judgments, decrees, injunctions writs, orders and similar actions by a
court of competent jurisdiction; compliance with which is required or
customarily observed in such jurisdiction.

13.5 AUTHORIZED PERSON shall mean any person or entity authorized to
give Instructions on behalf of the Fund in accordance with Section 4.1.

13.6 BOOK-ENTRY AGENT shall mean an entity acting as agent for the
issuer of Investments for purposes of recording ownership or similar
entitlement to Investments, including without limitation a transfer agent
or registrar.

13.7 CLEARING CORPORATION shall mean any entity or system established
for purposes of providing securities settlement and movement and associated
functions for a given market.

13.8 DELEGATION AGREEMENT shall mean any separate agreement entered
into between the Custodian and the Fund or its authorized representative
with respect to certain matters concerning the appointment and
administration of Subcustodians delegated to the Custodian pursuant to Rule
17f-5 under the 1940 Act.

<PAGE>

13.9 FOREIGN CUSTODY MANAGER shall mean the Fund's foreign custody
manager appointed pursuant to Rule 17f-5 under the 1940 Act.

13.10 FUNDS TRANSFER SERVICES AGREEMENT shall mean any separate
agreement entered into between the Custodian and the Fund or its authorized
representative with respect to certain matters concerning the processing of
payment orders from Principal Accounts of the Fund.

13.11 INSTRUCTION(S) shall have the meaning assigned in Section 4.

13.12 INVESTMENT ADVISOR shall mean any investment advisor as defined
in Section 202 (a)(11) of the Investment Advisors Act of 1940.

13.13 INVESTMENTS shall mean any investment asset of the Fund,
including without limitation securities, bonds, notes, and debentures as
well as receivables, derivatives, contractual rights or entitlements and
other intangible assets.

13.14 MARGIN ACCOUNT shall have the meaning set forth in Section 6.4
hereof.

13.15 PRINCIPAL ACCOUNT shall mean deposit accounts of the Fund
carried on the books of BBH&Co. as principal in accordance with Section 7.

13.16 SAFEKEEPING ACCOUNT shall mean an account established on the
books of the Custodian or any Subcustodian for purposes of segregating the
interests of the Fund (or clients of the Custodian or Subcustodian) from
the assets of the Custodian or any Subcustodian.

13.17 SECURITIES DEPOSITORY shall mean a central or book entry system
or agency established under Applicable Law for purposes of recording the
ownership and/or entitlement to investment securities for a given market.

13.18 SUBCUSTODIAN shall mean each foreign bank appointed by the
Custodian pursuant to Section 8, but shall not include Securities
Depositories.

13.19 TRI-PARTY AGREEMENT shall have the meaning set forth in Section
6.4 hereof.

13.20 1940 ACT shall mean the Investment Company Act of 1940.

14. COMPENSATION. The Fund agrees to pay to the Custodian for its services under
this Agreement such amount as may be agreed upon in writing from time to time
("Fee Schedule").

15. SEVERAL OBLIGATIONS OF THE FUNDS: With respect to any obligations of the
Funds and their

<PAGE>

related accounts arising hereunder, the Custodian shall look for payment or
satisfaction of any such obligation solely to the assets and property of the
Fund and such accounts to which such obligation relates as though each
investment company had separately contracted with the Custodian by separate
written instrument with respect to each Fund and its accounts. The Custodian and
each Subcustodian realize that the Fund is comprised of one or more Series. The
Custodian and each Subcustodian agree that it will honor and abide by any and
all Instructions or notices which the Custodian or Subcustodian may receive from
time to time from the Fund with respect to designating, marking, allocating or
otherwise attributing securities to or for the benefit of any one Series.

16. TERMINATION. This Agreement may be terminated by either party in accordance
with the provisions of this Section. The provisions of this Agreement and any
other rights or obligations incurred or accrued by any party hereto prior to
termination of this Agreement shall survive any termination of this Agreement.

This Agreement may be terminated as to one or more Funds (but less than all
the Funds) by delivery of an amended Schedule 1 deleting all such Funds, in
which case termination as to the deleted Funds shall take effect seventy-five
days after the date of such delivery. The execution and delivery of an amended
Schedule 1 which deletes one or more Funds, shall constitute a termination
hereof only with respect to such deleted Funds, shall be governed by the
provisions of Section 16.2 as to the identification of a successor custodian and
the delivery of Investments of the Fund so deleted to such successor custodian,
and shall not affect the obligations of the Custodian hereunder with respect to
the other Funds set forth in Schedule 1, as amended from time to time.

<PAGE>

16.1 NOTICE AND EFFECT. This Agreement may be terminated by either
party by written notice effective no sooner than seventy-five days
following the date that notice to such effect shall be delivered to other
party at its address set forth in paragraph 12.5 hereof.

16.2 SUCCESSOR CUSTODIAN. In the event of the appointment of a
successor custodian, it is agreed that the Investments of the Fund held by
the Custodian or any Subcustodian shall be delivered to the successor
custodian in accordance with reasonable Instructions. The Custodian agrees
to cooperate with the Fund in the execution of documents and performance of
other actions necessary or desirable in order to facilitate the succession
of the new custodian. If no successor custodian shall be appointed, the
Custodian shall in like manner transfer the Fund's Investments in
accordance with Instructions.

16.3 DELAYED SUCCESSION. If no Instruction has been given as of the
effective date of termination, Custodian may at any time on or after such
termination date and upon ten days written notice to the Fund either (a)
deliver the Investments of the Fund held hereunder to the Fund at the
address designated for receipt of notices hereunder; or (b) deliver any
investments held hereunder to a bank or trust company having a
capitalization of $2M USD equivalent and operating under the Applicable law
of the jurisdiction where such Investments are located, such delivery to be
at the risk of the Fund. In the event that Investments or moneys of the
Fund remain in the custody of the Custodian or its Subcustodians after the
date of termination owing to the failure of the Fund to issue Instructions
with respect to their disposition or owing to the fact that such
disposition could not be accomplished in accordance with such Instructions
despite diligent efforts of the Custodian, the Custodian shall be entitled
to compensation for its services with respect to such Investments and
moneys during such period as the Custodian or its Subcustodians retain
possession of such items and the provisions of this Agreement shall remain
in full force and effect until disposition in accordance with this Section
is accomplished.

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed as of the date first above written.

By:_______________________________

On behalf of the Funds listed on Schedule 1 hereto

BROWN BROTHERS HARRIMAN & CO.

By:_______________________________

<PAGE>

SCHEDULE 1 TO

CUSTODIAN AGREEMENT

BETWEEN

CERTAIN OPEN-END MANAGEMENT INVESTMENT COMPANIES ("FUNDS")

and BROWN BROTHERS HARRIMAN & CO.

The following is a list of Funds and their Series for which the Custodian shall
serve under a Custodian Agreement dated as of July 20, 1999 (the "Agreement"):

The following series of Vanguard International Equity Index Funds:

Vanguard Emerging Markets Stock Index Fund

Vanguard European Stock Index Fund

Vanguard Pacific Stock Index Fund

The following series of Vanguard Horizon Funds:

Vanguard Global Asset Allocation Fund

Vanguard Global Equity Fund

The following series of Vanguard Trustees' Equity Fund:

Vanguard International Value Fund

Vanguard Variable Insurance Funds-International Portfolio

IN WITNESS WHEREOF, each of the parties hereto has caused this Appendix to be
executed in its name and on behalf of such Funds.

FUNDS BROWN BROTHERS HARRIMAN & CO.
By: _________________________ By: ____________________________

Name: _______________________ Name: __________________________

Title: ______________________ Title: _________________________

<PAGE>

BROWN BROTHERS HARRIMAN & CO. - GLOBAL CUSTODY NETWORK
VANGUARD
APPENDIX A

COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
ARGENTINA CITIBANK NA, BUENOS AIRES Caja de Valores
CRYL
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96

AUSTRALIA NATIONAL AUSTRALIA BANK LTD. (NAB) Austraclear Ltd.
CHESS
National Australia Bank Agt. 5/1/85 Reserve Bank of Australia
Agreement Amendment 2/13/92
Omnibus Amendment 11/22/93

AUSTRIA BANK AUSTRIA AG OeKB
Creditanstalt Bankverein Agreement 12/18/89
Omnibus Amendment 1/17/94

BAHRAIN HSBC BANK MIDDLE EAST, BAHRAIN FOR None
HONGKONG & SHANGHAI BANKING CORP. LTD. (HSBC)
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
BBME Supplement 5/14/96
Side Letter Agreement dated 7/28/97

BANGLADESH STANDARD CHARTERED BANK (SCB), DHAKA None
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96

BELGIUM BANK BRUSSELS LAMBERT (BBL) CIK
National Bank of Belgium
Banque Bruxelles Lambert Agt. 11/15/90
Omnibus Amendment 3/1/94

BERMUDA BANK OF N.T. BUTTERFIELD & SON LTD. None
The Bank of N.T. Butterfield & Son Ltd.
Agreement 5/27/97

BOTSWANA STANBIC BANK BOTSWANA LTD FOR STANDARD None
BANK OF SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 9/29/97

BRAZIL BANKBOSTON NA, SAO PAULO CBLC
CLC
The First National Bank of Boston Agreement 1/5/88
Omnibus Amendment 2/22/94
Amendment 7/29/96

BULGARIA ING BANK NV, SOFIA CDAD
BNB
ING Bank N.V. Agreement 9/15/97

Page 1 of 8

<PAGE>

COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
CANADA ROYAL BANK OF CANADA (RBC) Bank of Canada
The Royal Bank of Canada Agreement CDS
2/23/96

CHILE CITIBANK NA, SANTIAGO DCV
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96

CHINA STANDARD CHARTERED BANK (SCB), SHANGHAI SSCCRC
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96

CHINA STANDARD CHARTERED BANK (SCB), SHENZHEN SSCC
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96

COLOMBIA CITITRUST COLOMBIA SA, SOCIEDAD DCV
FIDUCIARIA FOR CITIBANK NA Deceval
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, N.A./Cititrust Colombia Agreement 12/2/91
Citibank, N.A. Subsidiary Amendment 10/19/95

CROATIA BANK AUSTRIA CREDITANSTALT CROATIA DD SDA
FOR BANK AUSTRIA AG
Creditanstalt AG / Bank Austria Creditanstalt
Croatia d.d. Agt. 9/1/98

CYPRUS CYPRUS POPULAR BANK LTD. None
***Requires additional documentation prior to investment.***
Cyprus Popular Bank Ltd. Agt. 2/18/98

CZECH REPUBLIC CITIBANK AS FOR CITIBANK NA SCP
Czech National Bank
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank NA / Citibank AS Agreement 6/24/96

DENMARK DEN DANSKE BANK VP
Den Danske Bank Agreement 1/1/89
Omnibus Amendment 12/1/93

ECUADOR CITIBANK NA, QUITO Decevale
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, Quito Side Letter 7/3/95

EGYPT CITIBANK NA, CAIRO MCSD
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96

Page 2 of 8

<PAGE>

COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
FINLAND MERITA BANK PLC FCSD
Union Bank of Finland Agreement 2/27/89
Omnibus Amendment 4/6/94

FRANCE CREDIT AGRICOLE INDOSUEZ (CAI) SICOVAM
Banque de France
Banque Indosuez Agreement 7/19/90
Omnibus Amendment 3/10/94

GERMANY DRESDNER BANK DBC
Dresdner Bank Agreement 10/6/95

GHANA MERCHANT BANK (GHANA) LIMITED FOR None
STANDARD BANK OF SOUTH AFRICA (SBSA)
***Requires additional documentation prior to investment.***
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment Pending

GREECE CITIBANK NA, ATHENS Apothetirion Titlon A.E.
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96

HONG KONG HONGKONG & SHANGHAI BANKING HKSCC
CORPORATION LTD. CMU
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96

HUNGARY CITIBANK BUDAPEST RT. FOR CITIBANK NA KELER Ltd.
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, N.A. Subsidiary Amendment 10/19/95
Citibank, N.A. / Citibank Budapest Agreement 6/23/92
Citibank, N.A. / Citibank Budapest Amendment 9/29/92

INDIA DEUTSCHE BANK AG, MUMBAI NSDL
Deutsche Bank Agreement 2/19/96

INDONESIA CITIBANK NA, JAKARTA None
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96

IRELAND ALLIED IRISH BANKS PLC (AIB) CrestCo.
Allied Irish Banks Agreement 1/10/89 Gilt Settlement Office
Omnibus Amendment 4/8/94

ISRAEL BANK HAPOALIM BM TASE Clearinghouse Ltd.
Bank Hapoalim Agreement 8/27/92

ITALY BANCA COMMERCIALE ITALIANA (BCI) Monte Titoli
Banca D'Italia
Banca Commerciale Italiana Agreement 5/8/89
Agreement Amendment 10/8/93
Omnibus Amendment 12/14/93

Page 3 of 8

<PAGE>

COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
JAPAN BANK OF TOKYO - MITSUBISHI, LTD. (BTM) JASDEC
Bank of Japan
Bank of Tokyo - Mitsubishi Agreement 6/17/96

JORDAN HSBC BANK MIDDLE EAST, JORDAN FOR None
HONGKONG & SHANGHAI BANKING CORP. (HSBC)
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
BBME Supplement 5/14/96
Side letter Agreement dated 7/28/97

KENYA STANBIC BANK KENYA LIMITED FOR STANDARD None
BANK OF SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 9/29/97

KOREA CITIBANK NA, SEOUL KSD
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, Seoul Agreement Supplement 10/28/94

LEBANON HSBC BANK MIDDLE EAST, LEBANON FOR Midclear
HONGKONG & SHANGHAI BANKING CORP. (HSBC)
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
BBME Supplement 5/14/96
Side letter Agreement dated 7/28/97

LUXEMBOURG KREDIETBANK LUXEMBOURG (KBL) Cedel
Kredietbank Luxembourg Agt. 4/7/98

MALAYSIA HONGKONG BANK MALAYSIA BERHAD (HBMB) Bank Negara Malaysia
FOR HONGKONG SHANGHAI BANKING CORP. MCD
(HSBC) Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
Malaysia Subsidiary Supplement 5/23/94
Side letter Agreement dated 7/28/97

MAURITIUS HONGKONG & SHANGHAI BANKING CORP. LTD. CDS
(HSBC), PORT LOUIS
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96

MEXICO CITIBANK MEXICO SA FOR CITIBANK NA Indeval
Banco de Mexico
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank Mexico, S.A. Amendment 2/28/95

Page 4 of 8

<PAGE>

COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
MOROCCO CITIBANK MAGHREB, CASABLANCA FOR MAROCLEAR
CITIBANK NA Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Side Letter Agreement Pending

NAMIBIA STANDARD BANK NAMIBIA FOR STANDARD OF None
BANK SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 10/3/96

NETHERLANDS ABN-AMRO BANK NV NECIGEF
ABN-AMRO Agreement 12/19/88
MEESPIERSON NV
MeesPierson NV Agreement 6/4/99

NEW ZEALAND NATIONAL AUSTRALIA BANK LTD. (NAB), NZCSD
AUCKLAND
National Australia Bank Agt. 5/1/85
Agreement Amendment 2/13/92
Omnibus Amendment 11/22/93
New Zealand Addendum 3/7/89

NORWAY DEN NORSKE BANK VPS
Den norske Bank Agreement 11/16/94

OMAN HSBC BANK MIDDLE EAST, OMAN FOR Muscat Depository &
HONGKONG & SHANGHAI BANKING CORP. LTD. Securities & Registration
(HSBC)
Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Co.
Omnibus Supplement 12/29/93
Schedule 5/14/96
BBME Supplement 5/14/96
Side letter Agreement dated 7/28/97

PAKISTAN STANDARD CHARTERED BANK (SCB), KARACHI CDC
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96

PERU CITIBANK NA, LIMA CAVALI
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96

PHILIPPINES CITIBANK NA, MANILA PCD
Citibank, N.A., New York Agt. 7/16/81 ROSS
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96

POLAND CITIBANK (POLAND) SA FOR CITIBANK NA NDS
National Bank of Poland
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank Subsidiary Amendment 10/30/95
Citibank, N.A. / Citibank Poland S.A. Agt. 11/6/92

Page 5 of 8

<PAGE>

COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
PORTUGAL BANCO COMERCIAL PORTUGUES SA (BCP) CVM
Banco Comercial Portugues 5/18/98

ROMANIA ING BANK NV, BUCHAREST SNCDD
BSE
ING Bank N.V. Agreement 9/29/97 NBR

RUSSIA BANK CREDIT SUISSE FIRST BOSTON AO VTB
(CSFB AO)FOR CREDIT SUISSE, ZURICH NDC
***Requires signed Amendment to the Custodian Agreement prior
to investment.***
Credit Suisse, Zurich Agreement 4/30/96

CITIBANK T/O FOR CITIBANK NA
***Requires signed Amendment to the Custodian Agreement prior
to investment.***
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, N.A. Subsidiary Amendment 10/19/95
Citibank N.A. / Citibank T/O Agt. 6/16/97
Side Letter Agt. 8/18/97

SINGAPORE HONGKONG & SHANGHAI BANKING CORP. LTD. CDP
(HSBC), SINGAPORE
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96

SLOVAKIA ING BANK NV, BRATISLAVA SCP
National Bank of Slovakia
ING Bank N.V. Agreement 9/1/98

SLOVENIA BANK AUSTRIA DD LJUBLJANA KDD
Master Subcustodian Agreement 4/17/98
Amendment dated 4/17/98
Amendment dated 10/14/98

SOUTH AFRICA STANDARD BANK OF SOUTH AFRICA (SBSA) CD
Standard Bank of South Africa Agreement 3/11/94

SPAIN BANCO SANTANDER CENTRAL HISPANO SA SCLV
(BSCH)
Banco de Espana
Banco de Santander Agreement 12/14/88

SRI LANKA HONGKONG & SHANGHAI BANKING CORP. LTD. CDS
(HSBC), Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96

SWAZILAND STANDARD BANK SWAZILAND LTD FOR None
STANDARD BANK OF SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 9/29/97

SWEDEN SKANDINAVISKA ENSKILDA BANKEN (SEB) VPC
Skandinaviska Enskilden Banken Agreement 2/20/89
Omnibus Amendment 12/3/93

Page 6 of 8

<PAGE>

COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
SWITZERLAND UBS AG SIS
Union Bank of Switzerland Agreement 12/20/88
Omnibus Amendment 11/29/94

TAIWAN STANDARD CHARTERED BANK (SCB), TAIPEI TSCD
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96

THAILAND HONGKONG & SHANGHAI BANKING CORP. LTD. TSDC
(HSBC),
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96

TRANSNATIONAL BROWN BROTHERS HARRIMAN & CO. (BBH&CO.) Cedel
Euroclear

TURKEY CITIBANK NA, ISTANBUL Takasbank
Central Bank of Turkey
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96

UNITED KINGDOM HSBC BANK PLC CGO
Midland Bank Agreement 8/8/90 CrestCo.
Omnibus Amendment 12/15/93 CMO

URUGUAY BANKBOSTON NA, MONTEVIDEO None
The First National Bank of Boston Agreement 1/5/88
Omnibus Amendment 2/22/94
Amendment 7/29/96

VENEZUELA CITIBANK NA, CARACAS CVV
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96

ZAMBIA STANBIC BANK ZAMBIA LTD FOR STANDARD LuSE Central Shares
BANK OF SOUTH AFRICA (SBSA) Depository Ltd.
BoZ
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 10/3/96

ZIMBABWE STANBIC BANK ZIMBABWE LTD FOR STANDARD None
BANK OF SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 10/3/96

Page 7 of 8

<PAGE>

NOTES:

1.) THE DEPOSITORIES IN CHILE, PANAMA AND VENEZUELA ARE PRESENTLY
ELECTIVE. IT IS NOT THE CURRENT INTENTION OF BROWN BROTHERS HARRIMAN &
CO. TO USE SUCH DEPOSITORIES UNLESS THEIR USE BECOMES COMPULSORY.
EUROCLEAR IS COMPULSORY FOR FIXED INCOME OBLIGATIONS AND ELECTIVE FOR
EQUITIES. CURRENTLY, BROWN BROTHERS HARRIMAN & CO. USES EUROCLEAR FOR
SETTLEMENT OF EQUITIES WHERE WE ARE INSTRUCTED TO DO SO. WE DO NOT USE
EUROCLEAR FOR THE ONGOING SAFEKEEPING OF EQUITIES.

2.) IF YOU ARE AUTHORIZING INVESTMENT IN COSTA RICA, CYPRUS, ESTONIA,
GHANA, LITHUANIA, OR NIGERIA, THESE ARRANGEMENTS ARE THE SUBJECT OF
ADDITIONAL INFORMATION IN SCHEDULE A TO THE FCM REPORT.

I HEREBY CERTIFY THAT THE BOARD OR ITS DELEGATE HAS APPROVED THE COUNTRIES AND
CENTRAL DEPOSITORIES LISTED ON THIS APPENDIX

__________________________________

SIGNATURE

NAME: Robert D. Snowden

COMPANY:

(if other than Board)

TITLE: Controller

DATE: July 20, 1999

Page 8 of 8

<PAGE>

BROWN BROTHERS HARRIMAN & CO. - GLOBAL CUSTODY NETWORK
VANGUARD-RECOVER STANDARD MARKETS
APPENDIX B

COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
COSTA RICA BANCO BCT SA CEVAL
***Requires additional documentation prior to investment.***
Master Subcustodian Agreement 8/10/98

CYPRUS CYPRUS POPULAR BANK LTD. None
***Requires additional documentation prior to investment.***
Cyprus Popular Bank Ltd. Agt. 2/18/98

ESTONIA HANSABANK, TALLINN FOR MERITA BANK ECDSL
***Requires additional documentation prior to investment.***
Merita Bank Agreement 12/1/97

LITHUANIA VILNIAUS BANKAS, VILNIUS FOR MERITA CSDL
BANK
***Requires additional documentation prior to investment.***
Merita Bank Agreement 12/1/97

Page 1 of 1

<PAGE>

July 1, 1999

FACSIMILE

Ms. Sarah A. Buescher
The Vanguard Group
P. O. Box 2600
Valley Forge, PA 19482-2600

Dear Sarah:

You have requested a statement from us regarding what is known as "Year
2000 Compliance" by which is meant the steps taken to assure that computerized
information and communications systems will retain essential functionality in
transition from the year 1999 to the year 2000. Please accept the following in
response to that request.

You will understand that we are not with respect to yourselves merchants of
software and therefore warranties of merchantability and the like are not
supported by context. Rather, we provide services to you that are in one measure
or another dependent for normal operation on the functionality of various
computer systems and software. Accordingly, allow this letter to confirm that:
(1) we will use reasonable care and diligence in accordance with the terms of
the agreement governing the services to assure that these services are not
compromised by loss of systems or software functionality related to the
succession of the year 2000; (2) we will use reasonable care and diligence to
procure that our agents and subcustodians perform likewise; and, (3) we will use
reasonable care and diligence to provide for alternate means of providing
services in the event that a computer system or software might be negatively
affected by the succession of the year 2000.

Please contact me at (617) 772-1371 if you have any questions.

Sincerely,

W. Casey Gildea
Manager

WCG:arg

Exhibit EX-99.BJ

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 16 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated November 5, 1999, relating to the financial
statements and financial highlights appearing in the September 30, 1999 Annual
Report to Shareholders of Vanguard Variable Insurance Fund, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the Prospectus
and under the headings "Financial Statements" and "Service
Providers--Independent Accountants" in the Statement of Additional Information.

PricewaterhouseCoopers LLP
Philadelphia, PA

December 28, 1999