FRANKLIN LIFE VARIABLE ANNUITY FUND A, N-14, 1998-08-07

FRANKLIN LIFE VARIABLE ANNUITY FUND A
N-14, 1998-08-07

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998

File No. ___________

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-14

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

/ / Pre-Effective Amendment No. ___ / / Post-Effective Amendment No.
(CHECK APPROPRIATE BOX OR BOXES.)

EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER:

FRANKLIN LIFE VARIABLE ANNUITY FUND A

AREA CODE AND TELEPHONE NUMBER:
(800) 528-2011, Ext. 2591

ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:

c/o The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713

NAME AND ADDRESS OF AGENT FOR SERVICE:

Ross D. Friend, Esq.
The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713

COPY OF ALL COMMUNICATIONS TO:

Stephen E. Roth, Esquire
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415

TITLE OF SECURITIES BEING REGISTERED: Interests in a separate account issued
through variable annuity contracts. No filing fee is due because of reliance
on Section 24(f) of the Investment Company Act of 1940.

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as possible after
effectiveness of this registration statement

It is proposed that this filing will become effective on September 6, 1998
pursuant to Rule 488(a) under the Securities Act of 1933.

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CROSS REFERENCE SHEET
Pursuant to Rule 481(a)

PART A CAPTION IN PROSPECTUS/PROXY STATEMENT

1. Beginning of Registration Cross Reference Sheet; Notice of
Statement and Outside Front Cover Special Meetings of Contract Owners
Page of Prospectus

2. Beginning and Outside Back Cover Table of Contents
Page of Prospectus

3. Fee Table, Synopsis Information, Synopsis; Principal Risk Factors;
and Risk Factors Comparison of Fees and Expenses

4. Information About the Transaction The Proposed Reorganization; Appendix A

5. Information About the Registrant Information on the Funds, VIP and VIP
II; Availability of Certain Other
Information; Appendix B

6. Information About the Company Information on the Funds, VIP and VIP
Being Acquired II; Availability of Certain Other
Information; Appendix C; Appendix D;
Appendix E; Appendix F

7. Voting Information Notice of Special Meetings of Contract
Owners; General Information Regarding
Proxy Solicitation; Voting of
Portfolio Shares

8. Interest of Certain Persons and Not Applicable
Experts

9. Additional Information Required Not Applicable
for Re-offering by Persons Deemed
to be Underwriters

PART B CAPTION IN STATEMENT OF ADDITIONAL
INFORMATION

10. Cover Page Cover Page

11. Table of Contents Table of Contents

12. Additional Information About the Appendix A; Appendix B
Registrant

13. Additional Information About the Appendix C; Appendix D
Company Being Acquired

14. Financial Statements

PART C

Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C of this Registration Statement.

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FRANKLIN LIFE VARIABLE ANNUITY FUND A
FRANKLIN LIFE VARIABLE ANNUITY FUND B
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
c/o The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713

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

NOTICE OF SPECIAL MEETINGS OF CONTRACT OWNERS

To owners of variable annuity contracts (the "Contracts") issued by The
Franklin Life Insurance Company ("The Franklin") eligible to vote in connection
with certain separate accounts established by The Franklin.

Notice is hereby given that special meetings (the "Meetings") of owners of
the Contracts (collectively,"Contract Owners") eligible to vote in connection
with Franklin Life Variable Annuity Fund A ("Fund A"), Franklin Life Variable
Annuity Fund B ("Fund B"), or Franklin Life Money Market Variable Annuity Fund C
("Fund C") (collectively, the "Funds") will be held on September 21, 1998 at
_____ a.m., Central Standard Time, at The Franklin's home office at #1 Franklin
Square, Springfield, Illinois 62713. The Meetings will be held for the purposes
of considering and acting on the following matters, as set forth in the
accompanying Proxy Statement/Prospectus:

1. To approve or to disapprove an Agreement and Plan of Reorganization
(the "Agreement") and related transactions (together, the Agreement
and related transactions are the "Reorganization") whereby: (i) Fund
A will be renamed and restructured into a single unit investment trust
comprising three investment divisions (the "Continuing Fund"); (ii)
the assets of each of the Funds will be transferred to one of the
three investment divisions in the Continuing Fund such that Contract
Owners' interests will continue as interests in the Continuing Fund;
and (iii) each investment division will invest exclusively in shares
of a specified portfolio of Fidelity Investments'-Registered
Trademark- Variable Insurance Products Fund or Variable Insurance
Products Fund II.

2. To consider and act upon such other business as may properly come
before the Meetings or any adjournment(s) or postponement(s) thereof.

The proposed Reorganization is discussed in detail in the Proxy
Statement/Prospectus dated August 31, 1998 that accompanies this Notice.

As Contract Owner of record at the close of business on July 23, 1998, you
have the right to vote at the Meetings or any adjournment(s) or postponement(s)
thereof. Contract Owners who do not expect to attend the Meetings in person are
requested to complete, sign and date the accompanying proxy, which is solicited
by the Board of Managers of each of the Funds, and to return it immediately in
the envelope provided for that purpose. Returning the proxy will not restrict
or impair a Contract Owner's right to revoke the proxy or to attend and vote
personally at the Meetings.

YOUR VOTE IS IMPORTANT. CONTRACT OWNERS WHO DO NOT EXPECT TO ATTEND THE
MEETINGS ARE REQUESTED TO COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY, AND TO
RETURN IT IMMEDIATELY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT THEY MAY BE
REPRESENTED AT THE MEETINGS. IF YOU LATER DECIDE TO ATTEND THE MEETINGS IN
PERSON, YOU MAY VOTE AT THE MEETING EVEN THOUGH YOU PREVIOUSLY SUBMITTED A
PROXY.

SPECIAL NOTICE: To take action on the proposed Reorganization, it is necessary
that Contract Owners

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entitled to cast at least 50% of all votes eligible to be cast with respect to
each of the Funds, voting separately, be present in person or represented by
proxy at the Meetings. To be implemented, each Fund must approve the
Reorganization by the requisite vote of persons eligible to vote with respect to
that Fund. THEREFORE, THE BOARD OF MANAGERS OF EACH FUND URGENTLY REQUESTS THAT
CONTRACT OWNERS COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY SO THAT
THE NECESSARY QUORUM AND VOTE WILL BE OBTAINED.

By Order of the Board of Managers of each of

Franklin Life Variable Annuity Fund A
Franklin Life Variable Annuity Fund B
Franklin Life Money Market Variable Annuity Fund C

s/s Elizabeth E. Arthur
Elizabeth E. Arthur
Secretary

Springfield, Illinois

August 31, 1998

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PART A

INFORMATION REQUIRED IN THE PROXY STATEMENT/PROSPECTUS

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August 31, 1998
PROXY STATEMENT
of
FRANKLIN LIFE VARIABLE ANNUITY FUND A
FRANKLIN LIFE VARIABLE ANNUITY FUND B
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
PROSPECTUS
of
FRANKLIN LIFE VARIABLE ANNUITY FUND A
c/o The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
(800) 528-2011

This Proxy Statement/Prospectus is furnished by the respective Board of
Managers of Franklin Life Variable Annuity Fund A ("Fund A"), Franklin Life
Variable Annuity Fund B ("Fund B"), and Franklin Life Money Market Variable
Annuity Fund C ("Fund C") (collectively, the "Funds"), to owners of certain
individual variable annuity contracts (the "Contracts") issued by The Franklin
Life Insurance Company ("The Franklin" or the "Company") through the Funds.

This Proxy Statement/Prospectus is being furnished to owners of the
Contracts ("Contract Owners") in connection with the solicitation of proxies in
the form enclosed for use at the special meetings (the "Meetings") of Contract
Owners to be held on September 21, 1998 at ____ a.m., Central Standard Time, at
The Franklin's home office at #1 Franklin Square, Springfield, Illinois 62713,
for the purposes set forth below and in the accompanying Notice of the Special
Meetings.

Contract Owners are being asked to approve or to disapprove an Agreement
and Plan of Reorganization (the "Agreement") and related transactions (together,
the Agreement and related transactions are the "Reorganization") whereby: (i)
Fund A will be restructured into a single unit investment trust comprising three
investment divisions ("Subaccount A," "Subaccount B," and "Subaccount C") and
renamed as Franklin Life Variable Annuity Fund (the "Continuing Fund"); (ii) the
assets of each Fund will be liquidated and transferred to one of the three
Subaccounts in the Continuing Fund such that Contract Owners' interests will
continue as interests in the Continuing Fund; and (iii) each Subaccount will
invest exclusively in shares of a specified portfolio of Fidelity
Investments'-Registered Trademark- Variable Insurance Products Fund ("VIP") or
Variable Insurance Products Fund II ("VIP II") as follows: Subaccount A and
Subaccount B will invest exclusively in shares of the VIP II Index 500
Portfolio, and Subaccount C will invest exclusively in shares of the VIP Money
Market Portfolio. VIP and VIP II are each a series-type mutual fund that
currently comprises several investment portfolios including the VIP Money Market
Portfolio and the VIP II Index 500 Portfolio (each, a "Portfolio").

- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------

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If the Reorganization is approved by Contract Owners (and if any necessary
exemptive order is received from the Securities and Exchange Commission), then,
immediately following the consummation of the Reorganization, each Contract
Owner will have an interest in the number of units in a Subaccount of the
Continuing Fund having a value equal to the value of that Contract Owner's
interest in Fund A, Fund B, or Fund C, respectively, immediately prior to the
Reorganization.

Each Fund currently invests directly in securities appropriate for the
respective Fund's investment objective. Each Fund's investment objective and
the investment objective of the relevant Portfolios are described below:

- The investment objective of Fund A and Fund B is long-term
appreciation of capital through investment appreciation and the
retention and reinvestment of income. VIP II Index 500 Portfolio
seeks to provide investment results that correspond to the total
return of a broad range of common stocks publicly traded in the United
States.

- The investment objective of Fund C is long-term compounding of income
through retention and reinvestment of income from investments in a
diversified portfolio of short-term money market securities yielding a
high level of current income to the extent consistent with the
preservation of capital and the maintenance of liquidity. The VIP
Money Market Portfolio seeks to earn a high level of current income
while maintaining a stable $1.00 share price by investing in high-
quality, short-term securities.

This combination Proxy Statement/Prospectus concisely sets forth
information about the Reorganization, the proposed future operation of the
Continuing Fund, and the Portfolios which the persons entitled to vote in
respect of each of the Funds (the "Fund Voters") should know before casting
their votes. This Proxy Statement/Prospectus should be retained for future
reference. Copies of the current prospectus for each of the Funds, and the
current prospectuses for the VIP Money Market Portfolio and the VIP II Index 500
Portfolio, each dated April 30, 1998, are attached as appendices to this Proxy
Statement/Prospectus and are incorporated herein by reference.

A Statement of Additional Information dated the same date as this Proxy
Statement/Prospectus and relating to matters covered in this Proxy
Statement/Prospectus has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. The Statement of Additional
Information includes appendices containing the current statements of additional
information and annual reports for Fund A and the Portfolios. The Statement of
Additional Information is available upon oral or written request and without
charge. The Franklin will also furnish, without charge, a copy of a Fund's
Annual Report dated December 31, 1997 to a Fund Voter upon request. Such a
request (for the Statement and/or an Annual Report) should be directed to The
Franklin Life Insurance Company, #1 Franklin Square, Springfield, Illinois
62713, Attention: Box 1018 (telephone 800-528-2011, Extension 2591). Other
inquiries about the Funds should be directed to The Franklin at the same address
or telephone number.

2
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TABLE OF CONTENTS

GENERAL INFORMATION REGARDING PROXY SOLICITATION . . . . . . . . . . . . . . .4

SYNOPSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

PRINCIPAL RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

THE PROPOSED REORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . .7
DESCRIPTION OF THE REORGANIZATION . . . . . . . . . . . . . . . . . . . .7
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS. . . . . .8
COMPARISON OF FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . 14
REASONS FOR THE TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . 21
ACTUAL AND PRO FORMA CAPITALIZATION . . . . . . . . . . . . . . . . . . 23
COMPARATIVE PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . 24

INFORMATION ON THE FUNDS, VIP AND VIP II . . . . . . . . . . . . . . . . . . 25
MANAGEMENT OF THE FUNDS AND THE PORTFOLIOS. . . . . . . . . . . . . . . 26
ORGANIZATION AND OPERATION OF THE PORTFOLIOS. . . . . . . . . . . . . . 27
Characteristics of VIP and VIP II's Shares . . . . . . . . . . . . 27
Dividends, Distributions, and Taxes. . . . . . . . . . . . . . . . 28
Voting of Portfolio Shares . . . . . . . . . . . . . . . . . . . . 28
Certain Ownership Interests. . . . . . . . . . . . . . . . . . . . 29
SALE OF THE CONTRACTS AND PORTFOLIO SHARES. . . . . . . . . . . . . . . 29
DEDUCTIONS, CHARGES, FEES, AND EXPENSES . . . . . . . . . . . . . . . . 30
Deductions and Charges Under the Contracts . . . . . . . . . . . . 30
Contracts Issued Through Fund A. . . . . . . . . . . . . . . . . . 30
Contracts Issued Through Fund B. . . . . . . . . . . . . . . . . . 30
Contracts Issued Through Fund C. . . . . . . . . . . . . . . . . . 30
Fees and Expenses of the Portfolios. . . . . . . . . . . . . . . . 31
SUPPLEMENTARY FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . 31
Financial Highlights for the Funds . . . . . . . . . . . . . . . . 31
Financial Highlights for the Portfolios. . . . . . . . . . . . . . 32

AVAILABILITY OF CERTAIN OTHER INFORMATION. . . . . . . . . . . . . . . . . . 33

OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

APPENDIX A - Agreement and Plan of Reorganization
APPENDIX B - Prospectus for Franklin Life Variable Annuity Fund A
APPENDIX C - Prospectus for Franklin Life Variable Annuity Fund B
APPENDIX D - Prospectus for Franklin Life Money Market Variable Annuity Fund C
APPENDIX E - Prospectus for VIP Money Market Portfolio
APPENDIX F - Prospectus for VIP II Index 500 Portfolio

3
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GENERAL INFORMATION REGARDING PROXY SOLICITATION

This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Managers of each of Fund A, Fund B, and Fund C of
proxies for use at Special Meetings of Fund Voters eligible to vote in respect
of the Contracts issued by The Franklin through the Funds.

If the enclosed proxy is completed, signed, dated and returned, it may
nevertheless be revoked at any time before its exercise by written notice to The
Franklin or by vote in person at the Special Meetings. A later-dated proxy
received by The Franklin will revoke a prior proxy. The proxy solicitation will
be by mail but may also be by telephone, telegram, facsimile, or personal
interview conducted by personnel of The Franklin or outside contractors employed
to assist in the solicitation. The expenses of the proxy solicitation will be
paid by The Franklin. Such expenses are expected to be approximately $40,000.

The separate rules and regulations governing each of the Funds provide that
the number of votes which may be cast with respect to a Contract before Annuity
Payments begin will be determined by the number of Accumulation Units credited
to Contract Owners. After Annuity Payments begin, the number of votes which an
Annuitant may cast is based on the amount of assets supporting the Contract and
held in the respective Fund to meet the obligations related to the Contract,
divided by the Accumulation Unit value for the particular Fund. Fractional
votes will be counted.

As of May 28, 1998, there were 118,016.590 votes entitled to be cast at the
Special Meetings with respect to Fund A, 15,669.688 votes entitled to be cast
with respect to Fund B, and 70,689.540 votes entitled to be cast with respect to
Fund C. As of that date, the following persons were entitled to cast 5% or more
of the total votes of each of the respective Funds. The Franklin and the Funds
do not anticipate that the information provided in the table below will vary
materially by the record date of the Special Meetings:

- --------------------------------------------------------------------------------
Name and Address of Contract Number of Percent of
Owner Votes Voting Power
- --------------------------------------------------------------------------------
Fund A: None

- --------------------------------------------------------------------------------
Fund B: Mrs. Juanita S. Reynoso (1) 877.199 5.598
Mr. Gonzalo R. Reynoso (1) 856.646 5.467
------- -----
553 Hackney Hill Street 1,733.845 11.065
Globe, Arizona 85501

- --------------------------------------------------------------------------------
Fund C: Beverly A. DeBlase 5,454.636 7.716
209 Yorkshire Pl.
Bellevue, Ohio 44811
- --------------------------------------------------------------------------------

(1) In accordance with interpretations of the Securities and Exchange
Commission of the concept of "beneficial ownership," Mrs. Juanita S.
Reynoso and Mr. Gonzalo R. Reynoso might each be deemed to be the
beneficial owner of the contract owned by the other.

4
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Before Annuity Payments begin, Contract Owners have the right to vote at
the Special Meetings. After Annuity Payments begin under a Contract, Annuitants
have the right to vote at the Special Meetings.

All proxies executed, dated and returned to The Franklin by the close of
business on September 20, 1998 will be voted in accordance with instructions
marked thereon. If instructions are not marked thereon, proxies for each Fund
Voter will be voted FOR the proposals to be voted on at the Special Meetings.

To take action on the proposed Reorganization, it is necessary that
Contract Owners entitled to cast at least 50% of all votes eligible to be cast
with respect to each of the Funds, voting separately, be present in person or
represented by proxy at the Meetings. Approval of the Agreement and the
Reorganization requires, with respect to each of the Funds, the affirmative vote
of the lesser of (i) 67% of the votes cast at the Special Meetings, or (ii) more
than 50% of the total eligible votes. The Reorganization must be approved by
the requisite vote of the Fund Voters of each Fund as a prerequisite to its
implementation.

The Special Meetings may be adjourned for the purpose of further proxy
solicitation, or for any other purpose, if 50% of the total eligible votes for
any Fund are not represented at the Special Meetings. Unless otherwise
instructed, proxies will be voted in favor of any adjournment. At any
subsequent reconvening of the meetings, proxies will be voted in the same manner
as they would have been voted at the original meetings, unless the proxies have
been revoked prior to the subsequent meetings.

SYNOPSIS

The Board of Managers of each Fund (which consists of the same individuals
for each Fund) has authorized the Reorganization. Within five business days
prior to the closing date of the Reorganization (currently scheduled for October
5, 1998), the assets of each of the Funds will be converted into cash. During
much of this period, Contract Owners would be "out of the market" and would not
be affected by any positive or negative investment experience of securities that
were converted into cash. On the closing date, the cash accumulated with
respect to Fund A will be allocated to and used by Subaccount A to purchase
shares of the VIP II Index 500 Portfolio; the cash accumulated with respect to
Fund B will be allocated to and used by Subaccount B to purchase shares of the
VIP II Index 500 Portfolio; and the cash accumulated with respect to Fund C will
be allocated to and used by Subaccount C to purchase shares of the VIP Money
Market Portfolio. Immediately after the Reorganization, Fund A, Fund B, and
Fund C Contract Owners' interests will be represented by interests in Subaccount
A, Subaccount B, and Subaccount C, respectively, having a value identical to the
Contract Owners' interests in the Funds immediately before the Reorganization.
VIP and VIP II are each a management investment company (commonly known as a
"mutual fund") that is not affiliated with the Funds or The Franklin, and that
is managed by Fidelity Management & Research Company, one of America's largest
mutual fund managers.

The Franklin will pay all costs and expenses associated with effecting the
Reorganization. The Franklin will not pay any costs or expenses associated with
unrealized positive investment experience during the time when Contract Owners
are "out of the market" as described above. The charges provided for in the
Contracts will not increase as a result of the Reorganization, and in certain
cases will be reduced. SIGNIFICANTLY, IN ANTICIPATION OF THE APPROVAL OF THE
REORGANIZATION BY THE FUND VOTERS OF EACH FUND, THE FRANKLIN HAS DETERMINED TO
WAIVE THE SUBSEQUENT IMPOSITION AND RECEIPT OF ALL SALES

5
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LOADS, SURRENDER OR DEFERRED SALES CHARGES, AND ADMINISTRATION FEES SPECIFIED IN
EACH CONTRACT BEGINNING IN OCTOBER 1998. Mortality and expense risk fees
deducted under the Contracts will remain unchanged. Because each of the Funds
will no longer be a management investment company, The Franklin will no longer
serve as the investment manager to each Fund and, consequently, no investment
management fee will be deducted from assets of the Funds after the
Reorganization. However, an investment management fee and a charge for "other
expenses" will be deducted from the assets of each Portfolio. Based on the
levels of these fees and charges for the year ended December 31, 1997, the
investment management fee and the charge for "other expenses" for the Portfolios
may be lower than the investment management fee for the Funds. There will be no
change in the value of a Contract Owner's Contract and no change in a Contract
Owner's benefits under the Contract as a result of the Reorganization. Exchange
rights, redemption procedures, and other features of the Contracts will not be
affected by the Reorganization. The Franklin believes that the Reorganization
will not result in adverse tax consequences to Contract Owners.

PRINCIPAL RISK FACTORS

The principal risk factors involved in investing in a Subaccount of the
Continuing Fund and, therefore, indirectly in a Portfolio will be similar to the
principal risk factors currently associated with investing in a Fund. Those risk
factors are that the investments made by each Portfolio's investment manager may
not appreciate in value or will, in fact, lose value. Specifically, the
investments are subject to three general types of investment risks: financial
risk, which refers to the ability of the issuer of a security to pay principal
and interest when due or to maintain or increase dividends; market risk, which
refers to the degree to which the price of a security will react to changes in
conditions in the securities markets and to changes in the overall level of
interest rates; and current income volatility, which refers to the degree to
which and the timing by which changes in the overall level of interest rates or,
in the case of certain derivative instruments, other underlying economic
variables or indices affect the current income from an investment.

In addition, by investing in a Subaccount of the Continuing Fund and,
therefore, indirectly in a Portfolio, Contract Owners will become exposed to
certain additional risk factors that are not currently associated with investing
in a Fund. For example, although unlikely, one or more of the Portfolios may
fail to qualify as a regulated investment company in any particular year and may
thereby incur federal tax liability on income and capital gains distributed to
shareholders. In that case, the Contracts would also fail to qualify as annuity
contracts for federal income tax purposes resulting in the loss of their tax-
favored status. See, "Organization and Operation of the Portfolios --
Dividends, Distributions and Taxes," below. This would adversely affect the
investment performance of the disqualified Portfolios and therefore the
investment performance of the corresponding Subaccounts of the Continuing Fund.
Also, Portfolio shares currently are, and will continue to be, owned by separate
accounts of other insurance companies to fund variable annuity contracts and
variable life insurance policies. While it is conceivable that, in the future,
it may be disadvantageous to the Continuing Fund to be invested in the
Portfolios simultaneously with such other separate accounts, The Franklin
currently does not see any such disadvantages.

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THE PROPOSED REORGANIZATION

DESCRIPTION OF THE REORGANIZATION

The Reorganization involves the conversion of the net assets of each Fund
into cash, the designation of the cash associated with each Fund as the initial
assets of a Subaccount of the Continuing Fund, and the purchase of shares of a
specified Portfolio in return for the cash of a Subaccount. If the
Reorganization is approved by Fund Voters of each Fund, the Funds will no longer
hold securities and other instruments directly but rather will hold similar
investments indirectly through the intermediate vehicle of VIP or VIP II. Those
investments will be managed by Fidelity Management & Research Company ("FMR"),
Fidelity Investments Money Management, Inc., or Bankers Trust Company, instead
of The Franklin, the current investment manager for each of the Funds.

At present, each Fund is a diversified management investment company, as
such companies are defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). Each Fund is supervised by a Board of Managers having a
majority of members who are not "interested persons" (I.E., who are drawn from
outside) of The Franklin, and each Fund invests in securities and other
instruments in accordance with objectives outlined in a prospectus. (See the
separate prospectuses dated April 30, 1998 for Fund A, Fund B, and Fund C,
respectively, which accompany this Proxy Statement/Prospectus as Appendices B,
C, and D, respectively, and are incorporated herein by reference.) If the
Reorganization is approved by the Fund Voters of each Fund, Fund A would be
renamed as Franklin Life Variable Annuity Fund and restructured as a unit
investment trust that will be subdivided into three Subaccounts, each
corresponding to and investing solely in shares of a particular Portfolio. (See
the prospectuses dated April 30, 1998 for VIP Money Market Portfolio and VIP II
Index 500 Portfolio, which accompany this Proxy Statement/Prospectus as Appendix
E and Appendix F and are incorporated herein by reference.)

The value of a unit in each Subaccount of the Continuing Fund will be based
on the net asset value per share of the corresponding Portfolio. The total
value of the Accumulation Units a Contract Owner has in each Fund immediately
prior to the Reorganization will be no different than the total value of the
Accumulation Units the same Contract Owner will have in the appropriate
Subaccount of the Continuing Fund immediately after the Reorganization. The
total value of the Annuity Units a Contract Owner has in each Fund immediately
prior to the Reorganization will be no different than the total value of the
Annuity Units the same Contract Owner will have in the appropriate Subaccount of
the Continuing Fund immediately after the Reorganization.

As of 3:00 p.m. Central Standard Time on the closing date, all of the
assets of each Fund will have been liquidated into cash and the cash will be
transferred to the Subaccounts of the Continuing Fund and used to purchase the
number of shares of the specified Portfolio having an aggregate net asset value
equal to the cash contributed. The Franklin will pay any brokerage commissions
related to the liquidation of the Funds' assets.

The Franklin, as the legal owner of Portfolio shares to be held in the
Continuing Fund, will not realize taxable income as a result of any gain on the
sale of those shares or as a result of distributions made by the Portfolios to
The Franklin, as described above, to the extent that such gains or distributions
are reflected in variable annuity contract reserves. The Franklin does not
believe that it will recognize any gain or loss in connection with the
Reorganization, but if it does, it will not make any charge to the Continuing
Fund or to Contract Owners for federal income taxes resulting from recognition
of any such

7
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gain.

More information on the Reorganization is contained in a document entitled
"Agreement and Plan of Reorganization" (the "Agreement"), which has been
approved and adopted by the Board of Managers of each of the Funds and entered
into by The Franklin (in its capacity as the insurance company of which the
Funds are a part under state insurance law) and the Funds. The Agreement is
attached to this Proxy Statement/Prospectus as Appendix A. Approval of the
Agreement and the Reorganization by the Fund Voters of each Fund is a
prerequisite to the implementation of the Reorganization. The Reorganization
may be postponed from time to time or canceled for any reason with the consent
of the parties thereto.

COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS

The investment objective of both Fund A and Fund B is long-term
appreciation of capital through investment appreciation and the retention and
reinvestment of income. Fund A and Fund B seek to achieve their investment
objective by investing in equity securities, mainly common stocks. VIP II Index
500 Portfolio seeks to provide investment results that correspond to the total
return of a broad range of common stocks publicly traded in the United States.
Under normal conditions, VIP II Index 500 Portfolio seeks to invest at least 80%
of its assets (65% if assets are below $20 million) in equity securities of
companies that compose the Standard & Poor's 500 Index-Registered Trademark-
("S&P 500"). The respective Boards of Managers of Fund A and Fund B believe
that although the investment objective and policies of Fund A and Fund B are
similar but not identical to those of the VIP II Index 500 Portfolio, Contract
Owners of Fund A and Fund B should find the VIP II Index 500 Portfolio
attractive because: (1) the Portfolio is designed for investors who want to keep
expenses low while pursuing growth of capital and income through a portfolio of
securities that includes common stocks of companies representing a significant
portion of the market value of all common stocks publicly traded in the United
States, as measured by the S&P 500; and (2) the fundamental investment
restrictions of the VIP II Index 500 Portfolio are not materially different from
those of Fund A and Fund B.

Fund C's investment objective is long-term compounding of income through
retention and reinvestment of income from investments in a diversified portfolio
of short-term money market securities yielding a high level of current income to
the extent consistent with the preservation of capital and the maintenance of
liquidity. VIP Money Market Portfolio seeks to earn a high level of current
income while maintaining a stable $1.00 share price by investing in high-
quality, short-term securities. The Board of Managers of Fund C believes that
the investment objective, policies, and restrictions of the VIP Money Market
Portfolio are not materially different from the investment objective, policies,
and restrictions of Fund C.

Currently, each Fund's investment policy is to invest directly in
individual securities selected by The Franklin, the investment manager to each
Fund. It is currently a fundamental investment restriction of each Fund that
the Fund may not have more than 5% of its assets invested in any one issuer,
except that up to 25% of each Fund's total assets may be invested without regard
to such 5% limitation.(1) In

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

(1) A fundamental investment restriction is one that cannot be changed without
the affirmative vote of the holders of a majority of the outstanding voting
shares of the respective Fund. For this purpose, a "majority" of shares means
the lesser of: (a) 67% or more of the voting shares present at a meeting, if the

8
<PAGE>

addition, each Fund currently has a non- fundamental investment restriction that
the Fund will not invest in the securities of other investment companies.(2)
Approval of the Reorganization by Fund Voters of each Fund may be deemed an
approval of a change in the investment policies and restrictions of the Funds to
require investment entirely and solely in specific mutual fund portfolios.

The following table compares the fundamental investment restrictions of
Fund A and Fund B to the fundamental investment restrictions of the VIP II Index
500 Portfolio.

- --------------------------------------------------------------------------------
Fund A and Fund B VIP II Index 500 Portfolio
- --------------------------------------------------------------------------------
Fund will not concentrate its VIP II Index 500 Portfolio may not
investments in any one industry or purchase the securities of any issuer
group of related industries, and no (other than securities issued or
more than 25% of the value of the guaranteed by the U.S. Government or
Fund's assets will be invested in any any of its agencies or
one industry or group of related instrumentalities) if, as a result,
industries. more than 25% of the Portfolio's total
assets would be invested in the
securities of companies whose
principal business activities are in
the same industry.
- --------------------------------------------------------------------------------
Fund will not issue senior securities, VIP II Index 500 Portfolio may not
except that the Fund may borrow money issue senior securities, except as
as set forth in the paragraph permitted under the 1940 Act.
immediately below.
- --------------------------------------------------------------------------------
Fund will not borrow money except for VIP II Index 500 Portfolio may not
temporary or emergency purposes from borrow money, except that the
banks, and any such borrowings will Portfolio may borrow money for
not be used to purchase investment temporary or emergency purposes (not
securities and will not exceed 5% of for leveraging or investment) in an
the value of the Fund's assets. amount not exceeding 33 1/3% of its
total assets (including the amount
borrowed) less liabilities (other than
borrowings). Any borrowings that come
to exceed this amount will be reduced
within three days (excluding Sundays
and holidays) to the extent necessary
to comply with the 33 1/3% limitation.
- --------------------------------------------------------------------------------
Fund will not underwrite securities of VIP II Index 500 Portfolio may not
other issuers, except that the Fund underwrite securities issued by
may acquire portfolio securities under others, except to the extent that the
circumstances where, if sold, it might Portfolio may be considered an
be deemed to be an underwriter for underwriter within the meaning of the
purposes of the Securities Act of Securities Act of 1933 in the
1933. No such securities will be disposition of restricted securities.
acquired except where parties other
than the Fund shall have agreed to
bear any and all costs of registration
under the Securities Act of 1933. No
more than 10% of the value of the
Fund's assets will at any time be
invested in such securities.
- --------------------------------------------------------------------------------

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

holders of more than 50% of such votes are present or represented by proxy; or
(b) more than 50% of the voting shares.

(2) A non-fundamental investment restriction may be changed by action of the
Board of Managers of the Fund.

9
<PAGE>

- --------------------------------------------------------------------------------
Fund A and Fund B VIP II Index 500 Portfolio
- --------------------------------------------------------------------------------
Fund will not engage in the purchase VIP II Index 500 Portfolio may not
and sale of interests in real estate, purchase or sell real estate unless
except that the Fund may engage in the acquired as a result of ownership of
purchase and sale of readily securities or other instruments (but
marketable interests in real estate this shall not prevent the Portfolio
investment trusts or similar from investing in securities or other
securities, which may be deemed to instruments backed by real estate or
represent indirect interests in real securities of companies engaged in the
estate. real estate business).
- --------------------------------------------------------------------------------
Fund will not engage in the making of VIP II Index 500 Portfolio may not
loans to other persons, except that lend any security or make any other
the Fund may acquire privately placed loan if, as a result, more than 33 1/3%
corporate debt securities of a type of the Portfolio's total assets would
customarily purchased by institutional be lent to other parties, but this
investors. The foregoing does not limitation does not apply to purchases
restrict the purchase by the Fund of a of debt securities or to repurchase
portion of an issue of publicly agreements.
distributed bonds, debentures or other
securities, whether or not the
purchase is made upon the original
issuance of such securities.
- --------------------------------------------------------------------------------
Fund will not engage in the purchase VIP II Index 500 Portfolio may not
or sale of commodities or commodity purchase or sell physical commodities
contracts. unless acquired as a result of
ownership of securities or other
instruments (but this shall not
prevent the Portfolio from purchasing
or selling options and futures
contracts or from investing in
securities or other instruments backed
by physical commodities).
- --------------------------------------------------------------------------------
With respect to 75% of its assets, VIP II Index 500 Portfolio may not,
Fund will not purchase the securities with respect to 75% of its total
of any one issuer, other than assets, purchase the securities of any
obligations issued or guaranteed by issuer (other than securities issued
the U.S. Government and its agencies or guaranteed by the U.S. Government
and instrumentalities, if such or any of its agencies or
purchase would cause more than 5% of instrumentalities, or securities of
the Fund's assets to be invested in other investment companies) if, as a
the securities of such issuer. result, more than 5% of the
Portfolio's total assets would be
invested in the securities of that
issuer.
- --------------------------------------------------------------------------------
With respect to 75% of its assets, VIP II Index 500 Portfolio may not,
Fund will not acquire more than 10% of with respect to 75% of its total
the outstanding voting securities of assets, purchase the securities of any
any one issuer, other than obligations issuer (other than securities issued
issued or guaranteed by the U.S. or guaranteed by the U.S. Government
Government and its agencies and or any of its agencies or
instrumentalities. instrumentalities, or securities of
other investment companies) if, as a
result, the Portfolio would hold more
than 10% of the outstanding voting
securities of that issuer.
- --------------------------------------------------------------------------------

The following table compares the fundamental investment restrictions of
Fund C to the fundamental (and non-fundamental where noted) investment
restrictions of the VIP Money Market Portfolio.

10
<PAGE>

- --------------------------------------------------------------------------------
Fund C VIP Money Market Portfolio
- --------------------------------------------------------------------------------
Fund C will not concentrate its VIP Money Market Portfolio may not
investments in any one industry or purchase the securities of any issuer
group of related industries, and no (other than securities issued or
more than 25% of the value of Fund C's guaranteed by the U.S. Government or
assets will be invested in any one any of its agencies or
industry or group of related instrumentalities) if, as a result,
industries, except that there is no more than 25% of the Portfolio's total
limitation with respect to investments assets would be invested in the
in obligations issued or guaranteed by securities of companies whose
the U.S. Government or its agencies or principal business activities are in
instrumentalities, or in bankers' the same industry, except that the
acceptances, repurchase agreements or Portfolio will invest more than 25% of
certificates of deposit of domestic its total assets in the financial
banks. For purposes of this services industry.
restriction, telephone, gas and
electric utilities, banks, savings
associations, personal credit
institutions, business credit
institutions, and insurance companies
shall each be considered a separate
industry.
- --------------------------------------------------------------------------------
Fund C will not issue senior VIP Money Market Portfolio may not
securities, except that Fund C may issue senior securities, except as
borrow money as set forth in the permitted under the 1940 Act.
paragraph immediately below.
- --------------------------------------------------------------------------------
Fund C will not borrow money except VIP Money Market Portfolio may not
for temporary or emergency purposes, borrow money, except that the
and any such borrowings will not be Portfolio may (i) borrow money for
used to purchase investment securities temporary or emergency purposes (not
and will not exceed 5% of the value of for leveraging or investment), and
Fund C's assets; provided, however, (ii) engage in reverse repurchase
that Fund C may borrow money up to agreements for any purpose; provided
one-third of its assets, not to that (i) and (ii) in combination do
increase its income but to meet not exceed 33 1/3% of the Portfolio's
redemption requests which might total assets (including the amount
otherwise require untimely borrowed) less liabilities (other than
dispositions of portfolio securities. borrowings). Any borrowings that come
So long as such borrowings exceed 5% to exceed this amount will be reduced
of the value of Fund C's assets, Fund within three days (not including
C will not make any new investments. Sundays and holidays) to the extent
In addition, to the extent such necessary to comply with the 33 1/3%
borrowings exceed the 5% limit and limitation.
cause a subsequent reduction of the
required asset coverage, Fund C will
reduce the amount of its borrowings to
comply with the appropriate asset
coverage required under the 1940 Act.
- --------------------------------------------------------------------------------
Fund C will not pledge, hypothecate, No comparable fundamental or non-
mortgage or otherwise encumber its fundamental restriction.
assets except in an amount not in
excess of 15% of the value of its
assets to secure borrowings made in
accordance with the borrowing
restrictions described above.
- --------------------------------------------------------------------------------

11
<PAGE>

- --------------------------------------------------------------------------------
Fund C VIP Money Market Portfolio
- --------------------------------------------------------------------------------
Fund C will not underwrite securities VIP Money Market Portfolio may not
of other issuers, except that Fund C underwrite securities issued by
may acquire portfolio securities under others, except to the extent that the
circumstances where, if sold, it might Portfolio may be considered an
be deemed to be an underwriter for underwriter within the meaning of the
purposes of the Securities Act of Securities Act of 1933 in the
1933. No such securities will be disposition of restricted securities.
acquired except where parties other
than Fund C shall have agreed to bear
any and all costs of registration
under the Securities Act of 1933. No
more than 10% of the value of Fund C's
assets will at any time be invested in
such securities.
- --------------------------------------------------------------------------------
Fund C will not engage in the purchase VIP Money Market Portfolio may not
and sale of interests in real estate, purchase or sell real estate unless
except that Fund C may engage in the acquired as a result of ownership of
purchase and sale of money market securities or other instruments (but
securities secured by real estate or this shall not prevent the Portfolio
interests therein or securities issued from investing in securities or other
by companies that invest in real instruments backed by real estate or
estate or interests therein. securities of companies engaged in the
real estate business).
- --------------------------------------------------------------------------------
Fund C will not engage in the making VIP Money Market Portfolio may not
of loans to other persons, except that lend any security or make any other
Fund C may acquire qualified debt loan if, as a result, more than 33 1/3%
obligations or other money market of the Portfolio's total assets would
securities and enter into repurchase be lent to other parties, but this
agreements (provided that the limitation does not apply to purchases
aggregate value of repurchase of debt securities or to repurchase
agreements maturing in more than seven agreements.
days will not exceed 10% of Fund C's
total assets), and may lend its
portfolio securities (provided that
such loans do not in the aggregate
exceed 20% of the value of Fund C's
assets) if such loans are made
according to the guidelines of the
Securities and Exchange Commission and
the Board of Managers of the Fund,
including maintaining collateral from
the borrower equal at all times to the
current market value of the securities
loaned.
- --------------------------------------------------------------------------------
Fund C will not engage in the purchase VIP Money Market Portfolio may not
or sale of commodities or commodity purchase or sell physical commodities
contracts or invest in oil, gas or unless acquired as a result of
other mineral exploration or ownership of securities or other
development programs. instruments.
- --------------------------------------------------------------------------------
Fund C will not purchase securities VIP Money Market Portfolio does not
(other than repurchase agreements of currently intend to purchase any
not more than seven days' duration) security if, as a result, more than
for which there exists no readily 10% of its net assets would be
available market, or for which there invested in securities that are deemed
are legal or contractual restrictions to be illiquid because they are
on resale, if as a result of any such subject to legal or contractual
purchase, more than 10% of the value restrictions on resale or because they
of Fund C's assets would be invested cannot be sold or disposed of in the
in such securities. ordinary course of business at
approximately the prices at which they
are valued. (Non-fundamental)
- --------------------------------------------------------------------------------

12
<PAGE>

If the Reorganization is approved by the Fund Voters of each Fund, Contract
Owners will lose the protections of certain fundamental policies and
restrictions of the respective Fund (and become subject to additional investment
risk) to the extent that the corresponding policies and restrictions of the
Portfolios either are not fundamental (I.E., may be changed without the approval
of a majority of the Portfolio's outstanding voting securities) or impose less
severe limitations than those of the Funds.

- -------------------------
(3) The Board of Trustees of VIP will ask shareholders of the VIP Money Market
Portfolio to approve a revision to this investment restriction at a special
meeting scheduled for September 16, 1998. The revised restriction would state
"[t]he fund [VIP Money Market Portfolio] may not purchase the securities of any
issuer if, as a result, the fund would not comply with any applicable
diversification requirements for a money market fund under the Investment
Company Act of 1940 and the rules thereunder, as such may be amended from time
to time."

13
<PAGE>

More complete descriptions of the investment objectives, policies, and
restrictions of each of the Funds and the corresponding Portfolios are contained
in their prospectuses and statements of additional information, which
prospectuses accompany this Proxy Statement/Prospectus as Appendices B, C, D, E
and F, respectively.

COMPARISON OF FEES AND EXPENSES

The overall costs to Contract Owners after the Reorganization are likely to
be lower than they currently are. SIGNIFICANTLY, IN ANTICIPATION OF THE
APPROVAL OF THE REORGANIZATION, THE FRANKLIN HAS DETERMINED TO WAIVE THE
SUBSEQUENT IMPOSITION AND RECEIPT OF ALL SALES LOADS, SURRENDER OR DEFERRED
SALES CHARGES, AND ADMINISTRATION FEES SPECIFIED IN EACH CONTRACT BEGINNING IN
OCTOBER 1998. Therefore, Contract Owners in the Continuing Fund may make
additional purchases without incurring any sales load on such purchases, and
also may make surrenders without having deductions made for surrender or
deferred sales charges. Further, purchase payments made in the Continuing Fund
will not be subject to any administration fees, and Fund C Contracts will not be
subject to any annual administration fee.

Currently, three charges are imposed under the Contracts against each
Fund's assets -- a mortality risk fee, an expense risk fee, and an investment
management service charge. These charges are specified annual percentages of
each Fund's average net assets. The mortality risk fee is 0.90% for all of the
Funds. The expense risk fee is 0.10% for Fund A and Fund B, and 0.165% for Fund
C. The investment management service charge is 0.44% for Fund A and Fund B, and
0.375% for Fund C. The charges for the mortality risk fee for all Funds and for
the expense risk fee for Fund A and Fund B are guaranteed not to increase.
After the Reorganization, the 0.90% mortality risk fee and the 0.10% (or 0.165%)
expense risk fee will continue to be imposed against the assets of each of the
Subaccounts of the Continuing Fund, but the 0.44% (or 0.375%) investment
management service charge will no longer be imposed against the assets of the
Subaccounts of the Continuing Fund. Instead, VIP II Index 500 Portfolio's
management and sub-advisory fees, paid to its investment adviser and sub-
adviser, respectively, will be charged indirectly against the assets of
Subaccounts A and B of the Continuing Fund; and VIP Money Market Portfolio's
management fee, paid to its investment adviser, will be charged indirectly
against the assets of Subaccount C of the Continuing Fund.(4)

The management fee charged to each Portfolio, and the sub-advisory fee
charged to VIP II Index 500 Portfolio, are calculated as a percentage of the
Portfolio's average net assets and are paid to FMR (Bankers Trust Company in the
case of VIP II Index 500 Portfolio's sub-advisory fee) monthly. For the fiscal
year ended December 31, 1997, the management fee rate (as a percentage of
average net assets)

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

(4) Fidelity Investments Money Management, Inc. serves as sub-adviser to the
VIP Money Market Portfolio. Effective December 1, 1997, Bankers Trust Company
was appointed as sub-adviser for the VIP II Index 500 Portfolio and has assumed
portfolio management responsibilities for that Portfolio. FMR retains
supervisory responsibilities for investment management and other services under
its management contracts with the VIP Money Market Portfolio and VIP II Index
500 Portfolio.

14
<PAGE>

was 0.27%(5) for the VIP II Index 500 Portfolio and 0.21% for the VIP Money
Market Portfolio.

VIP II Index 500 Portfolio pays its management and sub-advisory fees at the
annual rate of 0.24% of its average net assets. These fees include a management
fee of 0.24% payable to FMR and an estimated sub-advisory fee of less than 0.01%
payable to Bankers Trust Company (representing 40% of net income from securities
lending).

The management fee for the VIP Money Market Portfolio is calculated by
multiplying the sum of (1) the group fee rate (described below) and (2) the
individual Portfolio fee rate (0.03%), by the Portfolio's average net assets,
and adding an income-based fee.(6) The group fee rate is based on the average
monthly net assets of all the mutual funds advised by FMR and, for the fiscal
year ended December 31, 1997, the group fee rate was 0.1372% for the VIP Money
Market Portfolio.(7)

Total annual expenses for the Portfolios include the management fee (and a
sub-advisory fee for VIP II Index 500 Portfolio) plus payments for "other
expenses" (such as transfer agency and related services, and pricing and
bookkeeping services). For the Portfolios, the payments for "other expenses"
during 1997 were 0.13% of the average net assets of the VIP II Index 500
Portfolio, and 0.10% of average net assets of the VIP Money Market Portfolio.(8)

The total annual expenses for each Fund include the management fee,
mortality risk fee, and expense risk fee. There is no charge imposed against
the assets of the Funds for "other expenses." The total annual expenses for
each Subaccount of the Continuing Fund will include an indirect charge for the
total annual expenses of the corresponding Portfolio, plus the mortality risk
fee and the expense risk fee for that Subaccount. Using the 1997 percentages
(including FMR's voluntary expense reimbursement to VIP II Index 500 Portfolio),
the total annual expenses after the Reorganization would be 1.28% for

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

(5) Effective December 1, 1997, VIP II Index 500 Portfolio's management fee
rate was reduced to 0.24% of its average net assets.

(6) The income-based fee is 6% of the VIP Money Market Portfolio's gross income
in excess of a 5% yield and cannot exceed 0.24% of the VIP Money Market
Portfolio's average net assets.

(7) The group fee rate decreases as total assets under FMR's management
increase. VIP Money Market Portfolio shareholders are being asked at a
September 16, 1998 special meeting to vote on an amendment to the management
contract for the Portfolio that would provide for lower group rate fees when
FMR's assets under management exceed certain levels.

(8) During the year ended December 31, 1997, the investment adviser for the VIP
II Index 500 Portfolio voluntarily reimbursed total operating expenses of the
Portfolio (with certain exceptions noted below) to the extent such expenses
exceeded 0.28% of the Portfolio's average net assets. Absent this
reimbursement, the total operating expenses for the Portfolio would have been
0.40% of the average net assets of the Portfolio. There can be no guarantee
that such expense reimbursement will continue. Expenses eligible for
reimbursement do not include interest, taxes, brokerage commissions, or
extraordinary expenses. In addition, sub-advisory fees paid by the Portfolio
associated with securities lending are not eligible for reimbursement.

15
<PAGE>

Subaccount A, 1.28% for Subaccount B, and 1.375% for Subaccount C. In sum
(using 1997 percentages including FMR's voluntary expense reimbursement), after
the Reorganization total annual expenses for Subaccount A, Subaccount B and
Subaccount C, respectively, would be lower than the total annual expenses for
Fund A, Fund B, and Fund C, respectively (1.28% versus 1.44%; 1.28% versus
1.44%; and 1.375% versus 1.44%).

The following comparative fee tables for the year ended December 31, 1997,
illustrate: the current charges and deductions under the Contract for each
Fund; the fees and expenses of the corresponding Portfolio; and the charges and
deductions under the Contract for each Subaccount (including the fees and
expenses of the Portfolios) restated as if the Reorganization had been
consummated at the beginning of 1997:

FUND A AND VIP II INDEX 500 PORTFOLIO

- --------------------------------------------------------------------------------
COMPARATIVE FEE TABLE VIP II SUBACCOUNT A OF
(for the year ended December 31, 1997) INDEX 500 CONTINUING FUND
FUND A PORTFOLIO (pro forma)
- --------------------------------------------------------------------------------
CONTRACT OWNER TRANSACTIONS EXPENSES
- --------------------------------------------------------------------------------
Maximum Sales Load Imposed on
Purchases (as a percentage of 5.00% (A)
purchase payments) 6.00% (B) --- ---
- --------------------------------------------------------------------------------
Maximum Administration Fee (as
a percentage of purchase 4.00% (A)
payments) 3.00% (B) --- ---
- --------------------------------------------------------------------------------
FUND A ANNUAL EXPENSES (as a percentage of average net assets)
- --------------------------------------------------------------------------------
Management Fees 0.44% --- ---
- --------------------------------------------------------------------------------
Mortality Fees 0.90% --- 0.90%
- --------------------------------------------------------------------------------
Expense Risk Fees 0.10% --- 0.10%
- --------------------------------------------------------------------------------
Other Expenses ---
- --------------------------------------------------------------------------------
Total Fund A Annual Expenses 1.44% --- 1.00%
- --------------------------------------------------------------------------------
VIP II INDEX 500 PORTFOLIO ANNUAL EXPENSES (as a percentage of average net
assets)
- --------------------------------------------------------------------------------
Management Fees --- 0.27% 0.27%
- --------------------------------------------------------------------------------
Other Expenses --- 0.13% 0.13%
- --------------------------------------------------------------------------------
Total VIP II Index 500 Portfolio
Annual Expenses --- 0.40%(C) 0.40%(C)
- --------------------------------------------------------------------------------
TOTAL FUND A AND VIP II INDEX 500
PORTFOLIO ANNUAL EXPENSES 1.44% 0.40%(C) 1.40%(C)
- --------------------------------------------------------------------------------

16
<PAGE>

- --------------------------------------------------------------------------------
(A) Single Stipulated Payment Contract
(B) Periodic Stipulated Payment Contract
(C) FMR has voluntarily agreed, subject to revision or termination, to reimburse
the Portfolio if and to the extent that its aggregate operating expenses,
including management fees (but excluding interest, taxes, brokerage commissions
and extraordinary expenses), exceed an annual rate of 0.28% of the Portfolio's
average net assets. There is no guarantee that this reimbursement will
continue.
- --------------------------------------------------------------------------------

<PAGE>

FUND B AND VIP II INDEX 500 PORTFOLIO

- --------------------------------------------------------------------------------
COMPARATIVE FEE TABLE VIP II SUBACCOUNT B OF
(for the year ended December 31, 1997) INDEX 500 CONTINUING FUND
FUND B PORTFOLIO (pro forma)
- --------------------------------------------------------------------------------
CONTRACT OWNER TRANSACTIONS EXPENSES
- --------------------------------------------------------------------------------
Maximum Sales Load Imposed 5.00% (A);
on Purchases (as a 15.00% to
percentage of purchase 1.00%,
payments) 10.00% to
3.00%,
6.00% to
3.00%,
4.00% to
3.00%(B) --- ---
- --------------------------------------------------------------------------------
Maximum Administration Fee $100 (A);
(as a percentage of purchase 0.00% to
payments, for Periodic 10.00%,
Stipulated Payment 3.00% to
Contracts) 10.00%,
3.00% to
6.00%,
3.00% to
5.00%(C) --- ---
- --------------------------------------------------------------------------------
FUND B ANNUAL EXPENSES (as a percentage of average net assets)
- --------------------------------------------------------------------------------
Management Fees 0.44% --- ---
- --------------------------------------------------------------------------------
Mortality Fees 0.90% --- 0.90%
- --------------------------------------------------------------------------------
Expense Risk Fees 0.10% --- 0.10%
- --------------------------------------------------------------------------------
Other Expenses ---
- --------------------------------------------------------------------------------
Total Fund B Annual Expenses 1.44% --- 1.00%
- --------------------------------------------------------------------------------
VIP II INDEX 500 PORTFOLIO ANNUAL EXPENSES (as a percentage of average net
assets)
- --------------------------------------------------------------------------------
Management Fees --- 0.27% 0.27%
- --------------------------------------------------------------------------------
Other Expenses --- 0.13% 0.13%
- --------------------------------------------------------------------------------
Total VIP II Index 500 Portfolio
Annual Expenses --- 0.40%(D) 0.40%(D)
- --------------------------------------------------------------------------------
TOTAL FUND B AND VIP II INDEX 500
PORTFOLIO ANNUAL EXPENSES 1.44% 0.40%(D) 1.40%(D)
- --------------------------------------------------------------------------------
</TABLE>

<PAGE>

(A) Single Stipulated Payment Contract

(B) Periodic Stipulated Payment Contract. 15.00% to 1.00% (for a Contract
with a stipulated payment period of 12 or more years; 4.33% aggregate over all
years for a 12-year Contract); 10.00% to 3.00% (for a Contract with a
stipulated payment period of 9 to 11 years; 4.44% aggregate over all years for
a 9-year Contract); 6.00% to 3.00% (for a Contract with a stipulated payment
period of 6 to 8 years; 4.50% aggregate over all years for a 6-year Contract);
and 4.00% to 3.00% (for a Contract with a stipulated payment period of 2 to 5
years; 4.00% aggregate over all years for a 2-year Contract).

(C) Periodic Stipulated Payment Contract. 0.00% to 10.00% (for a Contract
with a stipulated payment period of 12 or more years; 4.67% aggregate over all
years for a 12-year Contract); 3.00% to 10.00% (for a Contract with a
stipulated payment period of 9 to 11 years; 4.44% aggregate over all years for
a 9-year Contract); 3.00% to 6.00% (for a Contract with a stipulated payment
period of 6 to 8 years; 4.50% aggregate over all years for a 6-year Contract);
and 3.00% to 5.00% (for a Contract with a stipulated payment period of 2 to 5
years; 5.00% aggregate over all years for a 2-year Contract).

(D) FMR has voluntarily agreed, subject to revision or termination, to
reimburse the Portfolio if and to the extent that its aggregate operating
expenses, including management fees (but excluding interest, taxes, brokerage
commissions and extraordinary expenses), exceed an annual rate of 0.28% of the
Portfolio's average net assets. There is no guarantee that this reimbursement
will continue.

FUND C AND VIP MONEY MARKET PORTFOLIO

Maximum Deferred Sales Load 6.00% (B)
(A) 8.00% (C) --- ---
$100 (D)
Maximum Administration Fee (E) --- ---
- --------------------------------------------------------------------------------
FUND C ANNUAL EXPENSES (as a percentage of average net assets)
- --------------------------------------------------------------------------------
Management Fees 0.375% --- ---
- --------------------------------------------------------------------------------
Mortality Fees 0.90% --- 0.90%
- --------------------------------------------------------------------------------
Expense Risk Fees 0.165% --- 0.165%
- --------------------------------------------------------------------------------
Other Expenses --- ---
- --------------------------------------------------------------------------------
Total Fund C Annual Expenses 1.44% --- 1.065%
- --------------------------------------------------------------------------------
VIP MONEY MARKET PORTFOLIO ANNUAL EXPENSES (as a percentage of average net
assets)
- --------------------------------------------------------------------------------
Management Fees --- 0.21% 0.21%

- --------------------------------------------------------------------------------
Other Expenses --- 0.10% 0.10%
- --------------------------------------------------------------------------------
Total VIP Money Market Portfolio
Annual Expenses --- 0.31% 0.31%
- --------------------------------------------------------------------------------
TOTAL FUND C AND VIP MONEY MARKET
PORTFOLIO ANNUAL EXPENSES 1.44% 0.31% 1.375%
- --------------------------------------------------------------------------------
</TABLE>

<PAGE>

(A) Expressed as a percentage of the lesser of: (1) the Cash Value of the part
of the Contract surrendered, or (2) the Stipulated Payments made during the
immediately preceding 72 months represented by the part of the Contract
surrendered (or the Stipulated Payment in the case of a Single Stipulated
Payment Contract).

(B) Single Stipulated Payment Contract. For total redemptions, percentage
decreases each Contract Year after the second until reaching zero for Contract
Year 5 and thereafter; for partial redemptions, percentage decreases to 4.00%
for Contract Year 3 and thereafter.

(C) Periodic Stipulated Payment Contract. For total redemptions, percentage
decreases each Contract Year after the third until reaching zero for Contract
Year 7 and thereafter; for partial redemptions, percentage decreases to 4.00%
for Contract Year 5 and thereafter.

(D) Single Stipulated Payment Contract.

(E) Periodic Stipulated Payment Contract. $20 per Contract Year plus $1 per
Stipulated Payment ($.50 if by bank draft or by employer or military
preauthorized automatic deduction).

<PAGE>

EXAMPLE

A. You would pay the following expenses (based on expenses for the year ended
December 31, 1997) on a $1,000 investment in your Contract, assuming a 5% annual
return on assets, if you surrender your Contract at the end of the applicable
time period. The first row of figures is for Single Stipulated Payment
Contracts, and the second row of figures is for Periodic Stipulated Payment
Contracts:

- --------------------------------------------------------------------------------
Subaccount A of the Continuing Fund
Fund A (actual) (pro forma)
- --------------------------------------------------------------------------------
10
1 year 3 years 5 years years 1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$103 $131 $162 $247 $13 $40 $70 $154
- --------------------------------------------------------------------------------
$103 $131 $162 $247 $13 $40 $70 $154
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Subaccount B of the Continuing Fund
Fund B (actual) (pro forma)
- --------------------------------------------------------------------------------
10
1 year 3 years 5 years years 1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$162 $189 $217 $297 $13 $40 $70 $154
- --------------------------------------------------------------------------------
$162 $189 $217 $297 $13 $40 $70 $154
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Subaccount C of the Continuing Fund
Fund C (actual) (pro forma)
- --------------------------------------------------------------------------------
10
1 year 3 years 5 years years 1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$173 $181 $171 $255 $14 $43 $75 $164
- --------------------------------------------------------------------------------
$116 $186 $217 $359 $14 $43 $75 $164
- --------------------------------------------------------------------------------

</TABLE>

B. You would pay the following expenses (based on expenses for the year ended
December 31, 1997) on a $1,000 investment in your Contract, assuming a 5% annual
return on assets, if you do not surrender your Contract at the end of the
applicable time period:

- --------------------------------------------------------------------------------
Subaccount A of the Continuing Fund
Fund A (actual) (pro forma)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
10
1 year 3 years 5 years years 1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
$103 $131 $162 $247 $13 $40 $70 $154
- --------------------------------------------------------------------------------
$103 $131 $162 $247 $13 $40 $70 $154
- --------------------------------------------------------------------------------
</TABLE>

<PAGE>

- --------------------------------------------------------------------------------
Subaccount C of the Continuing Fund
Fund C (actual) (pro forma)
- --------------------------------------------------------------------------------
10
1 year 3 years 5 years years 1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$113 $141 $171 $255 $14 $43 $75 $164
- --------------------------------------------------------------------------------
$36 $106 $177 $359 $14 $43 $75 $164
- --------------------------------------------------------------------------------
</TABLE>

THESE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES, AND THE
ACTUAL FUTURE EXPENSES PAID MAY BE GREATER OR LESS
THAN THOSE SHOWN.

REASONS FOR THE TRANSACTIONS

A combination of circumstances led the Board of Managers of each Fund to
propose the Reorganization. First, the asset base of the Funds will not
increase substantially in the foreseeable future because no new Contracts are
being sold (although continuing payments are accepted on existing Contracts).
Second, the portfolio manager primarily responsible for making investment
management decisions for the Funds has indicated a desire to discontinue serving
in this capacity. Third, since the Funds are separate entities, administration
costs for the Funds cannot benefit from economies of scale. Based on these
circumstances, the Board of Managers of each of the Funds decided to reevaluate
how each Fund should be managed. The respective Boards of Managers determined
that, rather than continuing to operate each Fund as an actively managed
portfolio, it would be more effective to restructure the Funds into a single
unit investment trust containing subaccounts that invest in actively or
passively managed investment portfolios. If the Reorganization is approved by
Fund Voters in each Fund, each Subaccount of the Continuing Fund will invest its
assets indirectly in securities through a Portfolio rather than directly in
securities, as each Fund currently does.

The Reorganization should benefit Contract Owners by enabling them to
participate in investment portfolios with a substantially larger asset base than
that currently held by each of the Funds. As of December 31, 1997, the net
assets in Fund A, Fund B, and Fund C were $12,294,889, $1,805,178, and
$1,921,099, respectively; while the net assets of the VIP II Index 500 Portfolio
and the VIP Money Market Portfolio as of that date were $2,098,041,775 and
$1,020,794,102, respectively. The Board of Managers of each Fund anticipates
that the larger asset base available through investments in the

22
<PAGE>

Portfolios will increase investment opportunities for and broaden
diversification of the funding medium for the Contracts.

The larger asset base would be especially advantageous with respect to Fund
C. The amount of assets that Fund C may invest in the securities of any one
issuer is restricted by Fund C's fundamental investment restrictions and the
regulations of the Securities and Exchange Commission and the Internal Revenue
Service. Under the most restrictive of these provisions, Fund C generally may
not invest more than 5% of its assets in the securities of any issuer, except
that it may invest up to 55% of its assets in securities issued or guaranteed as
to principal by the United States government. As of December 31, 1997, Fund C's
total assets were $1,921,249, and the maximum amount that Fund C was permitted
to invest in commercial paper of any one issuer was approximately $96,062. Due
to market conditions, it is more difficult to purchase an issue of commercial
paper in an amount less than $100,000. It is possible that the shrinking pool
of commercial paper investments available to Fund C due to its size may impair
the future investment performance of Fund C.

Various practical difficulties make it infeasible to use any of the Funds,
as they are currently structured, as the funding vehicle for insurance products
other than variable annuity contracts issued by The Franklin. The Portfolios,
however, currently are and will continue to be used for variable annuity
contracts and variable life insurance policies issued by numerous insurance
companies not affiliated with The Franklin. Therefore, more assets currently
are available to be invested in the Portfolios than are available to be invested
in the current Funds alone. The Franklin and the Board of Managers of each Fund
believe that this will result in economies of scale (particularly in view of the
declining assets of the Funds under the current circumstances in which no new
Contracts are being sold).

In addition, Contract Owners will benefit from the breadth and depth of
investment advisory expertise available to the VIP Money Market Portfolio and
the VIP II Index 500 Portfolio. This is particularly true for the VIP Money
Market Portfolio, which is an actively managed portfolio for which Fidelity
Investments Money Management, Inc. ("FIMM") serves as investment sub-adviser.
FIMM has primary responsibility for managing the VIP Money Market Portfolio's
investments. For the VIP II Index 500 Portfolio, Bankers Trust Company serves
as investment sub-adviser. Bankers Trust Company uses an indexing technique to
try to structure the Portfolio similarly to the structure of the S&P 500 and
seeks to achieve a 98% or better correlation between the Portfolio's total
return and the total return of the S&P 500. FMR monitors the correlation
between the performance of the VIP II Index 500 Portfolio and the S&P 500 on a
monthly basis.

As managers of portfolios significantly larger than each Fund, FMR, FIMM,
or Bankers Trust Company may be able to expend larger resources cost-effectively
to attain higher performance for the Portfolios although there is no guarantee
that higher performance will be achieved. The Boards of Managers of the
respective Funds also considered the favorable investment performance of the VIP
II Index 500 Portfolio and the VIP Money Market Portfolio compared to the
investment performance of the respective Funds over the past several years.
See, "Comparative Performance," below.

The VIP Money Market Portfolio was chosen as the investment vehicle for
Fund C Contract Owners' interests because the Portfolio and Fund C's investment
objectives and policies are reasonably consistent with each other. The VIP II
Index 500 Portfolio was selected as the investment vehicle for interests of
Contract Owners of Fund A and Fund B because the VIP II Index 500 Portfolio has
somewhat similar investment objectives and policies to Fund A and Fund B, and
because it is the respective Boards

<PAGE>

of Managers' belief that shareholders find S&P 500 index funds attractive since
these funds are designed for investors who want to pursue growth of capital and
current income through a portfolio of securities that broadly represents the
U.S. stock market, as measured by the S&P 500. In addition, index funds
generally have lower portfolio transaction costs (brokerage and other trading
costs), and a lower expense ratio (including advisory fees, distribution charges
and operating expenses), than actively managed funds.

Using the Portfolios as the investment vehicles for the Continuing Fund
would facilitate the addition of new investment options, if the Board of
Directors of The Franklin should choose to do so in the future. Although the
Board of Directors does not intend to pursue this avenue at this time, it would
be administratively simpler and less costly to add (and maintain) new investment
options in the form of new unmanaged subaccounts of the Continuing Fund
investing in additional portfolios of VIP or VIP II, or portfolios of other
mutual funds, than to add new investment options in the form of new managed
funds (structured as management investment companies).

In summary, The Franklin and the Board of Managers of each Fund expect the
Reorganization to result in increased investment opportunities, economies and
efficiencies which will benefit Contract Owners.

Shares of the Portfolios are sold to separate accounts to serve as the
underlying investment for both variable annuity contracts and variable life
insurance contracts. Shares of the Portfolios are also sold to separate
accounts of insurance companies that are not affiliated with The Franklin or
each other. As a result, there is a possibility that a material conflict may
arise between the interests of Contract Owners and owners of variable life
insurance contracts, or between the interests of Contract Owners and owners of
contracts whose values are allocated to one or more other insurance company
separate accounts investing in any one of the Portfolios. In the event of any
such material conflict, The Franklin will consider what action may be
appropriate, including removing a Portfolio from the Continuing Fund or
replacing a Portfolio with another portfolio.

The Franklin and the Board of Managers of each Fund believe that the
interests of Contract Owners immediately following the Reorganization will not
materially differ from their interests immediately prior to the Reorganization.
Contract Owners will still have an interest in a diverse portfolio of
investments with respect to each Subaccount of the Continuing Fund. The value
of Contract Owners' interests will not be changed by the Reorganization. In the
opinion of The Franklin, the Reorganization will not have any direct or indirect
adverse tax consequences for Contract Owners. Furthermore, the overall level of
fees and expenses borne, directly or indirectly, by each Fund's Contract Owners
should be lower immediately after the Reorganization than immediately before the
Reorganization.

ACTUAL AND PRO FORMA CAPITALIZATION

The following tables show the actual capitalization of the Funds, the VIP
II Index 500 Portfolio, and the VIP Money Market Portfolio on December 31, 1997,
as well as the pro forma capitalization of the Subaccounts, the VIP II Index 500
Portfolio and the VIP Money Market Portfolio on that date after giving effect to
the Reorganization:

<PAGE>

CAPITALIZATION
(as of December 31, FUND A FUND B FUND C SUBACCOUNT A SUBACCOUNT B SUBACCOUNT C
1997)(9) (actual) (actual) (actual) (pro forma) (pro forma) (pro forma)
<S> <C> <C> <C> <C> <C> <C>
Net Assets $12,294,889 $1,805,178 $1,921,099 $12,294,889 $1,805,178 $1,921,099
Net Asset Value $98.429 $110.589 $23.733 $114.40 $114.40 $1.00
Units or Shares
Outstanding 124,714 16,323 80,944 107,473 15,780 1,921,099

VIP II INDEX 500 VIP II INDEX 500 VIP MONEY MARKET VIP MONEY MARKET
CAPITALIZATION PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(as of December 31, 1997) (actual) (pro forma) (actual) (pro forma)
<S> <C> <C> <C> <C>
Net Assets $2,098,041,775 $2,112,141,842 $1,020,794,102 $1,022,715,201
Net Asset Value $114.40 $114.40 $1.00 $1.00
Units or Shares
Outstanding 18,340,322 18,463,575 1,020,837,796 1,022,758,895
</TABLE>

COMPARATIVE PERFORMANCE

The following tables show the actual and pro forma historic performance of
the Funds, for periods ended December 31, 1997, using various measures
appropriate for the Portfolio in which each Subaccount of the Continuing Fund
will solely invest if the Reorganization is approved. The pro forma performance
figures (shown in the right column) are derived from the actual performance of
each of the Portfolios as adjusted to reflect the mortality and expense risk
fees of the Continuing Fund, but do not reflect sales charges, surrender or
deferred sales loads and administration fees under the Contracts since these
charges and fees would not be imposed on the Continuing Fund. In other words,
the pro forma performance figures show how the Reorganization might have
affected historic performance if it had been consummated at an earlier time.
Although past performance is no guarantee of future results, Fund Voters may
wish to compare this pro forma performance of the Continuing Fund with the
actual performance of the Funds (shown in the left column of performance
figures)(10)

- --------------------------
(9) Net assets of Fund A include annuity reserves, therefore the number of
units outstanding multiplied by the net asset value does not equal the net
assets. For the other Funds and Subaccounts, the number of units or shares
outstanding multiplied by the net asset value does not equal the net assets due
to rounding.

(10) Average annual total return for Funds A and B was impacted by the
necessity of holding an amount of assets in cash in order to handle redemptions,
and by the inability of these Funds to reinvest dividends and capital gains in
the stock market due to these Funds' cash outflow.

<PAGE>

SUBACCOUNT OF
FUND CONTINUING FUND
(actual) (pro forma)
<S> <C> <C>
YIELD AND EFFECTIVE YIELD
(for periods ended December 31, 1997)

FUND C
Yield (7-day period) 3.93% 4.50%
Effective Yield (7-day period) 4.00% 4.60%

AVERAGE ANNUAL TOTAL RETURN (for periods
ended December 31, 1997)

FUND A
------
One Year 20.79% 31.68%
Five Years 13.17% 17.65%
Ten Years 12.25%

FUND B
------
One Year 27.30% 31.68%
Five Years 14.70% 17.65%
Ten Years 13.28%
</TABLE>

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

INFORMATION ON THE FUNDS, VIP AND VIP II

The Board of Directors of The Franklin established each of the Funds as a
"separate account" by resolutions pursuant to the provisions of the Illinois
Insurance Code. Fund A was established on November 5, 1969, Fund B was
established on April 1, 1970, and Fund C was established on July 23, 1981.
Under the provisions of the Illinois Insurance Code: (i) the income, gains and
losses of each Fund are credited to or charged against the amounts allocated to
the Fund in accordance with the terms of the respective Contracts, without
regard to The Franklin's other income, gains or losses; and (ii) the assets of
each Fund are not chargeable with liabilities arising out of The Franklin's
other business activities. Each Fund is registered with the Securities and
Exchange Commission under the 1940 Act as an open-end, diversified management
investment company -- a type of separate account known as a "managed account."
(Securities and Exchange Commission registration does not involve supervision of
the management or the investment practices or policies of the registered
investment company.) The Franklin no longer offers new Contracts through the
Funds. Additional information about each Fund is contained in the Fund's
prospectus (which accompanies this Proxy Statement/Prospectus as either Appendix
B, C, or D and is incorporated herein by reference) and in the Fund's statement
of additional information referred to in the Fund's prospectus.

26
<PAGE>

VIP was organized in the Commonwealth of Massachusetts on November 13,
1981, as a "Massachusetts business trust." VIP II was organized in the
Commonwealth of Massachusetts on March 21, 1988, also as a "Massachusetts
business trust." VIP and VIP II are each registered with the Securities and
Exchange Commission as an open-end management investment company -- a type of
company, in this case, commonly known as a "mutual fund." VIP and VIP II
currently offer their shares of beneficial interest exclusively to variable
annuity and variable life insurance separate accounts of insurance companies.
As "series" type of investment companies, VIP and VIP II issue distinct series
of shares, each of which represents an interest in a separate diversified
portfolio or "pool" of investments. Additional information is contained in the
prospectus for the VIP Money Market Portfolio (which accompanies this Proxy
Statement/Prospectus as Appendix E and is incorporated herein by reference), in
the prospectus for the VIP II Index 500 Portfolio (which accompanies this Proxy
Statement/Prospectus as Appendix F and is incorporated herein by reference), and
in the statements of additional information referred to in the prospectuses.

MANAGEMENT OF THE FUNDS AND THE PORTFOLIOS

Each Fund is managed by a Board of Managers. The Franklin acts as
investment manager for each Fund under an investment management agreement
between each Fund and The Franklin. For a complete discussion of each Fund's
investment advisory arrangements, see the respective prospectuses of the Funds
which accompany this Proxy Statement/Prospectus as Appendix B, Appendix C and
Appendix D.

VIP and VIP II are each managed by a Board of Trustees. FMR serves as
investment adviser for all of the portfolios currently offered by VIP and VIP
II. FIMM and Bankers Trust Company (together, the "sub-advisers") serve as sub-
advisers to the VIP Money Market Portfolio and the VIP II Index 500 Portfolio,
respectively. For a more complete discussion of the Portfolios' investment
advisory arrangements, see the VIP Money Market Portfolio and VIP II Index 500
Portfolio prospectuses which accompany this Proxy Statement/Prospectus as
Appendix E and Appendix F, respectively.

At such time as the Reorganization takes effect, The Franklin's investment
management relationship with each Fund will be ended, since the Subaccounts of
the Continuing Fund will then invest only in shares of the specified Portfolios.
Because each Subaccount of the Continuing Fund will invest in only one Portfolio
and no direct investments in securities will be made by the Continuing Fund, the
Continuing Fund will have no discretion in investment decisions and no need for
investment management or advice.

Pursuant to Management Contracts dated December 1, 1997 and January 1,
1994, respectively, FMR serves as investment adviser for the VIP II Index 500
Portfolio and the VIP Money Market Portfolio. FMR is a Massachusetts
corporation which is not affiliated with The Franklin. FMR's principal business
address is 82 Devonshire Street, Boston, Massachusetts 02109. FMR is a
registered investment adviser under the Investment Advisers Act of 1940, as
amended.

The Portfolios' Management Contracts terminate automatically in the event
of assignment or, with respect to any Portfolio, upon sixty (60) days' notice
given by a Portfolio's Board of Trustees, or by FMR as the case may be, or by
majority vote (as defined in the 1940 Act) of the Portfolio's shares.
Otherwise, the Management Contract will continue in force with respect to any
Portfolio so long as its continuance is approved at least annually by a majority
of the noninterested members of the Portfolio's

27
<PAGE>

Board of Trustees, and by (i) a majority vote (as defined in the 1940 Act) of
the Portfolio's shareholders or (ii) a majority of the Portfolio's Board of
Trustees.

In general, the sub-advisers perform similar investment advisory services
for the Portfolios as The Franklin currently does for the Funds. Each of the
sub-advisers has day-to-day responsibility for making investment decisions and
placing investment orders for the Portfolio it manages. The sub-advisers are
also responsible for seeing to it that purchases and sales of Portfolio
investments are made in a manner consistent with the current investment
objective and policies of each Portfolio. The sub-advisers are responsible for
the execution of securities transactions for the Portfolios.

The sub-advisers will use their best efforts to seek to execute portfolio
transactions at prices that are advantageous to the Portfolio and at commission
rates that are reasonable in relation to the benefits received. The sub-
advisers will attempt to achieve this result by selecting broker-dealers to
execute Portfolio transactions on the basis of: the size and type of the
transaction; the nature and character of the markets for the security to be
purchased or sold; the execution efficiency, settlement capability, and
financial condition of the broker-dealer; the broker-dealer's execution services
rendered on a continuing basis; and the reasonableness of any commissions. The
availability of research or other services or payment of Portfolio expenses may
also be considered in selecting broker-dealers.

ORGANIZATION AND OPERATION OF THE PORTFOLIOS

CHARACTERISTICS OF VIP AND VIP II'S SHARES. Shares issued by each of VIP
and VIP II are each divided into separate series representing interests in
separate portfolios. Each issued and outstanding share of a portfolio is
entitled to participate equally in dividends and distributions from such
portfolio and in the net assets of such portfolio (I.E., the assets remaining
after satisfaction of outstanding liabilities) upon a liquidation or
dissolution. For these purposes, and for purposes of determining the purchase
and redemption prices of shares, any assets which are not clearly allocable to a
particular portfolio or portfolios will be allocated in the manner determined by
VIP or VIP II's Board of Trustees. Accrued liabilities which are not allocable
to one or more portfolios will generally be allocated among the portfolios in
proportion to their relative net assets before adjustment for such unallocated
liability. In the unlikely event that any portfolio incurred liabilities in
excess of its assets, the other portfolios could be liable for such excess.
Similarly, and equally unlikely, each Subaccount of the Continuing Fund could
perhaps be liable for claims arising out of another Subaccount's operations.

VIP and VIP II's authorized capital consists of an unlimited number of
shares of beneficial interest of no par value. Shares currently entitle their
holders to one vote per share; however, separate votes will be taken by each
series on matters affecting an individual series.(1) Shares have noncumulative
voting rights and no preemptive or subscription rights. VIP and VIP II are not
required to hold shareholder meetings annually, although shareholder meetings
may be called for purposes such as electing or removing Trustees, changing
fundamental policies or approving an investment management contract.

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

(1) At a meeting scheduled for September 16, 1998, the Board of Trustees of
VIP will ask shareholders of the VIP Money Market Portfolio to adopt an
Amended and Restated Declaration of Trust which, if approved, would provide
that the voting power of each shareholder would be commensurate with the
value of the shareholder's dollar investment, rather than the number of
shares owned.

28
<PAGE>

DIVIDENDS, DISTRIBUTIONS, AND TAXES. Each Portfolio intends to qualify
each year as a "regulated investment company" for tax purposes so that it will
not be liable for federal tax on income and capital gains distributed to
shareholders. In order to qualify as a regulated investment company and avoid
being subject to federal income or excise taxes at the Portfolio level, each
Portfolio intends to distribute substantially all of its net investment income
and net realized capital gains within each calendar year as well as on a fiscal
year basis, and intends to comply with other tax rules applicable to regulated
investment companies. Income and capital gains distributions are reinvested in
additional shares of the Portfolio. This is done to preserve the tax-advantaged
status of the variable contracts that invest in the Portfolio. VIP Money Market
Portfolio may distribute any net realized short-term capital gains once a year
or more often as necessary, to maintain its net asset value at $1.00. VIP Money
Market Portfolio does not anticipate distributing long-term capital gains. Such
distributions to The Franklin in respect of the Subaccounts of the Continuing
Fund will be reinvested in additional full and fractional shares of the
Portfolio to which they relate. Shares of each Portfolio which are purchased
with reinvested distributions paid by such Portfolio will be held in the
corresponding Subaccount of the Continuing Fund, and will be appropriately
credited to the investment performance of that Subaccount for the benefit of
Contract Owners.

To qualify for treatment as a regulated investment company, each Portfolio
must, among other things, derive in each taxable year at least 90% of its gross
income from certain categories of income, including dividends, interest, and
gains from the sale or other disposition of "securities"; diversify its
portfolio assets; and distribute substantially all of its earnings to
shareholders. Each Portfolio will be treated as a separate entity for federal
income tax purposes. Therefore, the investments and results of the Portfolios
will not be aggregated for purposes of determining whether they meet the
foregoing requirements.

Although each Portfolio intends to operate in such a way that it will have
no federal income tax liability, if any such liability is nevertheless incurred,
the investment performance of such Portfolio would be adversely affected, to the
detriment of Contract Owners. This risk does not currently exist for Contract
Owners, since the Funds, unlike VIP or VIP II, need not qualify as a regulated
investment company. Indeed, the Funds are not treated for tax purposes as an
entity separate from The Franklin, which is taxed as an insurance company under
different provisions of the Internal Revenue Code (the "Code").

VOTING OF PORTFOLIO SHARES. The current voting procedures with respect to
the Funds are set forth under "General Information Regarding Proxy
Solicitation," above.

Each share of all portfolios of VIP and VIP II is currently entitled to one
vote, and the votes of all portfolios are cast on an aggregate basis except on
matters where the interests of the portfolios differ.(2) Where the interests of
the portfolios differ, the voting is on a portfolio-by-portfolio basis.
Approval or disapproval by the shareholders in one portfolio on such a matter
would not generally be a prerequisite of approval or disapproval by shareholders
in another portfolio; and shareholders in a portfolio not affected by a matter
generally would not be entitled to vote on that matter. Examples of matters
which would require a portfolio-by-portfolio vote are changes in a fundamental
investment policy of a particular

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

(2) See prior footnote regarding a proposed change in the voting rights for
the VIP Money Market Portfolio.

29
<PAGE>

portfolio and approval of an investment advisory agreement.

If the Reorganization is approved by the Fund Voters, The Franklin will
offer Contract Owners the opportunity to instruct The Franklin as to how VIP and
VIP II's shares allocable to their Contracts and held by The Franklin in the
Continuing Fund will be voted with respect to the same kinds of matters as to
which Contract Owners are currently entitled to vote. The number of shares held
in each Subaccount of the Continuing Fund deemed attributable to each Contract
Owner for this purpose will be determined by dividing the total value of the
Contract's Accumulation Units (or, after Annuity Payments commence, the amount
of Contract reserves) allocable to that Subaccount by the net asset value of one
share of the corresponding Portfolio as of the record date. Fractional votes
will be counted. Shares of the Portfolios in any Subaccount which are not
attributable to the Contracts or for which no voting instructions are timely
received by The Franklin will be voted in the same proportion as the shares for
which voting instructions are timely received under the Contracts. Thus,
although voting instructions will be reflected somewhat differently after the
Reorganization than before, The Franklin believes that this will not result in
any significant diminution of Contract Owners' voting privileges.

Notwithstanding the foregoing, it is anticipated that the Reorganization
will result in dilution of the voting influence which Contract Owners have with
respect to the funding medium for their Contracts. This dilution is
attributable to the fact that other separate accounts have voting interests in
the Portfolios, and shares of the Portfolios which are held in separate accounts
of insurance companies other than The Franklin will be voted in accordance with
instructions of the owners of policies or contracts issued by such other
companies.

CERTAIN OWNERSHIP INTERESTS. As of December 31, 1997, The Franklin owned
no Contract participating in the investment experience of Fund A, Fund B, or
Fund C, respectively. As of December 31, 1997, no member of the Board of
Managers nor any officer of any Fund owned any Contract participating in the
investment experience of Fund A, Fund B, or Fund C.

SALE OF THE CONTRACTS AND PORTFOLIO SHARES

The Contracts were sold by The Franklin's agents, who were licensed to sell
variable annuities and were registered representatives of Franklin Financial
Services Corporation ("Franklin Financial"). Franklin Financial is registered
as a broker-dealer under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), is a member of the National Association of Securities Dealers, Inc.
("NASD"), and was the principal underwriter of the Funds. The Contracts are no
longer being sold; however, additional Stipulated Payments will continue to be
accepted in accordance with contractual provisions. The Franklin currently does
not intend to issue new Contracts following the consummation of the
Reorganization.

Shares in each Portfolio are offered continuously to the separate accounts
of insurance companies by Fidelity Distributors Corporation ("FDC"). FDC is
registered as a broker-dealer under the 1934 Act, is a member of the NASD, and
is the principal underwriter of the Portfolios. FDC accepts orders for shares
at their net asset value, as no sales commission or load is charged.

30
<PAGE>

DEDUCTIONS, CHARGES, FEES, AND EXPENSES

DEDUCTIONS AND CHARGES UNDER THE CONTRACTS.

If the Reorganization is approved by the Fund Voters for each Fund, certain
Fund annual expenses, such as the investment management service charge, will not
be incurred directly by the Continuing Fund but, in effect, will be replaced by
the Portfolios' fees and expenses. Other deductions and charges, such as the
mortality and expense risk fees, will continue to apply after the
Reorganization. In addition, the Contracts' sales loads, surrender or deferred
sales charges, and administration fees will be discontinued. The deductions and
charges that remain applicable after the Reorganization are described below.

The Franklin offers two types of Contracts through each Fund: contracts
under which annuity payments to the annuitant commence immediately ("immediate
variable annuities"), and those under which annuity payments to the annuitant
commence in the future ("deferred variable annuities"). Immediate variable
annuities may only be purchased with a single payment to The Franklin under a
Contract. Deferred variable annuities may be purchased either with periodic
payments or single payments to The Franklin under a Contract.

CONTRACTS ISSUED THROUGH FUND A. The Contracts offered through Fund A ("Fund A
Contracts") were sold for use in connection with certain qualified plans and
trusts accorded special tax treatment or as individual retirement annuities
under the Internal Revenue Code (the "Code") as follows:

(1) in connection with qualified employee pension and profit-sharing trusts
described in Section 401(a) and tax-exempt under Section 501(a) of the Code, and
qualified annuity plans described in Section 403(a) of the Code;

(2) in connection with qualified pension, profit-sharing and annuity plans
established by self-employed persons;

(3) in connection with annuity purchase plans adopted by public school
systems and certain tax-exempt organizations pursuant to Section 403(b) of the
Code; or

(4) as Individual Retirement Annuities described in Section 408(b) of the
Code, including Simplified Employee Pensions described in Section 408(k) of the
Code.

CONTRACTS ISSUED THROUGH FUND B. The Contracts offered through Fund B ("Fund B
Contracts") are designed primarily to assist in retirement planning for
individuals. Fund B Contracts are NOT designed for use in connection with
employer-related plans or qualified plans and trusts accorded special tax
treatment under the Code.

CONTRACTS ISSUED THROUGH FUND C. The Contracts offered through Fund C ("Fund C
Contracts") are designed primarily to assist in retirement planning for
individuals. Fund C Contracts may be sold for use as individual retirement
annuities or in connection with trusts and retirement or deferred compensation
plans which may or may not qualify for favorable tax treatment under the Code.
Tax-Qualified Fund C Contracts were sold for use in the same markets that are
available under Fund A Contracts.

31
<PAGE>

PREMIUM TAXES. At the time any premium taxes are payable by The Franklin
on the consideration received from the sale of the Contracts, the amount thereof
will be deducted from the Stipulated Payments. Premium taxes ranging up to 5%
are charged by various jurisdictions in which The Franklin is transacting
business and in which it has offered Fund A Contracts, Fund B Contracts, and
Fund C Contracts.

MORTALITY AND EXPENSE RISK FEES. The Franklin assumes the risk that
annuity payments will continue for a longer period than anticipated because the
annuitant lives longer than expected, and also assumes the risk that the
administration deduction may be insufficient to cover the actual administration
expenses under the Contracts. For assuming these risks, The Franklin imposes a
daily charge against the value of the accumulation unit and the annuity unit.
For Fund A Contracts and Fund B Contracts, these charges are at the combined
annual rate of 1.002% (.002745% on a daily basis), of which .900% is for annuity
rate and mortality assurances and .102% is for expense assurances. The Franklin
will not increase these charges regardless of the actual mortality and expense
experience. For assuming the mortality and expense risks under Fund C
Contracts, The Franklin imposes a daily charge against the value of the
accumulation unit and the annuity unit at the current combined annual rate of
1.065% (.002918% on a daily basis), of which .900% is for annuity rate and
mortality assurances and .165% is for expense assurances. The Franklin may
increase the expense charge under Fund C Contracts at any time up to a maximum
of .850%.

FEES AND EXPENSES OF THE PORTFOLIOS

MANAGEMENT FEE. Just as each Fund (prior to the Reorganization) is
responsible for payment of an investment management service charge, each
Portfolio is responsible for payment of a management fee and VIP II Index 500
Portfolio also is responsible for payment of a sub-advisory fee. See discussion
above under "Comparison of Fees and Expenses."

OTHER EXPENSES OF THE PORTFOLIOS. The Portfolios also make payments to
Fidelity Investments Institutional Operations Company, Inc. ("FIIOC") for
transfer agency, dividend disbursing and shareholder servicing functions, and to
Fidelity Service Company, Inc. ("FSC") for certain accounting services. For the
fiscal year ended December 31, 1997, these payments, stated as an annual
percentage of the Portfolio's average net assets, were 0.07% to FIIOC, and 0.04%
to FSC for the VIP II Index 500 Portfolio; and 0.07% to FIIOC and 0.01% to FSC
for the VIP Money Market Portfolio. FMR has voluntarily agreed to reimburse a
portion of the VIP II Index 500 Portfolio's operating expenses. See discussion
above under "Comparison of Fees and Expenses."

SUPPLEMENTARY FINANCIAL INFORMATION

FINANCIAL HIGHLIGHTS FOR THE FUNDS. As a supplement to the ten fiscal
years of condensed financial information for each Fund contained in the
respective Fund's prospectus (accompanying this Proxy Statement/Prospectus as
Appendices B, C, and D), the following corresponding data are presented for the
year ended December 31, 1997:

32
<PAGE>

SELECTED DATA PER ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD
(for the year ended December 31, 1997)

<TABLE>
<CAPTION>
Fund A Fund B Fund C
------ ------ ------
<S> <C> <C> <C>
PER ACCUMULATION UNIT DATA:
Investment income ($) 1.910 2.025 1.204
Expenses ($) 1.312 1.447 .337
Net investment income ($) .598 .578 .867
Net realized and unrealized gain on investments ($) 16.346 23.136 --
Net increase in accumulation unit value ($) 16.944 23.714 .867
Accumulation unit value at beginning of period ($) 81.485 86.875 22.866
Accumulation unit value at end of period ($) 98.429 110.589 23.733
RATIOS:
Ratio of expenses to average net assets (%) 1.44 1.44 1.44
Ratio of net investment income to average net assets (%) .66 .58 3.73
Portfolio turnover rate (%) .70 .67 --
Number of accumulation units outstanding at end of period 124,714 16,323 80,944

</TABLE>

FINANCIAL HIGHLIGHTS FOR THE PORTFOLIOS. The following data are presented
for the year ended December 31, 1997 and correspond to the complete fiscal years
of financial highlights for each of the VIP Money Market Portfolio and the VIP
II Index 500 Portfolio contained in the Portfolios' prospectuses (accompanying
this Proxy Statement/Prospectus as Appendix E and Appendix F):

VIP AND VIP II
SELECTED DATA PER SHARE OUTSTANDING THROUGHOUT THE PERIOD
(for the year ended December 31, 1997)

<TABLE>
<CAPTION>
VIP II INDEX VIP MONEY
500 PORTFOLIO MARKET PORTFOLIO
------------- ----------------
<S> <C> <C>
PER SHARE DATA
Net asset value, beginning of period ($) 89.05 1.000
Income from investment operations:
Net investment income ($) 1.80a .053
Net realized and unrealized gain on investment
transactions ($) 26.67 --

33
<PAGE>

Total from investment operations ($) 28.47 .053
Less distributions from:
Net investment income (1.03) (.053)
Net realized gains on investment transactions (2.09) --
Total distributions (3.12) (.053)
Net asset value, end of period ($) 114.40 1.00
TOTAL RETURN (%) 32.83b 5.51d
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) 2,098,042 1,020,794
Ratio of operating expenses, to average net
assets (%) .28c .31
Ratio of net investment income to average net
assets (%) 1.74 5.32
Portfolio turnover rate (%) 9 --
</TABLE>

a - Net investment income per share has been calculated based on average shares
outstanding during the period.

b - Total return does not reflect charges attributable to insurance company
separate accounts. Inclusion of these charges would reduce the total
return shown. Total return would have been lower had certain expenses
not been reduced during the period shown.

c - FMR agreed to reimburse a portion of the Portfolio's expenses during the
period. Without this reimbursement, the Portfolio's expense ratio would
have been higher.

d - Total return would have been lower had certain expenses not been reduced
during the period shown.

AVAILABILITY OF CERTAIN OTHER INFORMATION

The Funds, VIP and VIP II are subject to various reporting and filing
requirements pursuant to statutes administered by the Securities and Exchange
Commission. The balance of this registration statement, of which this Proxy
Statement/Prospectus forms a part, as well as reports, proxy statements, and
other information filed with the Securities and Exchange Commission by the
Funds, VIP or VIP II, can be inspected and copied at the public reference
facilities maintained by the Securities and Exchange Commission at: 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549; 7 World Trade Center, Suite
1300, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the
Securities and Exchange Commission at prescribed rates by writing to the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549.

THE BOARD OF MANAGERS OF EACH OF THE FUNDS RECOMMENDS A VOTE FOR THE
REORGANIZATION.

34
<PAGE>

OTHER MATTERS

The Board of Managers of each Fund knows of no other matters which are
likely to be brought before the Special Meetings. In the event any other
matters do properly come before the Special Meetings, however, the persons named
in the enclosed proxy will vote the proxies in accordance with their best
judgment.

<PAGE>

PROXY OF CONTRACT OWNER

FRANKLIN LIFE VARIABLE ANNUITY FUND A

PROXY SOLICITED BY THE BOARD OF MANAGERS FOR A SPECIAL MEETING OF
CONTRACT OWNERS OF FRANKLIN LIFE VARIABLE ANNUITY FUND A
TO BE HELD ON SEPTEMBER 21, 1998.

[Contract Owner] Proxy Number: ____________________
[Address]
[City, State, Zip Code] Contract Number: _________________

Units: ______________

The undersigned Contract Owner of Franklin Life Variable Annuity Fund A
(the "Fund"), having received Notice of the Special Meeting of Contract
Owners of the Fund and the Proxy Statement/Prospectus accompanying such
Notice, each dated ________________, hereby constitutes and appoints Robert
G. Spencer and Elizabeth E. Arthur, and each of them, true and lawful
attorneys or attorney of the undersigned, with power of substitution, to
attend and to cast all votes entitled to be cast by the undersigned, for and
in the name, place and stead of the undersigned, at the Special Meeting of
Contract Owners of the Fund to be held on September 21, 1998 at ____ a.m.,
Central Standard Time, at The Franklin Life Insurance Company's home office
at #1 Franklin Square, Springfield, Illinois 62713, and at any and all
adjournments thereof, with all powers the undersigned would possess if
personally present.

All previous proxies given with respect to all votes entitled to be cast by
the undersigned at the Special Meeting are hereby revoked. THE PROXIES WILL
VOTE IN THE MANNER DIRECTED HEREIN, OR, IF NO DIRECTION HAS BEEN INDICATED, FOR
EACH PROPOSAL. The Board of Managers of the Fund recommends that this proxy be
marked FOR each proposal. This proxy may be revoked at any time prior to the
Special Meeting by executing a subsequent proxy, or by notifying the Secretary
of the Fund in writing, or by voting in person at the Special Meeting.

Please mark, sign, date, and return all proxy forms promptly in the
enclosed envelope. Please sign exactly as your name appears on this form. To
vote on the proposal, using blue or black ink, indicate your choice by marking
an "X" in the appropriate box as follows: /X/

THE PROXY FORM MUST BE SIGNED AND DATED FOR YOUR VOTE TO BE COUNTED.

- --------------------------------------------------------------------------------
For Against Abstain
- --------------------------------------------------------------------------------
1. Proposal to approve an Agreement and Plan of / / / / / /
Reorganization and related transactions
whereby Franklin Life Variable Annuity Fund A,
presently a management investment company, will
be renamed and restructured as a single unit
investment trust comprising three investment
divisions and will be combined with Franklin Life
Variable Annuity Fund B and Franklin Life Money
Market Variable Annuity Fund C, and each
investment division will invest exclusively in
shares of a specified portfolio of Fidelity's
Variable Insurance Products Fund or Fidelity's
Variable Insurance Products Fund II.
- --------------------------------------------------------------------------------

Signature: Signature:
------------------------- ------------------------------

Dated:
-------------------

<PAGE>

PROXY OF CONTRACT OWNER

FRANKLIN LIFE VARIABLE ANNUITY FUND B

PROXY SOLICITED BY THE BOARD OF MANAGERS FOR A SPECIAL MEETING OF
CONTRACT OWNERS OF FRANKLIN LIFE VARIABLE ANNUITY FUND B
TO BE HELD ON SEPTEMBER 21, 1998.

[Contract Owner] Proxy Number: ____________________
[Address]
[City, State, Zip Code] Contract Number: _________________

Units: ______________

The undersigned Contract Owner of Franklin Life Variable Annuity Fund B
(the "Fund"), having received Notice of the Special Meeting of Contract Owners
of the Fund and the Proxy Statement/Prospectus accompanying such Notice, each
dated ________________, hereby constitutes and appoints Robert G. Spencer and
Elizabeth E. Arthur, and each of them, true and lawful attorneys or attorney of
the undersigned, with power of substitution, to attend and to cast all votes
entitled to be cast by the undersigned, for and in the name, place and stead of
the undersigned, at the Special Meeting of Contract Owners of the Fund to be
held on September 21, 1998 at ____ a.m., Central Standard Time, at The Franklin
Life Insurance Company's home office at #1 Franklin Square, Springfield,
Illinois 62713, and at any and all adjournments thereof, with all powers the
undersigned would possess if personally present.

THE PROXY FORM MUST BE SIGNED AND DATED FOR YOUR VOTE TO BE COUNTED.

Signature: Signature:
------------------------- ------------------------------

Dated:
-------------------

<PAGE>

PROXY OF CONTRACT OWNER

FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C

PROXY SOLICITED BY THE BOARD OF MANAGERS FOR A SPECIAL MEETING OF
CONTRACT OWNERS OF FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
TO BE HELD ON SEPTEMBER 21, 1998.

[Contract Owner] Proxy Number: ____________________
[Address]
[City, State, Zip Code] Contract Number: _________________

Units: ______________

The undersigned Contract Owner of Franklin Life Money Market Variable
Annuity Fund C (the "Fund"), having received Notice of the Special Meeting of
Contract Owners of the Fund and the Proxy Statement/Prospectus accompanying
such Notice, each dated ________________, hereby constitutes and appoints
Robert G. Spencer and Elizabeth E. Arthur, and each of them, true and lawful
attorneys or attorney of the undersigned, with power of substitution, to
attend and to cast all votes entitled to be cast by the undersigned, for and
in the name, place and stead of the undersigned, at the Special Meeting of
Contract Owners of the Fund to be held on September 21, 1998 at ____ a.m.,
Central Standard Time, at The Franklin Life Insurance Company's home office
at #1 Franklin Square, Springfield, Illinois 62713, and at any and all
adjournments thereof, with all powers the undersigned would possess if
personally present.

THE PROXY FORM MUST BE SIGNED AND DATED FOR YOUR VOTE TO BE COUNTED.

Signature: Signature:
------------------------- ------------------------------

Dated:
-------------------

<PAGE>

APPENDIX A

AGREEMENT AND PLAN OF REORGANIZATION

<PAGE>

AGREEMENT AND PLAN OF REORGANIZATION
FOR
FRANKLIN LIFE VARIABLE ANNUITY FUND A
FRANKLIN LIFE VARIABLE ANNUITY FUND B
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
OF
THE FRANKLIN LIFE INSURANCE COMPANY

This Agreement and Plan of Reorganization (the "Agreement"), is
entered into as of the 27th day of May, 1998, by and among The Franklin Life
Insurance Company ("The Franklin"), a stock life insurance company organized
and existing under the laws of the State of Illinois, Franklin Life Variable
Annuity Fund A ("Fund A"), Franklin Life Variable Annuity Fund B ("Fund B"),
and Franklin Life Money Market Variable Annuity Fund C ("Fund C").

WHEREAS, each of Fund A, Fund B, and Fund C (collectively, the
"Funds") is a managed separate account established and existing under the
insurance laws of the State of Illinois, is registered with the Securities and
Exchange Commission (the "Commission") as an open-end, diversified management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), and is the funding vehicle for certain variable annuity contracts
issued by The Franklin (the "Contracts"); and

WHEREAS, Fund A and Fund B each invest primarily in common stocks to
achieve the investment objective of long-term appreciation of capital through
investment appreciation and the retention and reinvestment of income, and Fund C
invests in short-term money market securities to achieve the investment
objective of long-term compounding of income through retention and reinvestment
of income from investments in a diversified portfolio of short-term money market
securities yielding a high level of current income to the extent consistent with
the preservation of capital and the maintenance of liquidity; and

WHEREAS, each of Variable Insurance Products Fund ("VIP") and Variable
Insurance Products Fund II ("VIP II") is a business trust organized and existing
under the laws of the Commonwealth of Massachusetts, is a series-type mutual
fund that currently comprises several investment portfolios (each, a
"Portfolio") including the Money Market Portfolio for VIP and the Index 500
Portfolio for VIP II, and is registered with the Commission as an open-end
management investment company under the 1940 Act; and

WHEREAS, the Index 500 Portfolio normally invests at least 80% of its
assets in equity securities of companies that compose the Standard & Poor's 500
Index-Registered Trademark- ("S&P 500") to achieve its investment objective of
matching the total return of the S&P 500 while keeping expenses low; and the
Money Market Portfolio invests in high-quality, short-term money market
securities to achieve its investment objective of obtaining as high a level of
current income as is consistent with preserving capital and providing liquidity;
and

1
<PAGE>

WHEREAS, VIP and VIP II do and, to the extent permitted by the 1940
Act, may continue to serve as investment vehicles for variable annuity contracts
and variable life insurance policies issued by insurance companies that are not
affiliated with The Franklin; and

WHEREAS the Boards of Managers of each Fund has considered and
approved the actions contemplated by this Agreement and has authorized that Fund
to enter into this Agreement; and

WHEREAS, the Board of Directors of The Franklin has considered and
approved the actions contemplated by this Agreement and has authorized The
Franklin to enter into this Agreement;

NOW THEREFORE, in consideration of the mutual promises made herein,
the parties hereto agree as follows:

ARTICLE I: CLOSING DATE

SECTION 1.01. The reorganization contemplated by this Agreement shall
be effective on such date as may be mutually agreed upon in writing by all
parties to this Agreement (the "Closing Date"). The time on the Closing Date as
of which the reorganization is consummated is referred to hereinafter as the
"Effective Time."

SECTION 1.02. The parties agree to use their best efforts to obtain
all regulatory approvals and approvals of persons entitled to vote with respect
to each Fund ("Fund Voters"), and to perform all other acts necessary or
desirable to complete the reorganization as of the Closing Date.

ARTICLE II: TRANSACTIONS

SECTION 2.01. Prior to the Effective Time, Fund A will be renamed as
"Franklin Life Variable Annuity Fund" or such other name specified by the Board
of Managers of Fund A (hereafter, the "Continuing Fund"), and will be
reorganized into a single unit investment trust separate account comprising
three investment divisions ("Subaccount A," "Subaccount B," and "Subaccount C").

SECTION 2.02. Prior to the Effective Time: (1) all of the assets
(including securities and other investments held or in transit, receivables for
sold investments, dividends, interest receivables and any other assets) of Fund
A will be converted into cash and transferred to Subaccount A of the Continuing
Fund; (2) all of the assets (including securities and other investments held or
in transit, receivables for sold investments, dividends, interest receivables
and any other assets) of Fund B will be converted into cash and transferred to
Subaccount B of the Continuing Fund; and (3) all of the assets (including
securities and other investments held or in transit, receivables for sold
investments, dividends, interest receivables

2
<PAGE>

and any other assets) of Fund C will be converted into cash and transferred to
Subaccount C of the Continuing Fund.

SECTION 2.03. As of the Effective Time, The Franklin, on behalf of
the Continuing Fund, will transfer all cash (except for a minimal amount needed
to keep bank accounts open) of: (1) Subaccount A to VIP II's Index 500
Portfolio; (2) Subaccount B to VIP II's Index 500 Portfolio; and (3) Subaccount
C to VIP's Money Market Portfolio.

SECTION 2.04. In return for the cash received on behalf of Subaccount
A and Subaccount B of the Continuing Fund, The Franklin will receive from VIP
II, on behalf of each such Subaccount, shares in the series corresponding to the
Index 500 Portfolio. In return for the cash received on behalf of Subaccount C,
The Franklin will receive from VIP, on behalf of such Subaccount, shares in the
series corresponding to the Money Market Portfolio. The number of shares in
each series of VIP or VIP II to be received shall be determined by dividing (1)
the amount of cash transferred on behalf of each Subaccount of the Continuing
Fund, by (2) the per share value of the corresponding series of VIP or VIP II's
shares (computed in the manner set forth in the currently effective registration
statement for VIP and VIP II) as of the Closing Date or such other date required
by law.

SECTION 2.05. As of the Effective Time, The Franklin shall cause the
shares of VIP or VIP II it receives pursuant to Section 2.04 of this Agreement
to be duly and validly recorded and held on its records as assets of the
Continuing Fund, such that the interest of each owner of a Contract ("Contract
Owner") in each Subaccount of the Continuing Fund after the Closing Date will
then be equivalent in value to that Contract Owner's former interest in each
Fund. The Franklin shall take all action necessary to ensure that such
interests in the Continuing Fund, immediately following the Effective Time, are
duly and validly recorded on the Contract Owner's individual account records.

SECTION 2.06. VIP and VIP II's shares to be issued hereunder may,
upon instructions from The Franklin, be issued in open account form by book
entry without the issuance of certificates or may be represented by
certificates.

SECTION 2.07. If, at any time after the Closing Date, the Continuing
Fund or The Franklin shall determine that any further action is necessary or
desirable to complete the reorganization contemplated by this Agreement, the
appropriate entity or entities shall take all such actions which are considered
reasonable and necessary to complete the reorganization.

SECTION 2.08. Following the Closing Date: (1) The Franklin will not
provide investment advisory services to the Continuing Fund and, therefore, will
not charge the Continuing Fund for investment advisory services; (2) The
Franklin will waive the subsequent imposition and receipt of all sales loads,
surrender or deferred sales charges, and administration fees specified in each
of the Contracts; and (3) The Franklin will charge the Continuing Fund for
mortality and expense risks assumed by The Franklin and for any premium taxes
with respect to the Contracts.

3
<PAGE>

ARTICLE III: WARRANTIES AND CONDITIONS

SECTION 3.01. The Franklin and the Funds, as appropriate, make the
following representations and warranties, which shall survive the Closing Date
and bind their respective successors and assigns (I.E., the Continuing Fund):

(a) The Franklin and the Funds are validly organized and established,
and in good standing under the laws of the State of Illinois, and are fully
empowered and qualified to carry out their business in all jurisdictions where
they do so, including to enter into this Agreement and to effect the
reorganization contemplated hereby (provided that all necessary approvals
referred to in Section 3.02 of this Agreement are obtained).

(b) Each Fund is duly registered and in good standing as an
investment company under the 1940 Act.

(c) The Contracts are validly issued and non-assessable, and all of
the Contracts issued through each Fund have been offered and sold in material
compliance with applicable requirements of the federal securities laws.

(d) All corporate and other proceedings necessary and required to be
taken by or on the part of The Franklin and the Funds to authorize and carry out
this Agreement and to effect the reorganization have been duly and properly
taken.

(e) There are no suits, actions, or proceedings pending or threatened
against any party to this Agreement which, to its knowledge, if adversely
determined, would materially and adversely affect its financial condition, the
conduct of its business, or its ability to carry out its obligations hereunder.

(f) There are no investigations or administrative proceedings by the
Commission or by any insurance or securities regulatory body of any state or
territory or of the District of Columbia pending against any party to this
Agreement which, to its knowledge, would lead to any suit, action, or proceeding
that, if adversely determined, would materially and adversely affect its
financial condition, the conduct of its business, or its ability to carry out
its obligations hereunder.

(g) If any party to this Agreement becomes aware, prior to the
Effective Time, of any suit, action, or proceeding, of the types described in
paragraphs (e) or (f) above, instituted or commenced against it, such party
shall immediately notify and advise all other parties to this Agreement.

(h) Each party shall make available all information concerning itself
which may be required in any application, registration statement, or other
filing with a governmental body to be made by the parties to this Agreement, in
connection with any of the transactions contemplated by this Agreement and shall
join in all such applications or filings, subject to

4
<PAGE>

reasonable approval by its counsel. Each party represents and warrants that to
its knowledge all of such information so furnished shall be correct in all
material respects and that it shall not omit any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading.

(i) From the date of this Agreement through the Closing Date, each of
the Funds will conduct its business in accordance with such Fund's governing
Rules and Regulations and in substantial compliance with the Illinois Insurance
Laws and the terms of the Contracts issued through each Fund, and The Franklin
will conduct its business in accordance with its Bylaws and in substantial
compliance with the Illinois Insurance Laws.

(j) Except with respect to contracts entered into in connection with
the investment advisory services of the Funds which shall terminate on or prior
to the Closing Date, no party is engaged currently, and the execution, delivery
and performance of this Agreement by each party will not result, in a material
violation of any such party's charter, by-laws, or any material agreement,
indenture, instrument, contract, lease or other undertaking to which such party
is bound, and to such party's knowledge, the execution, delivery and performance
of this Agreement will not result in the acceleration of any obligation, or the
imposition of any penalty, under any material agreement, indenture, instrument,
contract, lease, judgment or decree to which any such party may be a party or to
which it is bound.

(k) This Agreement is a valid obligation of The Franklin and the
Funds and is legally binding upon them in accordance with its terms.

SECTION 3.02. The obligations of the parties hereunder shall be
subject to satisfaction of each of the following conditions:

(a) The representations contained herein shall be true as of and at
the Effective Time with the same effect as though made at such time, and such
parties shall have performed all obligations required by this Agreement to be
performed by each of them prior to such time.

(b) The Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act nor instituted any proceeding seeking
to enjoin consummation of the reorganization contemplated hereby.

(c) The appropriate parties shall have received orders from the
Commission providing such exemptions and approvals as they and their counsel
reasonably deem necessary, including exemptions from Section 17(a) of the 1940
Act, and shall have made all necessary filings, if any, with, and received all
necessary approvals from, state securities or insurance authorities.

(d) Fund A shall have filed with the Commission a registration
statement on Form N-14 under the Securities Act of 1933, as amended (the "1933
Act"), and such pre-

5
<PAGE>

effective amendments thereto as may be necessary or desirable to effect the
purposes of the reorganization; and the appropriate parties shall have taken all
actions necessary for such filings to become effective; and no reason shall be
known by the parties which would prevent the filings from becoming effective in
a timely manner.

(e) At a meeting of Fund Voters called for such purpose (or any
adjournments thereof), a majority of the outstanding voting securities (as
defined in the 1940 Act and the rules thereunder) of each of the Funds, voting
separately, shall have voted in favor of approving this Agreement and the
reorganization contemplated hereby.

(f) Each party shall have furnished, as reasonably requested by any
other party, legal opinions, officers' certificates, certified copies of board
and committee resolutions, certificates of good standing or "all fees paid" or
similar certificates, and other closing documentation as may be appropriate for
a transaction of this type.

ARTICLE IV: COSTS

SECTION 4.01. The Franklin shall bear all expenses incurred by it and
by each of the Funds in connection with effecting the reorganization
contemplated by this Agreement (including, without limitation, any expenses
incurred by it and each of the Funds in connection with: actions taken pursuant
to Section 2.07 of this Agreement; preparation and filing of registration
statements, applications, and amendments thereto on behalf of any and all
parties hereto; all legal, accounting, and data processing services for The
Franklin and each of the Funds necessary to effect the reorganization; and all
expenses incurred in connection with liquidating the Funds' assets as described
in Section 2.02).

ARTICLE V: TERMINATION

SECTION 5.01. This Agreement may be terminated and the reorganization
abandoned at any time prior to the Effective Time, notwithstanding approval by
Fund Voters:

(a) by mutual consent of the parties hereto; and

(b) by any of the parties if any condition set forth in Section 3.02
of this Agreement has not been fulfilled by the other parties.

SECTION 5.02. At any time prior to the Effective Time, any of the
terms or conditions of this Agreement may be waived by the party or parties
entitled to the benefit thereof if such waiver will not have a material adverse
effect on the interests of Contract Owners.

6
<PAGE>

ARTICLE VI: GENERAL

SECTION 6.01. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.

SECTION 6.02. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of Illinois, without regard to its
principles of conflicts of law.

* * *

<PAGE>

IN WITNESS WHEREOF, as of the day and year first above written,
each of the parties has caused this Agreement to be executed on its behalf by
its Chairman, President, or Vice President and attested by its Secretary or
Assistant Secretary, all thereunto duly authorized.

THE FRANKLIN LIFE INSURANCE COMPANY

Attest:

/s/ Elizabeth E. Arthur By: /s/ William A. Simpson
- ----------------------------- -------------------------------------------
Title: ASSISTANT SECRETARY Title: CHAIRMAN AND CHIEF EXECUTIVE OFFICER

FRANKLIN LIFE VARIABLE ANNUITY FUND A

Attest:

/s/ Elizabeth E. Arthur By: /s/ Robert G. Spencer
- ----------------------------- -------------------------------------------
Title: SECRETARY, Title: CHAIRMAN, BOARD OF MANAGERS
BOARD OF MANAGERS

FRANKLIN LIFE VARIABLE ANNUITY FUND B

Attest:

/s/ Elizabeth E. Arthur By: /s/Robert G. Spencer
- ----------------------------- -------------------------------------------
Title: SECRETARY, Title: CHAIRMAN, BOARD OF MANAGERS
BOARD OF MANAGERS

FRANKLIN LIFE MONEY MARKET VARIABLE
ANNUITY FUND C

Attest:

/s/ Elizabeth E. Arthur By: /s/Robert G. Spencer
- ----------------------------- -------------------------------------------
Title: SECRETARY, Title: CHAIRMAN, BOARD OF MANAGERS
BOARD OF MANAGERS

8
<PAGE>

APPENDIX B

FRANKLIN LIFE VARIABLE ANNUITY FUND A
PROSPECTUS

<PAGE>

FRANKLIN LIFE VARIABLE ANNUITY FUND A

PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(USED IN CONNECTION WITH QUALIFIED
TRUSTS OR PLANS OR AS INDIVIDUAL
RETIREMENT ANNUITIES) ISSUED BY

#1 Franklin Square
Springfield, Illlinois 62713
Telephone (800) 528-2011

THIS PROSPECTUS DESCRIBES INDIVIDUAL IMMEDIATE AND DEFERRED VARIABLE
ANNUITY CONTRACTS FOR USE IN CONNECTION WITH CERTAIN QUALIFIED PLANS AND TRUSTS
ACCORDED SPECIAL TAX TREATMENT OR AS INDIVIDUAL RETIREMENT ANNUITIES UNDER THE
INTERNAL REVENUE CODE (SEE "FEDERAL INCOME TAX STATUS", BELOW FOR MORE
INFORMATION). THE BASIC PURPOSE OF THE VARIABLE CONTRACTS IS TO PROVIDE ANNUITY
PAYMENTS WHICH WILL VARY WITH THE INVESTMENT PERFORMANCE OF FRANKLIN LIFE
VARIABLE ANNUITY FUND A (THE "FUND"). THE FUND NO LONGER OFFERS NEW CONTRACTS.

THE PRIMARY INVESTMENT OBJECTIVE OF THE FUND IS LONG-TERM APPRECIATION OF
CAPITAL THROUGH INVESTMENT APPRECIATION AND THE RETENTION AND REINVESTMENT OF
INCOME. THERE IS NO ASSURANCE THAT THIS OBJECTIVE WILL BE ATTAINED. GENERALLY,
THE FUND'S INVESTMENTS WILL CONSIST OF EQUITY SECURITIES, MAINLY COMMON STOCKS.

- -------------------------------------------------------------------------------
THIS PROSPECTUS SETS FORTH INFORMATION ABOUT THE FUND THAT A PROSPECTIVE
INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE KEPT FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE FUND AND THE FRANKLIN IS CONTAINED IN A
STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 30, 1998, WHICH HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN OR ORAL REQUEST. A STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED
FROM THE FRANKLIN BY WRITING TO THE ADDRESS (ATTENTION: BOX 1018) OR CALLING
THE TELEPHONE NUMBER (EXTENSION 2591) SET FORTH ABOVE OR BY RETURNING THE
REQUEST FORM ON THE BACK COVER OF THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED
IN THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE.
THE TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON
PAGE 37 OF THIS PROSPECTUS.
- -------------------------------------------------------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998.

<PAGE>

TABLE OF CONTENTS

PAGE

<S> <C>
Special Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table of Deductions and Charges. . . . . . . . . . . . . . . . . . . . 5
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Per-Unit Income and Changes in Accumulation Unit Value . . . . . . . . 8
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Description of the Separate Account. . . . . . . . . . . . . . . . . . 10
Deductions and Charges Under the Contracts . . . . . . . . . . . . . . 11
A. Sales and Administration Deductions. . . . . . . . . . . . . 11
B. Premium Taxes. . . . . . . . . . . . . . . . . . . . . . . . 11
C. Mortality and Expense Risk Charge. . . . . . . . . . . . . . 12
D. Investment Management Service Charge . . . . . . . . . . . . 12
E. Transfers to Other Contracts . . . . . . . . . . . . . . . . 12
F. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . 13
The Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
A. General. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
B. Deferred Variable Annuity Accumulation Period. . . . . . . . 15
C. Annuity Period . . . . . . . . . . . . . . . . . . . . . . . 22
Investment Policies and Restrictions of the Fund . . . . . . . . . . . 25
Federal Income Tax Status. . . . . . . . . . . . . . . . . . . . . . . 27
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
The Franklin. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
The Contracts: Qualified Plans. . . . . . . . . . . . . . . . . . 28
A. Qualified Pension, Profit-Sharing and Annuity Plans. . . . . 29
B. H. R. 10 Plans (Self-Employed Individuals) . . . . . . . . . 29
C. Section 403(b) Annuities . . . . . . . . . . . . . . . . . . 29
D. Individual Retirement Annuities. . . . . . . . . . . . . . . 30
Income Tax Withholding. . . . . . . . . . . . . . . . . . . . . . 31
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Distribution of the Contracts. . . . . . . . . . . . . . . . . . . . . 34
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Reports to Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Fundamental Changes. . . . . . . . . . . . . . . . . . . . . . . . . . 34
Year 2000 Transition . . . . . . . . . . . . . . . . . . . . . . . . . 35
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . 35
Other Variable Annuity Contracts; Effect of Non-Qualification. . . . . 36
Table of Contents of Statement of Additional Information . . . . . . . 37

</TABLE>

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

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON HAS BEEN AUTHORIZED BY THE
FRANKLIN LIFE INSURANCE COMPANY, FRANKLIN FINANCIAL SERVICES CORPORATION OR
FRANKLIN LIFE VARIABLE ANNUITY FUND A TO MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN ANY
AUTHORIZED SUPPLEMENTAL SALES MATERIAL.

2
<PAGE>

SPECIAL TERMS

The following is a glossary of certain terms used in this Prospectus:

ACCUMULATION UNIT--A measure used to determine the value of a Contract
Owner's interest in the Fund prior to the initial Annuity Payment Date.

ANNUITY PAYMENT DATE--The date the first monthly Annuity Payment is to be
made to the Variable Annuitant, and the same day of each month thereafter so
long as the annuity is due. Depending on the Settlement Option elected,
Annuity Payment Dates may occur on a periodic basis other than monthly.

ANNUITY PAYMENTS--Periodic payments made to a Variable Annuitant pursuant to
a Contract. In certain circumstances, Annuity Payments may be paid to a
Beneficiary after the death of a Variable Annuitant.

ANNUITY UNIT--A measure used to determine the value of Annuity Payments after
the first.

BENEFICIARY--The person or persons designated by the Contract Owner to whom
any payment due on death is payable.

CASH VALUE--The value of all Accumulation Units or Annuity Units attributable
to a Contract.

CODE--The Internal Revenue Code of 1986, as amended.

CONTRACT--An individual variable annuity contract issued by Franklin Life
Variable Annuity Fund A that is offered by this Prospectus.

CONTRACT ANNIVERSARY--An anniversary of the Effective Date of the Contract.

CONTRACT OWNER--Except in cases where the Contract is issued to a trustee of
a qualified employees' trust or pursuant to a qualified annuity plan, the
Contract Owner is the individual Variable Annuitant to whom the Contract is
issued. In cases where the Contract is issued to a trustee of a qualified
employees' trust or pursuant to a qualified annuity plan, the Contract Owner
will be respectively the trustee or the employer establishing such trust or
plan, and the employee named as the Variable Annuitant of such Contract is
referred to herein as the employee. When the term "Contract Owner" is used in
the context of voting rights, it includes the owners of all contracts which
depend in whole or in part on the investment performance of the Fund.

CONTRACT YEAR--Each year starting with the Effective Date and each Contract
Anniversary thereafter.

DEFERRED VARIABLE ANNUITY--An annuity contract which provides for Annuity
Payments to commence at some future date. Included are periodic payment
deferred contracts and single payment deferred contracts.

EFFECTIVE DATE--The date shown on the Schedule Page of the Contract as the
date the first Contract Year begins.

FIXED-DOLLAR ANNUITY--An annuity contract which provides for Annuity Payments
which remain fixed as to dollar amount throughout the Annuity Payment period.

HOME OFFICE--The Home Office of The Franklin located at #1 Franklin Square,
Springfield, Illinois 62713.

IMMEDIATE VARIABLE ANNUITY--An annuity contract which provides for Annuity
Payments to commence immediately rather than at some future date.

3
<PAGE>

INDIVIDUAL RETIREMENT ANNUITY--An annuity contract described in Section
408(b) of the Code. Individual Retirement Annuities may also qualify as
Simplified Employee Pensions.

PERIODIC STIPULATED PAYMENT CONTRACT--An annuity contract which provides that
payments made to purchase the contract will be made in periodic instalments
rather than in a single sum.

QUALIFIED CONTRACTS--Contracts issued under Qualified Plans.

QUALIFIED PLANS--Retirement plans which receive favorable tax treatment under
the Code and which are described on page 9, below.

ROLLOVER CONTRIBUTION--A transfer pursuant to Sections 402(c), 403(a)(4),
403(b)(8) or 408(d)(3) of the Code.

SETTLEMENT OPTION OR OPTIONS--Alternative terms under which payment of the
amounts due in settlement of the Contracts may be received.

SIMPLIFIED EMPLOYEE PENSION--An Individual Retirement Annuity which meets the
additional requirements of Section 408(k) of the Code.

SINGLE STIPULATED PAYMENT CONTRACT--An annuity contract which provides that
the total payment to purchase the contract will be made in a single sum
rather than in periodic instalments. Included are single payment immediate
contracts and single payment deferred contracts.

STIPULATED PAYMENTS--The payment or payments provided to be made to The
Franklin under a Contract.

THE FRANKLIN--The Franklin Life Insurance Company, an Illinois legal reserve
stock life insurance company.

VALUATION DATE--Each date as of which the Accumulation Unit value is
determined. This value is determined on each day (other than a day during
which no Contract or portion thereof is tendered for redemption and no order
to purchase or transfer a Contract is received by the Fund) in which there is
a sufficient degree of trading in the securities in which the Fund invests
that the value of an Accumulation Unit might be materially affected by
changes in the value of the Fund's investments, as of the close of trading on
that day.

VALUATION PERIOD--The period commencing on a Valuation Date and ending on the
next Valuation Date.

VARIABLE ANNUITANT--Any natural person with respect to whom a Contract has
been issued and a Variable Annuity has been, will be or (but for death) would
have been effected thereunder. In certain circumstances, a Variable Annuitant
may elect to receive Annuity Payments on a fixed-basis or a combination of a
fixed and variable basis.

VARIABLE ANNUITY--An annuity contract which provides for a series of periodic
annuity payments, the amounts of which may increase or decrease as a result
of the investment experience of a separate account.

4
<PAGE>

TABLE OF DEDUCTIONS AND CHARGES

<TABLE>
<S> <C>
Contract Owner Transaction Expenses

Sales Load Imposed on Purchases (as a percentage of
purchase payments)
Single Stipulated Payment Contract 5.00%
Periodic Stipulated Payment Contract 6.00%

Administration Fee (as a percentage of purchase payments)
Single Stipulated Payment Contract 4.00% ($100
maximum)
Periodic Stipulated Payment Contract 3.00%

Annual Expenses
(as a percentage of average net assets)
Management Fees 0.44%
Mortality and Expense Risk Fees
Mortality Fees 0.90%
Expense Risk Fees 0.10%
----

Total Annual Expenses 1.44%

</TABLE>

Example
<TABLE>
<CAPTION>

If you surrender your contract at the end of the applicable
time period: 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>

You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets:

Single Stipulated Payment Contract $ 103 $ 131 $ 162 $ 247

Periodic Stipulated Payment Contract $ 103 $ 131 $ 162 $ 247

</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

The Table of Deductions and Charges is intended to assist Contract Owners in
understanding the various fees and expenses that they bear directly or
indirectly. Additional deductions may be made from Stipulated Payments for any
premium taxes payable by The Franklin on the consideration received from the
sale of the Contracts. See "Premium Taxes," below. For a more detailed
description of such fees and expenses, see "Deductions and Charges under the
Contracts," below. The example assumes that a single Stipulated Payment of
$1,000 is made at the beginning of the periods shown. (It should be noted that
The Franklin will not actually issue a Single Stipulated Payment Contract unless
the single payment is at least $2,500.) This assumption applies even with
respect to Periodic Stipulated Payment Contracts, which would normally require
additional payments. The example also assumes a constant investment return of 5%
and the expenses might be different if the return of the Fund averaged 5% over
the periods shown but fluctuated during such periods. The amounts shown in the
example represent the aggregate amounts that would be paid over the life of a
Contract if the Contract were surrendered at the end of the applicable time
periods.

5
<PAGE>

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

SUMMARY

THE CONTRACTS

The individual variable annuity contracts (the "Contracts") being offered
by this Prospectus are for use in connection with certain qualified plans and
trusts accorded special tax treatment under the Code or as Individual Retirement
Annuities. See "Federal Income Tax Status," below. The basic purpose of the
Contracts is to provide Annuity Payments which will vary with the investment
performance of Franklin Life Variable Annuity Fund A (the "Fund"). The Contracts
provide Annuity Payments for life commencing on an initial Annuity Payment Date
selected by the Contract Owner; other Settlement Options are provided. See
"Introduction," and "The Contracts," below. At any time within 10 days after
receipt of a Contract, the Contract Owner may return the Contract and receive a
refund of any premium paid on the Contract. See "Right to Revocation of
Contract," below.

THE FUND AND ITS INVESTMENT OBJECTIVES

The Fund is an open-end diversified management investment company. The
primary investment objective of the Fund is long-term appreciation of capital
through investment appreciation and retention and reinvestment of income.
Generally, the Fund's investments will consist of equity securities, mainly
common stocks. The value of investments held in the Fund is subject to the risk
of changing economic conditions as well as the risk inherent in management's
ability to anticipate such changes. See "Investment Policies and Restrictions of
the Fund," below.

INVESTMENT ADVISER; PRINCIPAL UNDERWRITER

The Franklin Life Insurance Company ("The Franklin"), an Illinois legal
reserve stock life insurance company, acts as investment adviser to the Fund.
The Franklin is engaged in the writing of ordinary life policies, annuities and
income protection policies. Franklin Financial Services Corporation, a
wholly-owned subsidiary of The Franklin, is the principal underwriter for the
Fund. The Franklin is an indirect wholly-owned subsidiary of American General
Corporation. See "Investment Management Service Charge," and "Distribution of
the Contracts," below.

DEDUCTIONS AND CHARGES

The deductions and charges applicable to a Contract are illustrated in the
Table of Deductions and Charges that appears immediately before this Summary. In
the case of Periodic Stipulated Payment Contracts, a deduction equal to 6% of
each periodic payment is made for sales expenses and a deduction equal to 3% of
each such payment is made for administrative expenses. The combined deductions
amount to 9.89% of the net amount invested assuming no premium taxes are
applicable (6.59% for sales expenses and 3.30% for administrative expenses). In
the case of a Single Stipulated Payment Contract, a deduction equal to 5% of the
total single payment is made for sales expenses and a deduction equal to 4%
(with a maximum of $100) of such payment is made for administrative expenses
(for a combined total of 9%). In the case of the minimum Single Stipulated
Payment Contract sold, the combined deductions amount to 9.89% of the net amount
invested assuming no premium taxes are applicable (5.49% for sales expenses and
4.40% for administrative expenses). Any applicable state or local taxes on the
Stipulated Payments (currently, up to 5%) also are deducted from the single or
periodic Stipulated Payments. The amount remaining after deductions is allocated
to the Fund. See "Sales and Administration Deductions," "Transfers to Other
Contracts," and "Premium Taxes," below.

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

6
<PAGE>

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

The Contracts include The Franklin's undertaking that deductions for sales
and administrative expenses will not be increased regardless of the actual
expenses incurred, and that the Annuity Payments will be paid for the lifetime
of the Variable Annuitant (and, in the case of a joint and last survivor
annuity, for the joint lives of the persons specified) commencing on the
selected initial Annuity Payment Date based on the mortality assumptions
contained in the Contract, regardless of the actual mortality experience among
the Variable Annuitants. In exchange for these undertakings, a charge of 1.002%
of net asset value on an annual basis is made daily against the Fund (consisting
of 0.900% for The Franklin's assurances of annuity rates or mortality factors
and 0.102% for The Franklin's assurances of expense factors). A charge of 0.438%
of net asset value on an annual basis is also made daily against the Fund for
investment management services by The Franklin. The charges for annuity rate
assurances, expense assurances and investment management services thus aggregate
1.440% of net asset value on an annual basis. See "Mortality and Expense Risk
Charge," and "Investment Management Service Charge," below.

MINIMUM PERMITTED INVESTMENT

Subject to limited exceptions, the minimum single Stipulated Payment is
$2,500. The minimum Periodic Stipulated Payment Contract sold is one under which
the periodic Stipulated Payment is currently $10 ($120 on an annual basis). See
"Purchase Limits," below.

NEW CONTRACTS NO LONGER BEING ISSUED

The Fund no longer issues new Contracts.

REDEMPTION

A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the Contract's initial Annuity
Payment Date, may, subject to any limitations on early settlement contained in
an applicable Qualified Plan and subject to limitations on early withdrawals
imposed in connection with Section 403(b) annuity purchase plans (see "Federal
Income Tax Status," below), redeem all or part of the Contract and receive the
Cash Value (equal to the number of Accumulation Units credited to the part of
the Contract redeemed times the value of an Accumulation Unit at the end of the
Valuation Period in which the request for redemption is received) less federal
income tax withholding, if applicable. For information as to Accumulation Units,
see "Value of the Accumulation Unit," below. Subject to certain limitations, the
Contract Owner may elect to have all or a portion of the amount due upon a total
redemption of a Contract applied under certain Settlement Options or applied
toward the purchase of other annuity or insurance products offered by The
Franklin. Federal tax penalties may apply to certain redemptions. See
"Redemption," "Transfers to and from Other Contracts," "Settlement Options," and
"Federal Income Tax Status," below.

TERMINATION BY THE FRANKLIN

The Franklin currently reserves the right to terminate Contracts if
Stipulated Payments are less than $120 in each of three consecutive Contract
Years (excluding the first Contract Year) and if the Cash Value is less than
$500 at the end of such three-year period. Different termination provisions
apply in the case of Individual Retirement Annuities. See "Termination by The
Franklin," below.

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

7
<PAGE>

The financial information in this table for each of the three years in the
period ended December 31, 1997 has been audited by Ernst & Young LLP,
independent auditors. The financial information in this table for each of the
two years in the period ended December 31, 1994 was audited by Coopers & Lybrand
L.L.P., independent accountants. This table should be read in conjunction with
the financial statements and notes thereto included in the Statement of
Additional Information.

YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income $1.910 $ 1.685 $ 1.948 $ 1.408 $ 1.231 $ 1.064 $ 1.194 $ 1.326 $ 1.343 $ .235
Expenses 1.312 1.090 .875 .773 .773 .723 .654 .569 .528 .454
---------------------------------------------------------------------------------------------------
Net Investment
income .598 .595 1.073 .635 .458 .341 .540 .757 .815 .781
Net realized and
unrealized gain
(loss) on
securities 16.346 11.690 14.139 (.240) .112 .770 14.238 (3.287) 7.021 .043
---------------------------------------------------------------------------------------------------
Net change in
accumulation unit
value 16.944 12.285 15.212 .395 .570 1.111 14.778 (2.530) 7.836 .824
Accumulation unit
value:
Beginning of year 81.485 69.200 53.988 53.593 53.023 51.912 37.134 39.664 31.828 31.004
---------------------------------------------------------------------------------------------------
End of year $98.429 $81.485 $69.200 $53.988 $53.593 $53.023 $51.912 $37.134 $39.664 $31.828
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Ratio of expenses to
average net
assets 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net
investment
income to
average net
assets .66% .79% 1.76% 1.18% .85% .68% 1.19% 1.91% 2.22% 2.47%
Portfolio turnover
rate .70% 4.77% 14.66% 88.99% 68.62% 59.84% 28.47% 24.01% 64.55% 104.96%
Number of
accumulation
units outstanding
at end of year 124,714 139,945 150,474 172,507 198,763 217,948 229,368 256,831 277,735 305,265
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------

</TABLE>

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

FINANCIAL STATEMENTS

The financial statements for the Fund and The Franklin and the reports of
the independent auditors and accountants for the Fund and The Franklin are
included in the Statement of Additional Information.

8
<PAGE>

INTRODUCTION

FRANKLIN LIFE VARIABLE ANNUITY FUND A

INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY

The Contracts offered by this Prospectus are designed primarily to assist
in retirement planning for individuals. The Contracts provide Annuity Payments
for life commencing on a selected Annuity Payment Date; other Settlement Options
are available. The amount of the Annuity Payments will vary with the investment
performance of the assets of the Fund, a separate account which has been
established by The Franklin under Illinois insurance law. For the primary
investment objective of the Fund, see "Investment Policies and Restrictions of
the Fund," below.

The Qualified Contracts described in this Prospectus will not knowingly be
sold other than for use:

(2) in connection with qualified pension, profit-sharing and annuity plans
established by self-employed persons ("H.R. 10 Plans");

(3) in connection with annuity purchase plans adopted by public school
systems and certain tax-exempt organizations pursuant to Section 403(b) of the
Code; or

(4) as Individual Retirement Annuities described in Section 408(b) of the
Code, including Simplified Employee Pensions described in Section 408(k) of the
Code.

Pursuant to this Prospectus, The Franklin offers two types of Contracts:
those under which Annuity Payments to the Variable Annuitant commence
immediately-"Immediate Variable Annuities"-and those under which Annuity
Payments to the Variable Annuitant commence in the future-"Deferred Variable
Annuities." Deferred Variable Annuities may be purchased either with periodic
Stipulated Payments or with a single Stipulated Payment, while Immediate
Variable Annuities may only be purchased with a single Stipulated Payment.

The Franklin is a legal reserve stock life insurance company organized
under the laws of the State of Illinois in 1884. The Franklin issues individual
life insurance, annuity and accident and health insurance policies, group
annuities and group life insurance and offers a variety of whole life, life,
retirement income and level and decreasing term insurance plans. Its Home Office
is located at #1 Franklin Square, Springfield, Illinois 62713.

American General Corporation ("American General") through its wholly-owned
subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding
shares of common stock of The Franklin. The address of AGC Life is American
General Center, Nashville, Tennessee 37250-0001. The address of American
General is 2929 Allen Parkway, Houston, Texas 77019-2155.

American General is one of the largest diversified financial services
organizations in the United States. American General's operating subsidiaries
are leading providers of retirement services, consumer loans, and life
insurance. The company was incorporated as a general business corporation in
Texas in 1980 and is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.

9
<PAGE>

Subject to the terms of any plan pursuant to which a Contract is issued,
the Contract Owner may elect to have a portion of the Stipulated Payment or
Payments applied by The Franklin for the purchase of a Fixed-Dollar Annuity.
Fixed-Dollar Annuity contracts do not, however, participate in the Fund and the
contracts are transferred to the general account of The Franklin. In cases where
both a Fixed-Dollar and a Variable Annuity are provided under the same contract,
either annuity may be terminated and the Cash Value attributable thereto
obtained or other Settlement Option elected by the Contract Owner, at any time
prior to commencement of Annuity Payments by The Franklin; under these
circumstances, the other annuity may be continued in effect, provided that the
annual stipulated payment allocated to the other annuity satisfies The
Franklin's usual underwriting practices. These practices presently require that
each periodic Stipulated Payment which purchases the Variable Annuity be at
least $10. See generally "Redemption," "Settlement Options," and "Federal Income
Tax Status-Individual Retirement Annuities," below.

Unless otherwise indicated in this Prospectus, the discussion of the
Contracts herein refers to Variable Annuity Contracts, or to the Variable
Annuity portion in cases where both a variable and a Fixed-Dollar Annuity are
provided in the same contract, and not to any Fixed-Dollar Annuity. Provisions
relating to a Fixed-Dollar Annuity and a Variable Annuity are separate, and
neither is dependent upon the other in its operation.

The discussion of Contract terms herein in many cases summarizes those
terms. Reference is made to the full text of the Contract forms, which are filed
with the Securities and Exchange Commission as exhibits to the Registration
Statement under the Securities Act of 1933 and the Investment Company Act of
1940 of which this Prospectus is a part. The exercise of certain of the Contract
rights herein described may be subject to the terms and conditions of any
Qualified Plan under which such Contract may be purchased. This Prospectus
contains no information concerning any such Qualified Plan. Further information
relating to some Qualified Plans may be obtained from the disclosure documents
required to be distributed to employees under the Employee Retirement Income
Security Act of 1974.

DESCRIPTION OF THE SEPARATE ACCOUNT

The Fund was established as a separate account on November 5, 1969 by
resolution of the Board of Directors of The Franklin pursuant to the
provisions of the Illinois Insurance Code. The Fund is an open-end
diversified management investment company registered with the Securities and
Exchange Commission under the Investment Company Act of 1940. Such
registration does not involve supervision of the management or investment
practices or policies of the Fund or of The Franklin by the Commission. The
Board of Managers of the Fund must be elected annually by Contract Owners. A
majority of the members of the Board of Managers are persons who are not
otherwise affiliated with The Franklin. See "Management," below. The Fund
meets the definition of a "Separate Account'' under the federal securities
laws.

Under the provisions of the Illinois Insurance Code: (i) the income,
gains or losses of the Fund are credited to or charged against the amounts
allocated to the Fund in accordance with the terms of the Contracts, without
regard to the other income, gains or losses of The Franklin; and (ii) the
assets of the Fund are not chargeable with liabilities arising out of The
Franklin's other business activities, including liabilities of any other
separate account which may be established. These assets are held with
relation to the Contracts described in this Prospectus and such other
Variable Annuity contracts as may be issued by The Franklin and designated by
it as participating in the Fund. All obligations arising under the
Contracts, including the promise to make Annuity Payments, are general
corporate obligations of The Franklin. Accordingly, all of The Franklin's
assets (except those allocated to other separate accounts which have been or
may be established) are available to meet its obligations and expenses under
the Contracts participating in the Fund.

The Franklin is taxed as a "life insurance company" under the Code. The
Fund is subject to tax as part of The Franklin for federal income tax purposes.
However, the operations of the Fund are

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considered separately from the other operations of The Franklin in computing The
Franklin's tax liability and the Fund is not affected by federal income taxes
paid by The Franklin with respect to its other operations. The operations of the
Fund are treated separately from the other operations of The Franklin for
accounting and financial statement purposes. Under existing law, no federal
income tax is payable by The Franklin on investment income and realized capital
gains of the Fund. See "Federal Income Tax Status," below.

DEDUCTIONS AND CHARGES UNDER THE CONTRACTS

The Franklin deducts the charges described below to cover costs and
expenses, services provided, and risks assumed under the Contracts. The amount
of a charge may not necessarily correspond to the costs associated with
providing the services or benefits indicated by the designation of the charge or
associated with the particular contract. For example, the sales deductions may
not fully cover all of the sales and distribution expenses actually incurred by
The Franklin, and proceeds from other charges, including the mortality and
expense risk charge, may be used in part to cover such expenses.

A. SALES AND ADMINISTRATION DEDUCTIONS

Deductions will be made as follows for sales expenses with respect to the
Contracts and for administrative expenses with respect to Contracts and the
Fund:

(1) Under Single Stipulated Payment Contracts, a deduction of 4%
(with a maximum of $100) is made from the single payment for administrative
expenses. In addition, a sales expense deduction of 5% of the total payment
is made from the payment. In the case of the minimum Single Stipulated
Payment Contract sold, the combined deductions for administrative expenses
and sales expenses amount to 9.89% of the net amount invested (5.49% for
sales expenses and 4.40% for administrative expenses) assuming no premium
taxes are applicable.

(2) Under Periodic Payment Contracts, a deduction of 6% is made from
each payment for sales expenses and 3% for administrative expenses. The
combined deductions for sales and administrative expenses amount to 9.89%
of the net amount invested (6.59% for sales expenses and 3.30% for
administrative expenses) assuming no premium taxes are applicable.

Deductions for sales expenses are made pursuant to a Sales Agreement
with Franklin Financial Services Corporation ("Franklin Financial"), a
wholly-owned subsidiary of The Franklin and the principal underwriter of the
Fund. See "Distribution of the Contracts," below, and in the Statement of
Additional Information. The above deductions for administrative expenses, and
charges for mortality and expense risk assurances discussed under "Mortality
and Expense Risk Charge," below, are made pursuant to an Administration
Agreement dated June 30, 1971 between the Fund and The Franklin. The
Administration Agreement is described under "Investment Advisory and Other
Services" in the Statement of Additional Information.

The total deductions made in respect of sales expenses of Franklin
Financial in 1995, 1996 and 1997 were $20,566, $14,575 and $11,286,
respectively, and all such amounts were retained on behalf of Franklin
Financial.

The administration deductions are designed to cover the actual expenses
of administering the Contracts and the Fund. The aggregate dollar amounts of
the administration deductions for the fiscal years ended December 31, 1995,
1996 and 1997 were $10,279, $7,285 and $5,640, respectively.

B. PREMIUM TAXES

At the time any premium taxes are payable by The Franklin on the
consideration received from the sale of the Contracts, the amount thereof will
be deducted from the Stipulated Payments. Premium

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taxes ranging up to 5% are charged by various jurisdictions in which The
Franklin is transacting business and in which it may, after appropriate
qualification, offer Contracts.

C. MORTALITY AND EXPENSE RISK CHARGE

While Annuity Payments will reflect the investment performance of the
Fund, they will not be affected by adverse mortality experience or by any
excess in the actual expenses of the Contracts and the Fund over the maximum
administration deductions provided for in the Contracts. The Franklin assumes
the risk that Annuity Payments will continue for a longer period than
anticipated because the Variable Annuitant lives longer than expected (or the
Variable Annuitants as a class do so) and also assumes the risk that the
administration deductions may be insufficient to cover the actual expenses of
the administration of the Contracts and of the Fund (except those expenses
listed under "Investment Management Service Charge," below, which the Fund
will bear). The Franklin assumes these risks for the duration of the Contract
and the annuity rate, mortality and expense risk deductions and charges set
forth herein will not be increased regardless of the actual mortality and
expense experience. The mortality risk charge is imposed regardless of
whether or not the payment option selected involves a life contingency.

For assuming these risks, The Franklin imposes a daily charge against
the value of the Accumulation Unit and the Annuity Unit. (For further
information as to the Accumulation Unit and the Annuity Unit, see "Deferred
Variable Annuity Accumulation Period" and "Annuity Period," below.) These
charges are at the current combined annual rate of 1.002% (.002745% on a
daily basis), of which .900% is for annuity rate and mortality assurances
and .102% is for expense assurances. If the money collected from this charge
is not needed, it will be to The Franklin's gain and may be used to cover
contract distribution expenses.

During 1995, 1996 and 1997, The Franklin earned and was paid $97,809,
$108,769 and $119,981, respectively, by reason of these charges. Such charges
during 1997 were equal to 1.002% of average net assets.

D. INVESTMENT MANAGEMENT SERVICE CHARGE

The investment management services are rendered and the charge is made
pursuant to an Investment Management Agreement executed and dated January 31,
1995, pursuant to approval by the Contract Owners at their annual meeting
held on April 17, 1995, and renewal to January 31, 1999 by the Board of
Managers of the Fund at its meeting on January 19, 1998. The Investment
Management Agreement is described under "Investment Advisory and Other
Services" in the Statement of Additional Information.

During 1995, 1996 and 1997, The Franklin earned and was paid $42,758,
$47,550 and $52,451, respectively, under the Investment Management Agreement
then in effect.

E. TRANSFERS TO OTHER CONTRACTS

Subject to any limitations in a Qualified Plan, Contracts may be
redeemed prior to the death of the Variable Annuitant and the initial Annuity
Payment Date and the Cash Value (less the required amount of federal income
tax withholding, if any) may be applied to the purchase of certain other
Variable Annuities, Fixed-Dollar Annuities or life insurance contracts issued
by The Franklin. Franklin Life Money Market Variable Annuity Fund C and
Franklin Life Variable Annuity Fund B, other separate accounts of The
Franklin funding Variable Annuity contracts, no longer issue new contracts.

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It is not clear whether gain or loss will be recognized for federal
income tax purposes upon the redemption of a Contract, another annuity
contract or a life insurance contract issued by The Franklin for purposes of
applying the redemption proceeds to the purchase of another contract issued
by The Franklin. Federal tax penalties may also apply to such redemptions.
Since the income and withholding tax consequences of such redemption and
purchase depend on many factors, any person contemplating redemption of a
Contract or another contract issued by The Franklin for purposes of
purchasing a different contract issued by The Franklin (or any other
contract) is advised to consult a qualified tax advisor prior to the time of
redemption.

F. MISCELLANEOUS

The Fund's total expenses for 1997 were $172,432, or 1.440% of average net
assets during 1997.

THE CONTRACTS

A. GENERAL

Certain significant provisions of the Contracts and administrative
practices of The Franklin with respect thereto are discussed in the following
paragraphs.

Contract Owner inquiries may be directed to the Equity Administration
Department of The Franklin at the address or telephone number set forth on the
cover of this Prospectus.

1. ANNUITY PAYMENTS

Variable Annuity Payments are determined on the basis of (i) an annuity
rate table specified in the Contract, and (ii) the investment performance of
the Fund. In the case of Deferred Variable Annuity Contracts, the annuity
rate table is set forth in the Contract (but see below). In the case of
Immediate Variable Annuities, the table is that used by The Franklin on the
date of issue of the Contract. The amount of the Annuity Payments will not be
affected by mortality experience adverse to The Franklin or by an increase in
The Franklin's expenses related to the Fund or the Contracts in excess of the
expense deductions provided for in the Contracts. The Variable Annuitant
under an annuity with a life contingency or one providing for a number of
Annuity Payments certain will receive the value of a fixed number of Annuity
Units each month, determined as of the initial Annuity Payment Date on the
basis of the applicable annuity rate table and the then value of his or her
account. The value of Annuity Units, and thus the amounts of the monthly
Annuity Payments, will, however, reflect investment gains and losses and
investment income occurring after the initial Annuity Payment Date, and thus
the amount of the Annuity Payments will vary with the investment experience
of the Fund. See "Annuity Period," below.

Court decisions, particularly ARIZONA GOVERNING COMMITTEE v. NORRIS,
have held that the use of gender-based mortality tables to determine benefits
under an employer-related retirement or benefit plan may violate Title VII of
the Civil Rights Act of 1964 ("Title VII"). These cases indicate that plans
sponsored by employers subject to Title VII generally may not provide
different benefits for similarly-situated men and women.

The Contracts described in this Prospectus incorporate annuity rate
tables which reflect the age and sex of the Variable Annuitant and the
Settlement Option selected. Such sex-distinct tables continue to be
appropriate for use, for example, under Contracts which are not purchased in
connection with an "employer-related" plan subject to NORRIS (such as
individual retirement annuities not sponsored by an employer). However, in
order to enable subject employers to comply with NORRIS, The Franklin will
provide "unisex" annuity rate tables for use under Contracts purchased in
connection with "employer-related" plans. Persons contemplating purchase of a
Contract, as well as current Contract Owners,

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<PAGE>

should consult a legal advisor regarding the applicability and implications of
NORRIS in connection with their purchase and ownership of a Contract.

2. INCREASE OR DECREASE BY CONTRACT OWNER IN AMOUNT OR NUMBER OF PERIODIC
STIPULATED PAYMENTS

Stipulated Payments can be paid on an annual, semi-annual or quarterly
schedule or, with The Franklin's consent, monthly. The first Stipulated Payment
is due as of the date of issue and each subsequent Stipulated Payment is due on
the first day following the interval covered by the next preceding Stipulated
Payment and on the same date each month as the date of issue. The Contract
Owner may increase the amount of a Stipulated Payment on an annualized basis
under a Periodic Stipulated Payment Contract (except in the case of an
Individual Retirement Annuity, which cannot be increased above the amounts
described under "Purchase Limits," immediately below) up to an amount on an
annualized basis equal to twice the amount of the first Stipulated Payment on
an annualized basis. Similarly, subject to the limitations described under
"Purchase Limits," immediately, below, the amount of a Periodic Stipulated
Payment may be decreased by the Contract Owner on any date a Stipulated Payment
is due. Unless otherwise agreed to by The Franklin, the mode of Stipulated
Payment may be changed only on a Contract Anniversary.

The Contract Owner may continue making Stipulated Payments after the agreed
number of Stipulated Payments has been made, but The Franklin will not accept
Stipulated Payments after age 75. Submission of a Stipulated Payment in an
amount different from that of the previous payment, subject to the aforesaid
limits, will constitute notice of the election of the Contract Owner to make
such change.

3. ASSIGNMENT OR PLEDGE

A Contract may not be assigned by the Contract Owner except when issued
to a trustee in connection with certain types of plans designed to qualify
under Section 401 of the Code or when made pursuant to a qualified domestic
relations order rendered by a state court in satisfaction of family support
obligations. In general, a pledge or assignment made with respect to certain
Contracts may, depending on such factors as the amount pledged or assigned,
be treated as a taxable distribution. See "Individual Retirement Annuities,"
below, for special rules applicable thereto. Moreover, in certain instances,
pledges or assignments of a Qualified Contract may result in the imposition
of certain tax penalties. See generally "The Contracts: Qualified Plans,"
below.

Persons contemplating the assignment or pledge of a Contract are advised to
consult a qualified tax advisor concerning the federal income tax consequences
thereof.

4. PURCHASE LIMITS

Currently, no periodic Stipulated Payment may be less than $10 ($120 on an
annual basis). Under the terms of the Contract, The Franklin may increase the
minimum periodic Stipulated Payment to $20 ($240 on an annual basis). No single
Stipulated Payment may be less than $2,500, except that in the case of a
deferred Single Stipulated Payment Contract to be used as an Individual
Retirement Annuity funded with a Rollover Contribution, the total Stipulated
Payment applicable to the Variable Annuity, prior to administration and sales
deductions, must be at least $1,000 unless, with consent of The Franklin, a
smaller single Stipulated Payment is permitted. In the case of a Contract issued
for use as an Individual Retirement Annuity, annual premium payments may not, in
general, exceed $2,000. However, if the Individual Retirement Annuity is a
Simplified Employee Pension, annual premium payments may not exceed $30,000.
Single Stipulated Payment Contracts are not available as Individual Retirement
Annuities except for those funded with Rollover Contributions and except for
those to be used as Simplified Employee Pensions.

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<PAGE>

5. TERMINATION BY THE FRANKLIN

The Franklin currently reserves the right to terminate any Contract, other
than a Contract issued for use as an Individual Retirement Annuity, if total
Stipulated Payments paid are less than $120 in each of three consecutive
Contract Years (excluding the first Contract Year) and if the Cash Value is less
than $500 at the end of such three-year period. Under the terms of the
Contract, The Franklin may terminate such Contract if total Stipulated Payments
paid are less than $240 in each of such three consecutive Contract Years and if
the Cash Value is less than $500 at the end of such three-year period. The
Franklin must give 31 days' notice by mail to the Contract Owner of such
termination. The Franklin will not exercise any right to terminate such Contract
if the value of the Contract declines to less than $500 as a result of a decline
in the market value of the securities held by the Fund.

The Franklin reserves the right to terminate any Contract issued for use as
an Individual Retirement Annuity if no Stipulated Payments have been received
for any two Contract Years and if the first monthly Annuity Payment, determined
at the initial Annuity Payment Date, arising from the Stipulated Payments
received prior to such two-year period would be less than $20.

Upon termination as described above, The Franklin will pay to the Contract
Owner the Cash Value of the Contract, less federal income tax withholding, if
applicable. For certain tax consequences upon such payment, see "Federal Income
Tax Status," below.

6. RIGHT TO REVOCATION OF CONTRACT

A Contract Owner has the right to revoke the purchase of a Contract within
10 days after receipt of the Contract, and upon such revocation will be
entitled to a return of the entire amount paid. The request for revocation must
be made by mailing or hand-delivering the Contract and a written request for
its revocation within such 10-day period either to The Franklin Life Insurance
Company, Cashiers Department, #1 Franklin Square, Springfield, Illinois 62713,
or to the agent from whom the Contract was purchased. In general, notice of
revocation given by mail is deemed to be given on the date of the postmark, or,
if sent by certified or registered mail, the date of certification or
registration.

7. New Contracts No Longer Being Issued

The Fund no longer issues new Contracts.

B. DEFERRED VARIABLE ANNUITY ACCUMULATION PERIOD

1. CREDITING ACCUMULATION UNITS; DEDUCTIONS FOR SALES AND ADMINISTRATIVE
EXPENSES

During the accumulation period--the period before the initial Annuity
Payment Date--deductions from Stipulated Payments for sales and administrative
expenses are made as specified under "Deductions and Charges Under the
Contracts," above. In addition, any applicable premium taxes, also as specified
above under that caption, are deducted from the Stipulated Payments. The
balance of each Stipulated Payment is credited to the Contract Owner in the form
of Accumulation Units.

The number of a Contract Owner's Accumulation Units is determined by
dividing the net amount of Stipulated Payments credited to his or her Contract
by the value of an Accumulation Unit at the end of the Valuation Period during
which the Stipulated Payment is received, except that, in the case of the
original application for a Variable Annuity Contract, the value of an
Accumulation Unit within two business days after receipt of the application
will be used if the application and all information necessary to process the
application are complete upon receipt. If the application and such information
are not complete upon receipt, The Franklin, within five days after the receipt
of an original application and initial payment at the Home Office of The
Franklin, will attempt to complete the application and will either accept the
application or reject the application and return the initial payment.

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<PAGE>

The number of Accumulation Units so determined will not be changed by any
subsequent change in the dollar value of an Accumulation Unit, but the dollar
value of an Accumulation Unit may vary from day to day depending upon the
investment experience of the Fund.

2. VALUATION OF A CONTRACT OWNER'S CONTRACT

The Cash Value of a Contract at any time prior to the initial Annuity
Payment Date can be determined by multiplying the total number of Accumulation
Units credited to the account by the current Accumulation Unit value. The
Contract Owner bears the investment risk, that is, the risk that market values
may decline. There is no assurance that the Cash Value of the Contract will
equal or exceed the Stipulated Payments made. A Contract Owner may obtain from
the Home Office of The Franklin information as to the current value of an
Accumulation Unit and the number of Accumulation Units credited to his or her
Contract.

3. VALUE OF THE ACCUMULATION UNIT

The value of an Accumulation Unit was set at $10 effective July 1, 1971.
Accumulation Units currently are valued each Valuation Date (each day in which
there is a sufficient degree of trading in the securities in which the Fund
invests that the value of an Accumulation Unit might be materially affected by
changes in the value of the Fund's investments, other than a day during which no
Contract or portion thereof is tendered for redemption and no order to purchase
or transfer a Contract is received by the Fund, as of the close of trading on
that day). After the close of trading on a Valuation Date, or on a day when
Accumulation Units are not valued, the value of an Accumulation Unit is equal to
its value as of the immediately following Valuation Date. The value of an
Accumulation Unit on the last day of any Valuation Period is determined by
multiplying the value of an Accumulation Unit on the last day of the immediately
preceding Valuation Period by the Net Investment Factor (defined below) for the
current Valuation Period.

At each Valuation Date a gross investment rate for the Valuation Period
then ended is determined from the investment performance of the Fund for the
Valuation Period. Such rate is equal to (i) accrued investment income for the
Valuation Period, plus capital gains and minus capital losses for the period,
whether realized or unrealized, on the assets of the Fund (adjusted by a
deduction for the payment of any applicable state or local taxes as to the
income or capital gains of the Fund) divided by (ii) the value of the assets of
the Fund at the beginning of the Valuation Period. The gross investment rate may
be positive or negative.

The net investment rate for the Valuation Period is then determined by
deducting, currently, .003945% (1.440% on an annual basis) for each day of the
Valuation Period as a charge against the gross investment rate. This charge is
made by The Franklin for providing investment management services, annuity rate
or mortality assurances and expense assurances. See "Deductions and Charges
Under the Contracts," above.

The net investment factor for the Valuation Period is the sum of 1.00000000
plus the net investment rate for the Valuation Period ("Net Investment Factor").

The net investment rate may be negative if the combined capital losses,
Valuation Period deductions and increase in the tax reserve exceed investment
income and capital gains. Thus, the Net Investment Factor may be less than
1.00000000, and the value of an Accumulation Unit at the end of a Valuation
Period may be less than the value for the previous Valuation Period.

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4. VALUATION OF FUND ASSETS

In determining the value of the assets of the Fund, each security traded on
a national securities exchange is valued at the last reported sale price on the
Valuation Date. If there has been no sale on such day, then the value of such
security is taken to be the current bid price at the time as of which the value
is being ascertained. Any security not traded on a securities exchange but
traded in the over-the-counter market is valued at the current bid price on the
Valuation Date. Any securities or other assets for which market quotations are
not readily available are valued at fair value as determined in good faith by
the Board of Managers.

5. REDEMPTION

A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the initial Annuity Payment Date,
may, subject to any limitations on early settlement contained in an applicable
Qualified Plan, redeem the Contract, in whole or in part, by submission of the
Contract and a written request for its redemption to The Franklin's Home Office,
and will receive the Cash Value of the part of the Contract redeemed. Early
withdrawal of certain amounts attributable to Contracts issued pursuant to an
annuity purchase plan meeting the requirements of Code Section 403(b) may be
prohibited. See "Federal Income Tax Status," below. The Cash Value of a Contract
or part thereof redeemed prior to the initial Annuity Payment Date is the number
of Accumulation Units credited to the Contract (or that part so redeemed) times
the value of an Accumulation Unit at the end of the Valuation Period in which
the request for redemption is received. Except in limited circumstances
discussed below, the payment of the Cash Value will be made within seven days
after the date a properly completed and documented request for redemption is
received by The Franklin at its Home Office. The right of redemption may be
suspended or the date of payment postponed during any periods when the New York
Stock Exchange is closed (other than customary weekend and holiday closings);
when trading in the markets the Fund normally utilizes is restricted, or an
emergency exists as determined by the Securities and Exchange Commission so that
disposal of the Fund's investments or determination of its net asset value is
not reasonably practicable; or for such other periods as the Securities and
Exchange Commission by order may permit to protect Contract Owners.

Where the Contract Owner has both a Variable Annuity and a Fixed-Dollar
Annuity, a request for partial redemption, if no other indication is obtained
from the Contract Owner, will be treated as a pro rata request for partial
redemption of the Variable Annuity and the Fixed-Dollar Annuity.

In lieu of a single payment of the amount due upon redemption of a
Contract, the Contract Owner may elect, at any time prior to the initial Annuity
Payment Date and during the lifetime of the Variable Annuitant, to have all or
any portion of the amount due applied under any available Settlement Option. See
"Settlement Options," below. However, no Settlement Option may be elected upon
redemption without surrender of the entire Contract.

The payment of the Cash Value of a redeemed Contract either in a single
payment or under an available Settlement Option may be subject to federal income
tax withholding and federal tax penalties. See "Federal Income Tax Status,"
below.

6. PAYMENT OF ACCUMULATED VALUE AT TIME OF DEATH

In the event of the death of the Variable Annuitant prior to the initial
Annuity Payment Date, death benefits payable to the surviving beneficiary will
be paid by The Franklin within seven days of receipt by The Franklin of written
notice of such death. The death proceeds payable will be the Cash Value of the
Contract determined as of the date on which written notice of death is received
by The Franklin by mail if such date is a Valuation Date; if such date is not a
Valuation Date, the determination will be made on the next following Valuation
Date. There is no assurance that the Cash Value of a Contract will equal or
exceed the Stipulated Payments made. For payment of death proceeds in the event
no Beneficiary is

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<PAGE>

surviving at the death of the Variable Annuitant, see "Change of Beneficiary or
Mode of Payment of Proceeds; Death of Beneficiaries," below. The Code imposes
certain requirements concerning payment of death benefits payable before the
initial Annuity Payment Date in the case of Qualified Contracts. Under those
Contracts, death benefits will be paid as required by the Code and as specified
in the governing plan documents. The terms of such documents should be consulted
to determine the death benefits and any limitations the plan may impose. You
should consult your legal counsel and tax advisor regarding these requirements.

Subject to the foregoing, the Contract Owner may, at any time prior to the
initial Annuity Payment Date, elect that all or any portion of such death
proceeds be paid to the Beneficiary under any one of the available Settlement
Options. See "Settlement Options," below. If the Contract Owner has not made
such an election, the Beneficiary may do so after the death of the Variable
Annuitant. The Contract Owner or the Beneficiary, whichever selects the method
of settlement, may designate contingent Beneficiaries to receive any other
amounts due should the first Beneficiary die before completion of the specified
payments. If neither the Contract Owner nor the Beneficiary elects payment of
death proceeds under an available Settlement Option, payment will be made to the
Beneficiary in a single sum.

Death proceeds may be applied to provide variable payments, fixed-dollar
payments or a combination of both.

The payment of death proceeds may be subject to federal income tax
withholding. See "Income Tax Withholding," below.

In the event of the death of the Variable Annuitant after the initial
Annuity Payment Date, payments under a Contract will be made as described in
"Settlement Options," below.

7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS

Upon a failure to make a Stipulated Payment under a Periodic Stipulated
Payment Contract, subject to The Franklin's power of termination described under
"Termination by The Franklin," above, and subject to the right of The Franklin
to pay the value of the Contract Owner's account in a single sum at the initial
Annuity Payment Date if the value on such date is less than $2,000, the Contract
Owner may elect, prior to the death of the Variable Annuitant and prior to the
initial Annuity Payment Date, either of the following options:

(a) to exercise any of the available Settlement Options described
under "Settlement Options," below, or redeem the Contract as described
under "Redemption," above; or

(b) to have the Contract continued from the date of failure to make
a Stipulated Payment as a paid-up annuity to commence on the initial
Annuity Payment Date stated in the Contract.

If no option is elected by the Contract Owner within 31 days after
failure to make a Stipulated Payment, the Contract will automatically be
continued under the paid-up annuity option.

8. REINSTATEMENT (AS TO PERIODIC STIPULATED PAYMENT CONTRACTS)

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9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF
BENEFICIARIES

While the Contract is in force the Contract Owner may (by filing a written
request at the Home Office of The Franklin) change the Beneficiary or Settlement
Option, or, if agreed to by The Franklin, change to a mode of payment different
from one of the Settlement Options, subject to applicable limitations under the
Code and any governing Qualified Plan.

If any Beneficiary predeceases the Variable Annuitant, the interest of such
Beneficiary will pass to the surviving Beneficiaries, if any, unless otherwise
provided by endorsement. If no Beneficiary survives the Variable Annuitant and
no other provision has been made, then, upon the death of the Variable
Annuitant, the proceeds will be paid in a single sum to the Contract Owner or,
if the Variable Annuitant was the Contract Owner, to the executors or
administrators of the Contract Owner's estate.

10. SETTLEMENT OPTIONS

At any time prior to the initial Annuity Payment Date and during the
lifetime of the Variable Annuitant, the Contract Owner may elect to have all or
a portion of the amount due in settlement of the Contract applied under any of
the available Settlement Options described below. If the Contract Owner fails to
elect a Settlement Option, payment automatically will be made in the form of a
life annuity. See "First Option," below, and "Deferred Variable Annuity
Contracts," below.

Annuity Payments under a Settlement Option are made to the Variable
Annuitant during his or her lifetime, or for such shorter period that may apply
under the particular Settlement Option. Upon the death of the original Variable
Annuitant after the initial Annuity Payment Date, any remaining Annuity Payments
that are due under the Settlement Option elected will be continued to the
Beneficiary or, if elected by the Contract Owner (or, if so designated by the
Contract Owner, by the Beneficiary), the Cash Value of the Contract, as
described under such Settlement Option below, will be paid to the Beneficiary in
one lump sum. Upon the death of any Beneficiary to whom payments are being made
under a Settlement Option, a single payment equal to the then remaining Cash
Value of the Contract, if any, will be paid to the executors or administrators
of the Beneficiary, unless other provision has been specified and accepted by
The Franklin. For a discussion of payments if no Beneficiary is surviving at the
death of the Variable Annuitant, see "Change of Beneficiary or Mode of Payment
of Proceeds; Death of Beneficiaries," immediately above.

Payment to a Contract Owner upon redemption of a Contract, and payment of
death proceeds to a Beneficiary upon the death of the Variable Annuitant prior
to the initial Annuity Payment Date, may also be made under an available
Settlement Option in certain circumstances. See "Redemption," above, and
"Payment of Accumulated Value at Time of Death," above.

Available Settlement Options may be selected on a fixed or variable basis
or a combination thereof, except that Settlement Options may be selected only on
a fixed basis under a Contract issued for use as an Individual Retirement
Annuity. Under an Option which is paid on a fixed basis, there is no sharing in
the investment experience of the Fund and, upon commencement of payments,
participation in the Fund terminates (the subject Contract will be transferred
to the general account of The Franklin). Settlement under the First, Second,
Third, Fourth or Fifth Option below is subject to satisfactory proof of age of
the person or persons to whom the Annuity Payments are to be made.

The minimum amount of proceeds which may be applied under any Settlement
Option for any person is $2,000 and proceeds of a smaller amount may be paid in
a single sum in the discretion of The Franklin, except in the case of a deferred
Single Stipulated Payment Contract funded with a Rollover Contribution not in
excess of $2,000. See "Purchase Limits," above. Further, if at any time payments
under a Settlement Option become less than $25 per payment, The Franklin has the
right to change the frequency of payment to such intervals as will result in
payments of at least $25.

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<PAGE>

In the case of Immediate Variable Annuity Contracts, the only Settlement
Options offered are the life annuity, the life annuity with 120, 180 or 240
monthly payments certain, or the joint and last survivor life annuity. See
"First Option," "Second Option" and "Fourth Option," below, and "Immediate
Variable Annuity Contracts," below.

The Statement of Additional Information describes certain limitations on
Settlement Options based on The Franklin's current understanding of the
distribution rules generally applicable to Contracts purchased under this
Prospectus for use as Individual Retirement Annuities or issued in connection
with Section 403(b) annuity purchase plans. See "Limitations on Settlement
Options" in the Statement of Additional Information. Persons considering the
purchase of a Contract and Contract Owners contemplating election of a
Settlement Option are urged to obtain and read the Statement of Additional
Information. Various questions exist, however, about the application of the
distribution rules to distributions from the Contracts and their effect on
Settlement Option availability thereunder. Persons contemplating the purchase of
a Contract are advised to consult a qualified tax advisor concerning the effect
of the distribution rules on the Settlement Option or Options he or she is
contemplating.

Neither this Prospectus nor the Statement of Additional Information,
however, describes limitations on Settlement Options based on applicable
distribution rules in the case of Contracts issued in connection with qualified
pension and profit-sharing plans under Section 401(a) of the Code and annuity
plans under Section 403(a) of the Code. Under those Contracts, available
Settlement Options are limited to those Options specified in the governing plan
documents. The terms of such documents should be consulted to determine
Settlement Option availability and any other limitations the plan may impose on
early redemption of the Contract, payment in settlement thereof, or similar
matters. Generally, limitations comparable to those described in the Statement
of Additional Information for Individual Retirement Annuities and Section 403(b)
annuity purchase plans also apply with respect to such qualified pension,
profit-sharing and annuity plans (including H.R. 10 Plans).

Persons contemplating election of the Fifth or Sixth Option should consult
a qualified tax advisor to determine whether the continuing right of redemption
under any such Option might be deemed for tax purposes to result in the
"constructive receipt" of the Cash Value of the Contract.

FIRST OPTION-LIFE ANNUITY. An annuity payable monthly during the lifetime
of the Variable Annuitant, ceasing with the last Annuity Payment due prior to
the death of the Variable Annuitant. This Option offers the maximum level of
monthly Annuity Payments since there is no guarantee of a minimum number of
Annuity Payments or provision for any continued payments to a Beneficiary upon
the death of the Variable Annuitant. It would be possible under this Option for
the Variable Annuitant to receive only one Annuity Payment if he or she died
before the second Annuity Payment Date, or to receive only two Annuity Payments
if he or she died after the second Annuity Payment Date but before the third
Annuity Payment Date, and so forth.

SECOND OPTION-LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN.
An annuity payable monthly during the lifetime of the Variable Annuitant
including the commitment that if, at the death of the Variable Annuitant,
Annuity Payments have been made for less than 120 months, 180 months or 240
months (as selected by the Contract Owner in electing this Option), Annuity
Payments shall be continued during the remainder of the selected period to the
Beneficiary. The cash value under this Settlement Option is the present value of
the current dollar amount of any unpaid Annuity Payments certain.

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<PAGE>

THIRD OPTION-UNIT REFUND LIFE ANNUITY. An annuity payable monthly during
the lifetime of the Variable Annuitant, ceasing with the last Annuity Payment
due prior to the death of the Variable Annuitant, provided that, at the death of
the Variable Annuitant, the Beneficiary will receive a payment of the then
dollar value of the number of Annuity Units equal to the excess, if any, of (a)
over (b) where (a) is the total amount applied under this Option divided by the
Annuity Unit value at the initial Annuity Payment Date and (b) is the number of
Annuity Units represented by each Annuity Payment multiplied by the number of
Annuity Payments made.

For example, if $10,000 were applied on the first Annuity Payment Date to the
purchase of an annuity under this Option, the Annuity Unit value at the initial
Annuity Payment Date were $2.00, the number of Annuity Units represented by each
Annuity Payment were 30.55, 10 Annuity Payments were paid prior to the date of
the Variable Annuitant's death and the value of an Annuity Unit on the Valuation
Date following the Variable Annuitant's death were $2.05, the amount paid to the
Beneficiary would be $9,623.73, computed as follows:

<TABLE>
<S><C>
($10.000 - (30.55 x 10)) X 2.05 = (5,000 - 305.5) X $2.05 = 4,694.5 X $2.05 = $9,623.73
------
$2.00

</TABLE>

FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. An annuity payable
monthly during the joint lifetime of the Variable Annuitant and a secondary
variable annuitant, and thereafter during the remaining lifetime of the
survivor, ceasing with the last Annuity Payment due prior to the death of the
survivor. Since there is no minimum number of guaranteed payments under this
Option, it would be possible under this Option to receive only one Annuity
Payment if both the Variable Annuitant and the secondary variable annuitant died
before the second Annuity Payment Date, or to receive only two Annuity Payments
if both the Variable Annuitant and the secondary variable annuitant died after
the second Annuity Payment Date but before the third Annuity Payment Date, and
so forth.

FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. An amount payable monthly
to the Variable Annuitant for a number of years which may be from one to 30 (as
selected by the Contract Owner in electing this Option). At the death of the
Variable Annuitant, payments will be continued to the Beneficiary for the
remaining period. The cash value under this Settlement Option is the then
present value of the current dollar amount of any unpaid Annuity Payments
certain. A Contract under which Annuity Payments are being made under this
Settlement Option may be redeemed in whole or in part at any time by the
Contract Owner for the aforesaid cash value of the part of the Contract
redeemed. See "Redemption," above.

It should be noted that, while this Option does not involve a life
contingency, charges for annuity rate assurances, which include a factor for
mortality risks, are included in the computation of Annuity Payments due under
this Option. Further, although not contractually required to do so, The Franklin
currently follows a practice, which may be discontinued at any time, of
permitting persons receiving Annuity Payments under this Option to elect to
convert such payments to a Variable Annuity involving a life contingency under
the First, Second, Third or Fourth Options above if, and to the extent, such
other Options are otherwise available to such person.

SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. The amount due will
be paid to the Variable Annuitant in equal annual, semiannual, quarterly or
monthly Annuity Payments of a designated dollar amount (not less than $75 a year
per $1,000 of the original amount due) until the remaining balance (adjusted
each Valuation Period by the Net Investment Factor for the period) is less than
the amount of one Annuity Payment, at which time such balance will be paid and
will be the final Annuity Payment under this Option. Upon the death of the
Variable Annuitant, payments will be continued to the Beneficiary until such
remaining balance is paid. The cash value under this Settlement Option is the
amount of proceeds then remaining with The Franklin. A Contract under which
Annuity Payments are being made under this Settlement Option may be redeemed at
any time by the Contract Owner for the aforesaid cash value.

21
<PAGE>

Annuity Payments made under the Sixth Option may, under certain
circumstances, be converted into a Variable Annuity involving a life
contingency. See the last paragraph under the Fifth Option, above, which applies
in its entirety to the Sixth Option as well.

SEVENTH OPTION-INVESTMENT INCOME. The amount due may be left on deposit
with The Franklin in its general account and a sum will be paid annually,
semiannually, quarterly or monthly, as selected by the Contract Owner in
electing this Option, which shall be equal to the net investment rate of 3%
stipulated as payable upon fixed-dollar amounts for the period multiplied by the
amount remaining on deposit. Upon the death of the Variable Annuitant, the
aforesaid payments will be continued to the Beneficiary. The sums left on
deposit with The Franklin may be withdrawn at any time.

Periodic payments received under this Option may be treated like interest
for federal income tax purposes. Interest payments are fully taxable and are
not subject to the general rules applicable to the taxation of annuities
described in "Federal Income Tax Status," below. Persons contemplating election
of this Seventh Option are advised to consult a qualified tax advisor concerning
the availability and tax effect of this election.

11. TRANSFER OF FIXED-DOLLAR ANNUITY VALUES TO ACQUIRE VARIABLE ANNUITY
ACCUMULATION UNITS

Where a Deferred Variable Annuity and a Fixed-Dollar Annuity have been
issued on the same Contract, on any Contract Anniversary during the accumulation
period of the Contract, the Contract Owner may have the cash value of his
Fixed-Dollar Annuity transferred in whole or in part to his Variable Annuity to
purchase Variable Annuity Accumulation Units at net asset value, without any
sales or administrative deductions. However, any such partial transfer of cash
value must be at least $500. (A similar privilege, but available four times in
one contract year, permits transfer of Variable Annuity Accumulation Unit values
to establish values under a Fixed-Dollar Annuity issued on the same Contract.)

C. ANNUITY PERIOD

1. ELECTING ANNUITY PAYMENTS AND SETTLEMENT OPTION; COMMENCEMENT OF
ANNUITY PAYMENTS

(a) DEFERRED VARIABLE ANNUITY CONTRACTS

A Contract Owner selects a Settlement Option and an initial Annuity Payment
Date prior to the issuance of the Deferred Variable Annuity Contract, except
that Contracts issued in connection with qualified pension and profit-sharing
plans (including H.R. 10 Plans) under Section 401(a) of the Code and annuity
plans (including H.R. 10 Plans) under Section 403(a) of the Code provide for
Annuity Payments to commence at the date and under the Settlement Option
specified in the plan. The Contract Owner may defer the initial Annuity Payment
Date and continue the Contract to a date not later than the Contract Anniversary
on which the attained age of the Variable Annuitant is 75 unless the provisions
of the Code or any governing Qualified Plan require Annuity Payments to commence
at an earlier date. See "Limitations on Settlement Options" in the Statement of
Additional Information. The Franklin will require satisfactory proof of age of
the Variable Annuitant prior to the initial Annuity Payment Date.

(b) IMMEDIATE VARIABLE ANNUITY CONTRACTS

The Franklin offers three forms of Immediate Variable Annuity Contracts:
the life annuity, the life annuity with 120, 180 or 240 monthly payments certain
and the joint and last survivor life annuity. For a description of these forms
of annuity, see the First, Second and Fourth Options under "Settlement Options,"
above.

22
<PAGE>

the frequency of Annuity Payments is more than one month, in which case the
first Annuity Payment will be made after a period equal to the period so
selected from the Effective Date (subject in every case to the survival of the
Variable Annuitant, except in cases where a guaranteed payment period is
provided).

2. THE ANNUITY UNIT

The Annuity Unit is a measure used to value the First Option (including the
automatic life annuity) and the Second, Third, Fourth and Fifth Options, if
elected on a variable basis.

The value of the Annuity Unit as of July 1, 1971 was fixed at $1.00 and for
each day thereafter is determined by multiplying the value of the Annuity Unit
on the preceding day by the "Annuity Change Factor" for the Valuation Period
ending on the tenth preceding day or by 1.0 if no Valuation Period ended on the
tenth preceding day. The "Annuity Change Factor" for any Valuation Period is
equal to the amount determined by dividing the Net Investment Factor for that
Valuation Period by a number equal to 1.0 plus the interest rate for the number
of calendar days in such Valuation Period at the effective annual rate of
3-1/2%. The division by 1.0 plus an interest factor of 3-1/2% in calculating the
Annuity Change Factor is effected in order to cancel out the assumed net
investment rate of 3-1/2% per year which is built into the annuity tables
specified in the Contract. See "Determination of Amount of First Monthly Annuity
Payment (Deferred Variable Annuity Contracts Only)," below, and "Assumed Net
Investment Rate," below.

Annuity Units are valued in respect of each Annuity Payment Date as of a
Valuation Date not less than 10 days prior to the Annuity Payment Date in
question in order to permit calculation of amounts of Annuity Payments and
mailing of checks in advance of their due dates.

3. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)

When Annuity Payments commence under a Deferred Variable Annuity
Contract, the value of the Contract Owner's account is determined as the
product of the value of an Accumulation Unit on the first Annuity Payment
Date and the number of Accumulation Units credited to the Contract Owner's
account as of such Annuity Payment Date.

The Contract utilizes tables indicating the dollar amount of the first
monthly Annuity Payment under each Settlement Option for each $1,000 of Cash
Value of the Contract. The first monthly Annuity Payment varies according to the
Settlement Option selected (see "Settlement Options," above) and the "adjusted
age" of the Variable Annuitant. The first monthly Annuity Payment may also vary
according to the sex of the Variable Annuitant. See "Annuity Payments," above.
(The Contracts provide for age adjustment based on the year of birth of the
Variable Annuitant and any joint Variable Annuitant; a person's actual age when
Annuity Payments commence may not be the same as the "adjusted age" used in
determining the amount of the first Annuity Payment.)

For Contracts utilizing sex-distinct annuity tables, the tables for the
First, Second, Third and Fourth Options are determined from the Progressive
Annuity Table assuming births in the year 1900 and a net investment rate of
3-1/2% a year. The tables for the Fifth Option are based on a net investment
rate of 3% for the General Account and 3-1/2% for the Separate Account. The
total first monthly Annuity Payment is determined by multiplying the number of
thousands of dollars of Cash Value of the Contract Owner's Contract by the
amount of the first monthly Annuity Payment per $1,000 of value from the tables
in the Contract.

23
<PAGE>

the Fund during the 10-day period referred to in the preceding sentence, since
that experience will be included (as part of the value of an Accumulation Unit)
in valuing the Contract Owner's Contract on the initial Annuity Payment Date and
(as part of the changes in value of an Annuity Unit) in determining the second
monthly Annuity Payment. Also, the number of Annuity Units (and hence the amount
of Annuity Payments) will be affected by the net asset values of the Fund
approximately 10 days prior to the initial Annuity Payment Date even though
changes in those net asset values have occurred during that 10-day period, and
even though the value of the Accumulation Units used to determine the Cash Value
of the Contract will reflect those changes. See "Amount of Second and Subsequent
Monthly Annuity Payments (Deferred Variable Annuity Contracts Only)," below.

Each Contract contains a provision that the first monthly Annuity Payment
will not be less than 103% of the first monthly Annuity Payment available under
a then currently issued Immediate Variable Annuity of The Franklin if a single
Stipulated Payment were made equal to the value which is being applied under the
Contract to provide annuity benefits. This provision assures the Variable
Annuitant that if at the initial Annuity Payment Date the annuity rates then
applicable to new Immediate Variable Annuity Contracts are significantly more
favorable than the annuity rates provided in his or her Contract, the Variable
Annuitant will be given the benefit of the new annuity rates.

4. AMOUNT OF SECOND AND SUBSEQUENT MONTHLY ANNUITY PAYMENTS (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)

The number of Annuity Units credited to a Contract on the initial Annuity
Payment Date remains fixed during the annuity period, and as of each subsequent
Annuity Payment Date the dollar amount of the Annuity Payment is determined by
multiplying this fixed number of Annuity Units by the then value of an Annuity
Unit.

5. DETERMINATION OF AMOUNT OF ANNUITY PAYMENTS (IMMEDIATE VARIABLE
ANNUITY CONTRACTS ONLY)

In the case of Immediate Variable Annuities, the number of Annuity Units
per month purchased is specified in the Contract. The number of such units is
determined by: (1) multiplying the net single Stipulated Payment (after
deductions for sales and administrative expenses and premium taxes) by the
applicable annuity factor from the annuity tables then used by The Franklin for
Immediate Variable Annuity Contracts, and (2) dividing such product by the value
of the Annuity Unit as of the date of issue of the Contract. This number of
Annuity Units remains fixed for each month during the annuity period, and the
dollar amount of the Annuity Payment is determined as of each Annuity Payment
Date by multiplying this fixed number of Annuity Units by the value of an
Annuity Unit as of each such Annuity Payment Date.

Annuity Units are valued as of a Valuation Date not less than 10 days prior
to the Effective Date of the Contract, pursuant to the procedure discussed under
"The Annuity Unit," above. Thus, the number of Annuity Units (and hence the
amount of the Annuity Payments) will be affected by the net asset value of the
Fund approximately 10 days prior to the Effective Date of the Contract, even
though changes in those net asset values have occurred during that 10-day
period.

As of the date of this Prospectus, The Franklin was using, in connection
with the determination of the number of Annuity Units per month purchased under
Immediate Variable Annuity Contracts, the 1955 American Annuity Table with
assumed 4-1/2% interest, the purchase rates in such table being increased by
0.5% (which percentage is decreased 0.2% for each year of age at the Effective
Date in excess of 70 years for male Variable Annuitants and in excess of 75
years for female Variable Annuitants). However, in lieu of such table, The
Franklin will provide "unisex" annuity rate tables for use under Contracts
purchased in connection with employer-related plans subject to the decision of
the Supreme Court in ARIZONA GOVERNING COMMITTEE v. NORRIS. See "Annuity
Payments," above.

The Annuity Change Factors used by The Franklin for Immediate Variable
Annuity Contracts assume a net investment rate of 3-1/2%.

24
<PAGE>

6. ASSUMED NET INVESTMENT RATE

The objective of a Variable Annuity Contract is to provide level Annuity
Payments during periods when the economy, price levels and investment returns
are relatively stable and to reflect as increased Annuity Payments only the
excess investment results flowing from inflation, increases in productivity or
other factors increasing investment returns. The achievement of this objective
will depend in part upon the validity of the assumption in the annuity factor
that a 3-1/2% net investment rate would be realized in the periods of relative
stability assumed. A higher rate assumption would mean a higher initial Annuity
Payment but a more slowly rising series of subsequent Annuity Payments in the
event of a rising actual investment rate (or a more rapidly falling series of
subsequent Annuity Payments in the event of a lower actual investment rate). A
lower assumption would have the opposite effect. If the actual net investment
rate is at the annual rate of 3-1/2%, the Annuity Payments under Contracts whose
Annuity Payments are measured by Annuity Units will be level.

INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND

The following are the fundamental investment policies of the Fund:

(1) The primary objective of the Fund in making investments is long-term
appreciation of capital. Occasional investments for the purpose of seeking
short-term capital appreciation may also be made.

(2) Realization of current investment return is a secondary objective,
subordinate to the primary objective.

(3) Any investment income and realized capital gains (net of any capital
gains tax) will be retained and reinvested.

(4) The Fund's policy is to be substantially fully invested. Generally,
the Fund's investments will consist of equity securities, mainly common stocks.
The purchase of common stock may be made both in rising and declining markets.
When it is determined, however, that investments of other types may be
advantageous in reaching the Fund's objectives, on the basis of combined
considerations of risk, income and appreciation, investments may be made in
bonds, debentures, notes or other evidences of indebtedness, issued publicly or
placed privately, of a type customarily purchased for investment by
institutional investors, including United States Government securities, in
corporate preferred stock or in certificates of deposit, or funds may be
retained in cash. Such debt securities may, or may not, be convertible into
stock or be accompanied by stock purchase options or warrants.

(5) Temporary investments may be made in United States Government
securities, certificates of deposit, short-term corporate debt securities
(subject to fundamental restriction (4), below) and other similar securities,
pending investment in the above-mentioned securities.

While The Franklin is obligated to make Annuity Payments in accordance with
selected Settlement Options, the amount of the Annuity Payments is not
guaranteed but is a variable amount. Since, historically, the value of a
diversified portfolio of common stocks held for an extended period of time has
tended to rise during periods of inflation and growth in the economy, the
Annuity Payment under a Variable Annuity should tend to conform more closely to
changes in the cost of living and the level of the economy than payments under a
Fixed-Dollar Annuity would do. However, there is no assurance that this
objective can be attained. There have been times when the cost of living has
increased while securities prices have decreased and times when the cost of
living and the level of the economy have gone up or down with no direct
correlation to the value of securities in general or to any particular type or
class of securities. The value of investments held in the Fund will fluctuate
daily and is subject to the risk of changing economic conditions as well as the
risks inherent in the ability of management to anticipate changes in those
conditions. The value of investments in common stock has historically fluctuated
more greatly than the value of investments in securities such as bonds,
debentures, notes, other evidences of indebtedness, preferred stock and
certificates of deposit, and hence investments in common stocks offer

25
<PAGE>

greater opportunities for appreciation and greater risk of depreciation. There
is no assurance that the Cash Value of the Contract during the years prior to
the Variable Annuitant's retirement or the aggregate amount received during the
years following the initial Annuity Payment Date will equal or exceed the
Stipulated Payments on the Contract.

The investment policies of the Fund include a provision that investments
may be made in securities other than common stocks if they are advantageous in
reaching the Fund's objectives, on the basis of combined considerations of risk,
income and appreciation. No assurance can be given, however, that investment in
such other securities will accomplish such objectives. Investments may be made
in bonds, debentures, notes or other evidences of indebtedness, issued publicly
or placed privately, of a type customarily purchased for investment by
institutional investors, including United States Government securities, and may
also be made in corporate preferred stock or in certificates of deposit, or
funds may be retained in cash. Such debt securities may, or may not, be
convertible into stock or be accompanied by stock purchase options or warrants.
Funds may also be temporarily invested in United States Government securities,
certificates of deposit, short-term corporate debt securities (subject to
certain restrictions) and other similar securities, pending long-term
investment. Although debt securities and preferred stocks of the type in which
the Fund would invest are generally considered to present less risk than common
stocks, the value of such securities is subject to market fluctuations as a
result of money market rates, the demand for such securities and factors
relating to the individual issuers of such securities. In the event the Fund
invests in such securities, such factors may limit the ability of the Fund to
convert such securities to cash and reinvest in other types of securities.
Historically, the Fund has not invested significant amounts in debt securities
or preferred stocks except for short-term investments in debt securities pending
ultimate long-term application of funds for investment purposes.

The following are the fundamental investment restrictions applicable to the
Fund:

(1) The Fund will not concentrate its investments in any one industry or
group of related industries, and no more than 25% of the value of the Fund's
assets will be invested in any one industry or group of related industries.

(2) The Fund will not issue senior securities, except that the Fund may
borrow money as set forth in paragraph (3) immediately below.

(3) The Fund will not borrow money except for temporary or emergency
purposes from banks, and any such borrowings will not be used to purchase
investment securities and will not exceed 5% of the value of the Fund's assets.

(4) The Fund will not underwrite securities of other issuers, except
that the Fund may acquire portfolio securities under circumstances where, if
sold, it might be deemed to be an underwriter for purposes of the Securities
Act of 1933. No such securities will be acquired except where parties other
than the Fund shall have agreed to bear any and all costs of registration
under the Securities Act of 1933. (However, it should be noted that even
though an agreement to register has been obtained, enforcement of such an
agreement may prove unfeasible or may involve delays which could adversely
affect the Fund's ability to resell such securities or the price at which
such securities might be resold.) No more than 10% of the value of the Fund's
assets will at any time be invested in such securities.

(5) The Fund will not engage in the purchase and sale of interests in
real estate, except that the Fund may engage in the purchase and sale of
readily marketable interests in real estate investment trusts or similar
securities, which may be deemed to represent indirect interests in real
estate.

<PAGE>

foregoing does not restrict the purchase by the Fund of a portion of an issue of
publicly distributed bonds, debentures or other securities, whether or not the
purchase is made upon the original issuance of such securities.

(7) The Fund will not engage in the purchase or sale of commodities or
commodity contracts.

(8) The Fund will not purchase the securities of any one issuer, other
than obligations issued or guaranteed by the United States Government and its
agencies or instrumentalities, if such purchase would cause more than 5% of the
Fund's assets to be invested in the securities of such issuer, except that up to
25% of the Fund's total assets taken at current value may be invested without
regard to such 5% limitation.

(9) The Fund will not acquire more than 10% of the outstanding voting
securities of any one issuer, other than obligations issued or guaranteed by the
United States Government and its agencies or instrumentalities, except that up
to 25% of the Fund's total assets taken at current value may be invested without
regard to such 10% limitation.

The fundamental investment policies and the fundamental investment
restrictions stated above may not be changed without approval by a vote of a
majority of the votes available to the Contract Owners. This means that the
policies or restrictions in question may not be changed without the approval of
the lesser of (a) the Contract Owners holding 67% or more of the voting power of
the Contract Owners present or represented at a meeting if Contract Owners
holding more than 50% of the total voting power of all Contract Owners in the
Fund are present or represented by proxy, or (b) Contract Owners holding more
than 50% of the total voting power of all Contract Owners in the Fund.

The following investment restrictions are not fundamental and may be
changed by action of the Board of Managers of the Fund:

(10) All securities in which the Fund invests shall be permissible for the
Fund under the Illinois Insurance Code. The Illinois Insurance Code provides
that investments of a separate account, like the Fund, are free of the
restrictions or provisions generally applicable to insurance companies under
that Code, and does not currently provide any special investment restrictions
applicable to separate accounts. However, no investment permitted under the
Illinois Insurance Code is thereby exempted from the other investment
restrictions specified under this caption.

(11) The Fund will not invest in companies for the purpose of exercising
control or management.

(12) The Fund will not invest in the securities of other investment
companies.

(13) The Fund will not purchase securities on margin, except for such
short-term credits as are necessary for the clearance of transactions.

(14) The Fund will not make short sales of securities.

(15) The Fund will not invest in corporate debt (other than commercial
paper) or preferred stock that is rated lower than one of the three top grades
by Moody's Investors Services, Inc. or Standard & Poor's Corporation and the
Fund will not invest in commercial paper rated lower than one of the two top
grades by such rating agencies.

FEDERAL INCOME TAX STATUS

27
<PAGE>

INTRODUCTION

The Contracts are designed for use by individuals in connection with
Qualified Plans under the Code. The federal income tax treatment of the
Contracts and payments received thereunder depends on various factors,
including, among other factors, the tax status of The Franklin, the type of
retirement plan or program in connection with which the Contracts are used and
the form in which payments are received. The discussion of federal income taxes
contained in this Prospectus, which focuses on rules applicable to Contracts
purchased under this Prospectus, is general in nature and is based on existing
federal income tax law, which is subject to change. The tax discussion is not
intended as tax advice. The applicable federal income tax law is complex and
contains many special rules and exceptions in addition to the general rules
summarized herein. For these reasons, various questions about the applicable
rules exist. Accordingly, each person contemplating the purchase of a Contract
is advised to consult with a qualified tax advisor concerning federal income
taxes and any other federal, state or local taxes that may be applicable.

THE FRANKLIN

The Franklin is taxed as a "life insurance company" under the Code. Since
the operations of the Fund are part of the overall operations of The Franklin,
the Fund is subject to tax as part of The Franklin for federal income tax
purposes. Thus, the Fund is not taxed separately as a "regulated investment
company" under the Code.

Under the Code a life insurance company like The Franklin is generally
taxed at regular corporate rates, under a single-phase system, on its
specially-computed life insurance company taxable income. Some special rules
continue to apply, however, in the case of segregated asset accounts like the
Fund.

Investment income and realized capital gains on the assets of the Fund are
reinvested by The Franklin for the benefit of the Fund and are taken into
account in determining the value of Accumulation Units and Annuity Units. As a
result, such income and gains are applied to increase reserves applicable to the
Fund. Under the Code, no federal income tax is payable by The Franklin on such
investment income or on realized capital gains of the Fund on assets held in the
Fund. However, if changes in the federal tax laws or interpretations thereof
result in The Franklin being taxed on income or gains attributable to the Fund,
then The Franklin may impose a charge against the Fund (with respect to some or
all Contracts) in order to set aside provisions to pay such taxes.

THE CONTRACTS: QUALIFIED PLANS

The manner in which payments received under a Contract are taxed for federal
income tax purposes depends on the form of payment. If payments are received in
the form of an annuity, then, in general, under Section 72 of the Code, such
payment is taxable to the recipient as ordinary income to the extent that such
payment exceeds the portion, if any, of the cost basis of the Contract that is
allocable to that payment. A payment received on account of partial redemption
of an annuity contract generally is taxable in whole or part. The taxation of a
partial redemption is governed by complex rules and a qualified tax advisor
should be consulted prior to a proposed partial redemption. If the Variable
Annuitant's life span exceeds his or her life expectancy, the Variable
Annuitant's cost basis will eventually be recovered, and any payments made after
that point will be fully taxable. If, however, the Annuity Payments cease after
the initial Annuity Payment Date by reason of the death of the Variable
Annuitant, the amount of any unrecovered cost basis in the Qualified Contract
will generally be allowed as a deduction to the Variable Annuitant for his or
her last taxable year.

Generally, payment of the proceeds of a Qualified Contract in a lump sum
instead of in the form of an annuity, either at or before maturity, also is
taxable as ordinary income to the extent the lump sum exceeds the cost basis of
the Qualified Contract. Taxation may be deferred, however, to the extent, if
any, that "rollover" treatment is available and elected for a particular
distribution.

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<PAGE>

Under a provision of federal income tax law effective for Contracts entered
into after October 21, 1988, distributions from a Contract are generally not
subject to aggregation with distributions from other annuity contracts issued by
The Franklin (or its affiliates) for the purpose of determining the taxability
of distributions not in the form of an annuity.

The Qualified Contracts are designed for use in connection with several
types of Qualifed Plans, as described generally below.

A. QUALIFIED PENSION, PROFIT-SHARING AND ANNUITY PLANS

Under pension and profit-sharing plans that qualify under Section 401(a) of
the Code and annuity purchase plans that qualify under Section 403(a) of the
Code (collectively "Corporate Qualified Plans"), amounts contributed by an
employer to the Corporate Qualified Plan on behalf of an employee and any gains
thereon are not, in general, taxable to the employee until distribution.
Generally, the cost basis of an employee under a Corporate Qualified Plan will
equal the amount of non-deductible contributions, if any, that the employee made
to the Corporate Qualified Plan. These retirement plans may permit the purchase
of the Contracts to accumulate retirement savings under the plans. Adverse tax
consequences to the plan, to the participant, or both may result if this
Contract is assigned or transferred to any individual as a means to provide
benefit payments.

The Code imposes an additional tax of 10% on the taxable portion of any
early withdrawal from a Corporate Qualified Plan made by a Variable Annuitant
before age 59-1/2, death, or disability. The additional income tax on early
withdrawals will not apply however to certain distributions including (a)
distributions beginning after separation from service that are part of a series
of substantially equal periodic payments made at least annually for the life of
the Variable Annuitant or the joint lives of the Variable Annuitant and his or
her Beneficiary, and (b) distributions made to Variable Annuitants after
attaining age 55 and after separating from service. Further, additional
penalties may apply to distributions made on behalf of a "5-percent owner" (as
defined by Section 416(i)(1)(B) of the Code).

If a lump sum payment of the proceeds of a Contract qualifies as a "lump
sum distribution" under the Code, special tax rules (including limited capital
gain and income averaging treatment in some circumstances) may apply.

B. H.R. 10 PLANS (SELF-EMPLOYED INDIVIDUALS)

Self-employed persons (including members of partnerships) are permitted to
establish and participate in Corporate Qualified Plans under Sections 401(a) and
403(a) of the Code. Corporate Qualified Plans in which self-employed persons
participate are commonly referred to as "H.R. 10 Plans."

The tax treatment of annuity payments and lump sum payments received in
connection with an H.R. 10 Plan is, in general, subject to the same rules
described in "Qualified Pension, Profit-Sharing and Annuity Plans," immediately
above. Some special rules apply, however, in the case of self-employed persons
which, for example, affect certain "lump sum distribution" and "rollover" rules.

C. SECTION 403(b) ANNUITIES

Section 403(b) of the Code permits public schools and other tax-exempt
organizations described in Section 501(c) (3) of the Code to purchase annuity
contracts for their employees subject to special tax rules.

29
<PAGE>

FICA (Social Security) taxes. Generally, the cost basis of an employee under a
Section 403(b) annuity contract will equal the amount of any non-deductible
contributions the employee made toward the contract plus any employer
contributions that were taxable to the employee because they exceeded excludable
amounts.

Federal tax law imposes limitations on distributions from Section 403(b)
annuity contracts. Withdrawals of amounts attributable to contributions made
pursuant to a salary reduction agreement in connection with a Section 403(b)
annuity contract will be permitted only (1) when an employee attains age 59-1/2,
separates from service, dies or becomes totally and permanently disabled or (2)
in the case of hardship. A withdrawal made in the case of hardship may not
include income attributable to the contributions. However, these limitations
generally do not apply to distributions which are attributable to assets held as
of December 31, 1988. In general, therefore, contributions made prior to January
1, 1989, and earnings on such contributions through December 31, 1988, are not
subject to these limitations. In addition, these limitations do not apply to
contributions made other than by a salary reduction agreement. A number of
questions exist concerning the application of these rules. Anyone considering a
withdrawal from a Contract issued in connection with a Section 403(b) annuity
plan should consult a qualified tax advisor.

The 10% penalty tax on early withdrawals described under "Qualified
Pension, Profit-Sharing and Annuity Plans," above, also applies to Section
403(b) annuity contracts.

D. INDIVIDUAL RETIREMENT ANNUITIES

1. SECTION 408(b) INDIVIDUAL RETIREMENT ANNUITIES

Under Sections 408(b) and 219 of the Code, special tax rules apply to
Individual Retirement Annuities. As described below, certain contributions to
such annuities (other than Rollover Contributions) are deductible within certain
limits and the gains on contributions (including Rollover Contributions) are not
taxable until distributed. Generally, the cost basis in an Individual Retirement
Annuity will equal the amount of non-deductible contributions (other than
rollovers), if any, made to the Individual Retirement Annuity. Under special
rules, all individual retirement plans will be treated as one plan for purposes
of these rules.

Section 408(b) sets forth various requirements that an annuity contract
must satisfy before it will be treated as an Individual Retirement Annuity.
Although final regulations that interpret some of these requirements have been
adopted, other regulations have been proposed that interpret the additional
requirement that, under a Section 408(b) Individual Retirement Annuity, the
premiums may not be fixed. These proposed regulations, which contain certain
ambiguities, may, of course, be changed before they are issued in final form.
ACCORDINGLY, WHILE THE FRANKLIN BELIEVES THAT THE CONTRACTS OFFERED BY THIS
PROSPECTUS MEET THE REQUIREMENTS OF SECTION 408(b), THE FINAL REGULATIONS AND
THE CURRENTLY PROPOSED REGULATIONS THEREUNDER, THERE CAN BE NO ASSURANCE THAT
THE CONTRACTS QUALIFY AS INDIVIDUAL RETIREMENT ANNUITIES UNDER SECTION 408(b)
PENDING THE ISSUANCE OF COMPLETE FINAL REGULATIONS UNDER THAT CODE SECTION.

Individuals who are not "active participants" in an employer-related
retirement plan described in Section 219(g) of the Code will, in general, be
allowed to contribute to an Individual Retirement Annuity and to deduct a
maximum of $2,000 annually (or 100% of the individual's compensation if less).
This deduction is phased out at certain income levels for individuals who are
active participants in employer-related retirement plans. These income levels
vary depending on an individual's marital and tax filing status and are
scheduled to gradually increase in the future. Individuals who may not make
deductible contributions to an Individual Retirement Annuity may, instead, make
non-deductible contributions (up to the applicable maximum described above) on
which earnings will accumulate on a tax-deferred basis. If the Individual
Retirement Annuity includes non-deductible contributions, distributions will be
divided on a pro rata basis between taxable and non-taxable amounts. Special
rules apply if, for example, an

30
<PAGE>

individual contributes to an Individual Retirement Annuity for his or her own
benefit and to another Individual Retirement Annuity for the benefit of his or
her spouse.

Individual Retirement Annuities are subject to limitations on the time when
distributions must commence. In addition, the 10% penalty tax on early
withdrawals described under "Qualified Pension, Profit-Sharing and Annuity
Plans," above, also applies to Individual Retirement Annuities, except that the
circumstances in which the penalty tax will not apply are different in certain
respects. Further, for any year in which a Contract Owner borrows any money
under or by use of the Individual Retirement Annuity, the Contract ceases to
qualify under Section 408(b), and an amount equal to the fair market value of
the Contract as of the first day of such year will be includible in the Contract
Owner's gross income for such year.

The sale of a Contract for use with an Individual Retirement Annuity may be
subject to special disclosure requirements of the Internal Revenue Service.
Purchasers of a Contract for use with Individual Retirement Annuities will be
provided with supplemental information required by the Internal Revenue Service
or other appropriate agency. Such purchasers will have the right to revoke
their purchase within 7 days of the earlier of the establishment of the
Individual Retirement Annuity or their purchase. A Qualified Contract issued in
connection with an Individual Retirement Annuity will be amended as necessary to
conform to the requirements of the Code. Purchasers should seek competent
advice as to the suitability of the Contract for use with Individual Retirement
Annuities.

2. SECTION 408(k) SIMPLIFIED EMPLOYEE PENSIONS

An Individual Retirement Annuity described in Section 408(b) of the Code
that also meets the special requirements of Section 408(k) qualifies as a
Simplified Employee Pension. Under a Simplified Employee Pension, employers may
contribute to the Individual Retirement Annuities of their employees subject to
the limitations in Section 408(j). An employee may exclude the employer's
contribution on his or her behalf to a Simplified Employee Pension from gross
income subject to certain limitations. Elective deferrals under a Simplified
Employee Pension are to be treated like elective deferrals under a cash or
deferred arrangement under Section 401(k) of the Code and are subject to a
$7,000 limitation, adjusted for inflation. In general, the employee may also
contribute and deduct an additional amount not in excess of the lesser of (a)
$2,000 or (b) 100% of compensation, subject to the phaseout discussed above, if
the Simplified Employee Pension meets the qualifications for an Individual
Retirement Annuity.

In general, except as stated in this section, the rules discussed in
"Section 408(b) Individual Retirement Annuities," immediately above, apply to a
Simplified Employee Pension.

INCOME TAX WITHHOLDING

Withholding of federal income tax is generally required from distributions
from Qualified Plans or Contracts issued in connection therewith, to the extent
the distributions are taxable and are not otherwise subject to withholding as
wages ("Distributions"). See "The Contracts: Qualified Plans," above, regarding
the taxation of Distributions.

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<PAGE>

which is not rolled over directly from a Section 401(a) qualified trust, a
Section 403(a) qualified annuity plan or a Section 403(b) qualified annuity
contract to an "eligible retirement plan" is subject to mandatory federal income
tax withholding in an amount equal to 20% of the eligible rollover distribution.
An "eligible retirement plan" generally includes a qualified trust described in
Section 401(a) of the Code, a qualified annuity plan described in Section 403(a)
of the Code, an individual retirement account described in Section 408(a) of the
Code or an Individual Retirement Annuity described in Section 408(b) of the
Code. Mandatory federal income tax withholding is required even if the Variable
Annuitant receives an eligible rollover distribution and rolls it over within 60
days to an eligible retirement plan. Federal income tax is not required to be
withheld from any eligible rollover distribution which is rolled over directly
from a qualified trust described in Section 401(a) of the Code, a qualified
annuity plan described in Section 403(a) of the Code or a qualified annuity
contract described in Section 403(b) of the Code to an eligible retirement plan.

Except with respect to certain payments delivered outside the United States
or any possession of the United States, federal income tax is not required to be
withheld from any Distribution which does not constitute an eligible rollover
distribution, if the Variable Annuitant or Beneficiary properly elects in
accordance with the prescribed procedures not to have withholding apply. In the
absence of a proper election not to have withholding apply, the amount to be
withheld from a Distribution which is not an eligible rollover distribution
depends upon the type of payment being made. Generally, in the case of a
periodic payment which is not an eligible rollover distribution, the amount to
be withheld from such payment is the amount that would be withheld therefrom
under specified wage withholding tables if the payment were a payment of wages
for the appropriate payroll period. In the case of a nonperiodic payment which
is not an eligible rollover distribution, the amount to be withheld is generally
equal to 10% of the amount of the Distribution.

The applicable federal law pertaining to income tax withholding from
Distributions is complex and contains many special rules and exceptions in
addition to the general rules summarized above. Special rules apply, for
example, if the Distribution is made to the surviving spouse of a Variable
Annuitant or if the Distribution is an eligible rollover distribution from a
qualified annuity contract under Section 403(b) of the Code. Any Variable
Annuitant or Beneficiary considering a Distribution should consult a qualified
tax advisor.
MANAGEMENT

The affairs of the Fund are conducted in accordance with Rules and
Regulations adopted by the Board of Managers. Under the Rules and Regulations,
the Board of Managers is authorized to take various actions on behalf of the
Fund, including the entry into contracts for the purpose of services with
respect to the Fund under circumstances where the approval of such contracts is
not required to be submitted to the Contract Owners. Subject to the authority of
the Board of Managers, officers and employees of The Franklin are responsible
for overall management of the Fund's business affairs.

VOTING RIGHTS

All Contract Owners will have the right to vote upon:

(1) The initial approval of any investment management agreement and any
amendment thereto.

(2) Ratification of an independent auditor for the Fund.

32
<PAGE>

(3) Any change in the fundamental investment policies or fundamental
investment restrictions of the Fund.

(4) Election of members of the Board of Managers of the Fund (cumulative
voting is not permitted).

(5) Termination of the investment management agreement (such termination
may also be effected by the Board of Managers).

(6) Any other matter submitted to them by the Board of Managers.

The number of votes which a Contract Owner may cast as to any Contract,
except after the initial Annuity Payment Date, is equal to the number of
Accumulation Units credited to the Contract. With respect to any Contract as to
which Annuity Payments measured by Annuity Units have commenced, the Contract
Owner may cast a number of votes equal to (i) the amount of the assets in the
Fund to meet the Variable Annuity obligations related to such Contract, divided
by (ii) the value of an Accumulation Unit. Accordingly, the voting rights of a
Contract Owner will decline during the Annuity Payment period as the amount of
assets in the Fund required to meet the Annuity Payments decreases and, in
addition, will decline as the value of an Accumulation Unit increases.
Fractional votes will be counted.

An employee covered by an H.R. 10 Plan, if not the Contract Owner, will
have the right to instruct the Contract Owner with respect to all votes
attributable to the Contract. An employee covered by a Contract issued in
connection with a qualified pension or profit-sharing plan described in Section
401 of the Code will have the right to instruct the Contract Owner with respect
to votes attributable to his or her payments to the plan, if any, and, to the
extent authorized by the terms of the plan, with respect to any additional votes
under the Contract. If Annuity Payments are being made under an annuity to a
person who is not a Contract Owner, that person will have the right to instruct
the Contract Owner with respect to votes attributable to the amount of the
assets in the Fund to meet the Annuity Payments related to the Contract.

Contract Owners will cast votes with respect to which instructions have
been received in accordance with such instructions. Votes with respect to which
employees, Variable Annuitants or other persons to whom payments are being made
under a Contract are entitled to instruct the Contract Owner, but for which the
Contract Owner has received no instructions, shall be cast by the Contract Owner
for or against each proposal to be voted on in the same proportion as votes for
which instructions have been received by such Contract Owner. If no one is
entitled to instruct the Contract Owner, or if the Contract Owner receives no
instructions, all votes which the Contract Owner is entitled to cast may be cast
at his or her sole discretion. Neither the Fund nor The Franklin has any duty to
inquire as to the instructions received or the authority of the Contract Owner
to cast such votes; except to the extent that the Fund or The Franklin has
actual knowledge to the contrary, the votes cast by Contract Owners will be
considered valid and effective as among the Fund, The Franklin and other persons
having voting rights with respect to the Fund.

Should assets be maintained in the Fund with respect to contracts other
than those offered by this Prospectus, contract owners under such contracts
would be entitled to vote, and their votes would be computed in a similar
manner. Assets maintained by The Franklin in the Fund in excess of the amounts
attributable to the Contracts or other contracts of The Franklin will entitle
The Franklin to vote and its vote would be computed in a similar manner. The
Franklin will cast its votes in the same proportion as the votes cast by
Contract Owners and the owners of such other contracts.

The number of votes which each Contract Owner may cast at a meeting shall
be determined as of a record date to be chosen by the Board of Managers within
120 days of the date of the meeting. At least 20 days' written notice of the
meeting will be given to Contract Owners of record. To be entitled to vote or to
receive notice, a Contract Owner must have been such on the record date.

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<PAGE>

DISTRIBUTION OF THE CONTRACTS

Franklin Financial Services Corporation ("Franklin Financial") serves as
"principal underwriter" (as that term is defined in the Investment Company Act
of 1940) for the Contracts pursuant to a Sales Agreement with the Fund. The
Sales Agreement is described under "Distribution of The Contracts" in the
Statement of Additional Information. Franklin Financial, located at #1 Franklin
Square, Springfield, Illinois 62713, is organized under the laws of the State of
Delaware and is a wholly-owned subsidiary of The Franklin.

The Fund no longer offers new Contracts. Commissions are paid to
registered representatives of Franklin Financial with respect to Stipulated
Payments received by The Franklin under the Contracts to a maximum of 5% of such
Stipulated Payments.

STATE REGULATION

As a life insurance company organized and operated under Illinois law, The
Franklin is subject to statutory provisions governing such companies and to
regulation by the Illinois Director of Insurance. An annual statement is filed
with the Director on or before March 1 of each year covering the operations of
The Franklin for the preceding year and its financial condition on December 31
of such year. The Franklin's books and accounts are subject to review and
examination by the Illinois Insurance Department at all times, and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners ("NAIC") periodically. The NAIC has divided the country
into six geographic zones. A representative of each such zone may participate in
the examination.

In addition, The Franklin is subject to the insurance laws and regulations
of the jurisdictions other than Illinois in which it is licensed to operate.
Generally, the insurance departments of such jurisdictions apply the laws of
Illinois in determining permissible investments for The Franklin.

For certain provisions of Illinois law applicable to the Fund's
investments, see "Investment Policies and Restrictions of the Fund," above.

REPORTS TO OWNERS

The Franklin will mail to the Contract Owner, at the last known address of
record at the Home Office of The Franklin, at least annually, a report
containing such information as may be required by any applicable law or
regulation and a statement showing the then Cash Value of his or her Contract.

FUNDAMENTAL CHANGES

Upon compliance with applicable law, including obtaining any necessary
affirmative vote of Contract Owners in each case: (a) the Fund may be operated
in a form other than as a "management company" under the Investment Company Act
of 1940 (including operation as a "unit investment trust"); (b) the Fund may be
deregistered under the Investment Company Act of 1940 in the event such
registration is no longer required; or (c) the provisions of the Contracts may
be modified to assure qualification under the pertinent provisions of the Code
or to comply with other applicable federal or state laws. In the event of any
such fundamental change, The Franklin may make appropriate amendments to the
Contracts to give effect to such change or take such other action as may be
necessary in this respect.

The Board of Managers of the Fund, and the respective Board of Managers of
each of Franklin Life Variable Annuity Fund B ("Fund B") and Franklin Life Money
Market Variable Annuity Fund C ("Fund C"), have approved resolutions whereby
Contract Owners will be asked during 1998 to approve or to disapprove an
Agreement and Plan of Reorganization (the "Agreement") and related transactions
(together, the Agreement and related transactions are the "Reorganization")
whereby: (i) the Fund will be

34
<PAGE>

restructured into a single unit investment trust consisting of three
subaccounts; (ii) the assets of each of the Fund, Fund B and Fund C will be
liquidated and the proceeds transferred to one of the three subaccounts in the
restructured Fund (so that the interests of Contract Owners and of Fund B and
Fund C contract owners will continue as interests in the restructured Fund); and
(iii) each subaccount will invest exclusively in shares of a specified mutual
fund portfolio.

Contract Owners will be provided with a proxy statement describing the
Reorganization in detail. If the Reorganization is approved, then immediately
following the consummation of the Reorganization, each Contract Owner will have
an interest in a number of units in a subaccount of the restructured Fund having
a value equal to the value of that Contract Owner's interest in a Fund
immediately prior to the Reorganization.

YEAR 2000 TRANSITION

Like all financial services providers, The Franklin utilizes systems that
may be affected by Year 2000 transition issues and it relies on service
providers, including banks, custodians, and investment managers that also may be
affected. The Franklin and its affiliates have developed, and are in the
process of implementing, a Year 2000 transition plan, and are confirming that
their service providers are also so engaged. The resources that are being
devoted to this effort are substantial. It is difficult to predict with
precision whether the amount of resources ultimately devoted, or the outcome of
these efforts, will have any negative impact on The Franklin. However, as of
the date of this prospectus, it is not anticipated that Contract Owners will
experience negative effects on their investment, or on the services provided in
connection therewith, as a result of the Year 2000 transition implementation.
The Franklin currently anticipates that its systems will be Year 2000 compliant
on or about December 31, 1998, but there can be no assurance that The Franklin
will be successful, or that interaction with other service providers will not
impair The Franklin's services at that time.

LEGAL PROCEEDINGS

In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and sales
practices, and a number of these lawsuits have resulted in substantial
settlements. The Franklin is a defendant in certain purported class action
lawsuits. These claims are being defended vigorously by The Franklin. Given
the uncertain nature of litigation and the early stages of this litigation, the
outcome of these actions cannot be predicted at this time. The Franklin
nevertheless believes that the ultimate outcome of all such pending litigation
should not have a material adverse effect on the Fund or on The Franklin's
financial position; however, it is possible that settlements or adverse
determinations in one or more of these actions or other future proceedings could
have a material adverse effect on The Franklin's results of operations for a
given period. No provision has been made in the consolidated financial
statements related to this pending litigation because the amount of loss, if
any, from these actions cannot be reasonably estimated at this time.

The Franklin is a party to various other lawsuits and proceedings arising
in the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon
information presently available, The Franklin believes that the total amounts
that will ultimately be paid, if any, arising from these lawsuits and
proceedings will not have a material adverse effect on the Fund or on The
Franklin's results of operations and financial position. However, it should be
noted that the frequency of large damage awards, including large punitive damage
awards, that bear little or no relation to actual economic damages incurred by
plaintiffs in jurisdictions like Alabama continues to increase and creates the
potential for an unpredictable judgment in any given suit.

REGISTRATION STATEMENT

35
<PAGE>

A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Contracts offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning the Fund, The Franklin and the Contracts offered hereby.
Statements contained in this Prospectus as to the content of Contracts and other
legal instruments are summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.

OTHER VARIABLE ANNUITY CONTRACTS; EFFECT OF NON-QUALIFICATION

The Franklin may offer, under other prospectuses, other variable annuity
contracts having interests in the Fund and containing different terms and
conditions from those offered hereby. All such other contracts, however, will be
designed for use in connection with certain Qualified Plans or as Individual
Retirement Annuities.

The Franklin will not knowingly permit moneys which are not "tax-benefited"
to be allocated to the Fund. The Franklin will transfer any portion of a
Contract allocated to the Fund to the general account of The Franklin, less a
deduction for federal income taxes payable on the portion so transferred, if, at
any time, the plan or arrangement with respect to which the Contract was sold
fails to meet the requirements of the Code. The Franklin will promptly notify
the Contract Owner of such transfer. The Contract Owner may elect to (1) leave
the funds so transferred in the general account, (2) redeem his Contract, or (3)
apply the funds so transferred to the purchase of a variable annuity contract
offered by Franklin Life Variable Annuity Fund B. See "Redemption," and
"Transfers to Other Contracts," above.

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<PAGE>

TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>

PAGE IN STATEMENT OF
ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------
<S> <C>
General Information . . . . . . . . . . . . . . . . . 2
Investment Objectives. . . . . . . . . . . . . . . . . 2
Limitations on Settlement Options. . . . . . . . . . . 2
Management . . . . . . . . . . . . . . . . . . . . . . 4
Investment Advisory and Other Services . . . . . . . . 6
Distribution of The Contracts. . . . . . . . . . . . . 7
Portfolio Turnover and Brokerage . . . . . . . . . . . 8
Safekeeper of Securities . . . . . . . . . . . . . . . 9
Legal Matters. . . . . . . . . . . . . . . . . . . . . 9
Experts. . . . . . . . . . . . . . . . . . . . . . . . 9
Index to Financial Statements. . . . . . . . . . . . . F-1

</TABLE>

37
<PAGE>

PROSPECTUS

FRANKLIN LIFE
VARIABLE ANNUITY FUND A

INDIVIDUAL VARIABLE ANNUITY CONTRACTS
FOR USE WITH CERTAIN QUALIFIED
PLANS AND TRUSTS ACCORDED SPECIAL
TAX TREATMENT AND AS INDIVIDUAL
RETIREMENT ANNUITIES

ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713

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

Complete and return this form to:

The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Attention: Box 1018
(800) 528-2011, extension 2591

Please send me the Statement of Additional Information dated April 30, 1998 for
Franklin Life Variable Annuity Fund A.

- -------------------------------------------------------------------------------
(Name)

- -------------------------------------------------------------------------------
(Street)

- -------------------------------------------------------------------------------
(City) (State) (Zip Code)
- -------------------------------------------------------------------------------

<PAGE>

APPENDIX C

FRANKLIN LIFE VARIABLE ANNUITY FUND B
PROSPECTUS

<PAGE>

FRANKLIN LIFE VARIABLE ANNUITY FUND B

PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(NOT USED IN CONNECTION WITH QUALIFIED
TRUSTS OR PLANS) ISSUED BY

#1 Franklin Square
Springfield, Illinois 62713
Telephone (800) 528-2011

THIS PROSPECTUS DESCRIBES INDIVIDUAL IMMEDIATE AND DEFERRED VARIABLE
ANNUITY CONTRACTS PROVIDING ANNUITY INSTALLMENTS FOR LIFE COMMENCING ON A
MATURITY DATE SELECTED BY THE CONTRACT OWNER; OTHER SETTLEMENT OPTIONS ARE ALSO
PROVIDED. THE BASIC PURPOSE OF THE VARIABLE CONTRACTS IS TO PROVIDE ANNUITY
PAYMENTS WHICH WILL VARY WITH THE INVESTMENT PERFORMANCE OF FRANKLIN LIFE
VARIABLE ANNUITY FUND B (THE "FUND"). THE FUND NO LONGER OFFERS NEW CONTRACTS.

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

THIS PROSPECTUS SETS FORTH INFORMATION ABOUT THE FUND THAT A PROSPECTIVE
INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE KEPT FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE FUND AND THE FRANKLIN IS CONTAINED IN A
STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 30, 1998, WHICH HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN OR ORAL REQUEST. A STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED
FROM THE FRANKLIN BY WRITING TO THE ADDRESS (ATTENTION: BOX 1018) OR CALLING
THE TELEPHONE NUMBER (EXTENSION 2591) SET FORTH ABOVE OR BY RETURNING THE
REQUEST FORM ON THE BACK COVER OF THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED
IN THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE.
THE TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON
PAGE 37 OF THIS PROSPECTUS.

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

THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Special Terms.............................................................. 3
Table of Deductions and Charges............................................ 5
Summary.................................................................... 7
Per-Unit Income and Changes in Accumulation Unit Value..................... 9
Introduction............................................................... 10
Description of the Separate Account........................................ 11
Deductions and Charges Under the Contracts................................. 11
A. Sales and Administration Deductions............................. 11
B. Premium Taxes................................................... 14
C. Mortality and Expense Risk Charge............................... 14
D. Investment Management Service Charge............................ 15
E. Transfers to Other Contracts.................................... 15
F. Miscellaneous................................................... 15
The Contracts.............................................................. 15
A. General......................................................... 15
B. Deferred Variable Annuity Accumulation Period................... 17
C. Annuity Period.................................................. 25
Investment Policies and Restrictions of the Fund........................... 27
Federal Income Tax Status.................................................. 30
Management................................................................. 33
Voting Rights.............................................................. 33
Distribution of the Contracts.............................................. 34
State Regulation........................................................... 34
Reports to Owners.......................................................... 34
Fundamental Changes........................................................ 34
Year 2000 Transition....................................................... 35
Legal Proceedings.......................................................... 35
Registration Statement..................................................... 36
Other Variable Annuity Contracts........................................... 36
Table of Contents of Statement of Additional Information................... 37
</TABLE>

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THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON HAS BEEN AUTHORIZED
BY THE FRANKLIN LIFE INSURANCE COMPANY, FRANKLIN FINANCIAL SERVICES CORPORATION
OR FRANKLIN LIFE VARIABLE ANNUITY FUND B TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND
IN ANY AUTHORIZED SUPPLEMENTAL SALES MATERIAL.

<PAGE>

SPECIAL TERMS

The following is a glossary of certain terms used in this Prospectus:

ACCUMULATION UNIT-A measure used to determine the value of a Contract Owner's
interest in the Fund prior to the initial Annuity Payment Date.

ANNUITY PAYMENT DATE-The date the first monthly Annuity Payment is to be made to
the Variable Annuitant, and the same day of each month thereafter so long as the
annuity is due. Depending on the Settlement Option elected, Annuity Payment
Dates may occur on a periodic basis other than monthly.

ANNUITY PAYMENTS-Periodic payments made to a Variable Annuitant pursuant to a
Contract. In certain circumstances, Annuity Payments may be paid to a
Beneficiary after the death of a Variable Annuitant.

ANNUITY UNIT-A measure used to determine the value of Annuity Payments after the
first.

BENEFICIARY-The person or persons designated by the Contract Owner to whom any
payment due on death is payable.

CASH VALUE-The value of all Accumulation Units or Annuity Units attributable to
a Contract.

CODE-The Internal Revenue Code of 1986, as amended.

CONTRACT-An individual variable annuity contract issued by Franklin Life
Variable Annuity Fund B that is offered by this Prospectus.

CONTRACT ANNIVERSARY-An anniversary of the Effective Date of the Contract.

CONTRACT OWNER-The Contract Owner is the individual Variable Annuitant to whom
the contract is issued or his or her assignee, or if an owner other than the
Variable Annuitant is designated in the application for the Contract, such other
person. When the term "Contract Owner" is used in the context of voting rights,
it includes the owners of all Contracts which depend in whole or in part on the
investment performance of the Fund.

CONTRACT YEAR-Each year starting with the Effective Date and each Contract
Anniversary thereafter.

DEFERRED VARIABLE ANNUITY-An annuity contract which provides for Annuity
Payments to commence at some future date. Included are periodic payment deferred
contracts and single payment deferred contracts.

EFFECTIVE DATE-The date shown on the Schedule Page of the Contract as the date
the first Contract Year begins.

FIXED-DOLLAR ANNUITY-An annuity contract which provides for Annuity Payments
which remain fixed as to dollar amount throughout the Annuity Payment period.

HOME OFFICE-The Home Office of The Franklin located at #1 Franklin Square,
Springfield, Illinois 62713.

IMMEDIATE VARIABLE ANNUITY-An annuity contract which provides for Annuity
Payments to commence immediately rather than at some future date.

INDIVIDUAL RETIREMENT ANNUITY-An annuity contract described in Section 408(b) of
the Code.

PERIODIC STIPULATED PAYMENT CONTRACT-An annuity contract which provides that
payments made to purchase the contract will be made in periodic instalments
rather than in a single sum.

SETTLEMENT OPTION OR OPTIONS-Alternative terms under which payment of the
amounts due in settlement of the Contracts may be received.

<PAGE>

SINGLE STIPULATED PAYMENT CONTRACT-An annuity contract which provides that the
total payment to purchase the contract will be made in a single sum rather than
in periodic instalments. Included are single payment immediate contracts and
single payment deferred contracts.

STIPULATED PAYMENTS-The payment or payments provided to be made to The Franklin
under a Contract.

THE FRANKLIN-The Franklin Life Insurance Company, an Illinois legal reserve
stock life insurance company.

VALUATION DATE-Each date as of which the Accumulation Unit value is determined.
This value is determined on each day (other than a day during which no Contract
or portion thereof is tendered for redemption and no order to purchase or
transfer a Contract is received by the Fund) in which there is a sufficient
degree of trading in the securities in which the Fund invests that the value of
an Accumulation Unit might be materially affected by changes in the value of the
Fund's investments, as of the close of trading on that day.

VALUATION PERIOD-The period commencing on a Valuation Date and ending on the
next Valuation Date.

VARIABLE ANNUITANT-Any natural person with respect to whom a Contract has been
issued and a Variable Annuity has been, will be or (but for death) would have
been effected thereunder. In certain circumstances, a Variable Annuitant may
elect to receive Annuity Payments on a fixed-basis or a combination of a fixed
and variable basis.

VARIABLE ANNUITY-An annuity contract which provides for a series of periodic
annuity payments, the amounts of which may increase or decrease as a result of
the investment experience of a separate account.

<PAGE>

TABLE OF DEDUCTIONS AND CHARGES

Contract Owner Transaction Expenses

Sales Load Imposed on Purchases (as a
percentage of purchase payments)

Single Stipulated Payment Contract 5.00%

Periodic Stipulated Payment Contract 15.00% to 1.00% (for a Contract
with a stipulated payment period of
12 or more years; 4.33% aggregate
over all years for a 12-year
Contract)

10.00% to 3.00% (for a Contract
with a stipulated payment period of
9 to 11 years; 4.44% aggregate over
all years for a 9-year Contract)

6.00% to 3.00% (for a Contract with
a stipulated payment period of 6 to
8 years; 4.50% aggregate over all
years for a 6-year Contract)

4.00% to 3.00% (for a Contract with
a stipulated payment period of 2 to
5 years; 4.00% aggregate over all
years for a 2-year Contract)

Administration Fee (as a percentage of
purchase payment)

Single Stipulated Payment Contract $100

Periodic Stipulated Payment Contract 0.00% to 10.00% (for a Contract
with a stipulated payment period of
12 or more years; 4.67% aggregate
over all years for a 12-year
Contract)

3.00% to 10.00% (for a Contract
with a stipulated payment period of
9 to 11 years; 4.44% aggregate over
all years for a 9-year Contract)

3.00% to 6.00% (for a Contract with
a stipulated payment period of 6 to
8 years; 4.50% aggregate over all
years for a 6-year Contract)

3.00% to 5.00% (for a Contract with
a stipulated payment period of 2 to
5 years; 5.00% aggregate over all
years for a 2-year Contract)

<PAGE>

Annual Expenses
(as a percentage of average net assets)

<TABLE>
<S> <C>
Management Fees 0.44%
Mortality and Expense Risk Fees
Mortality Fees 0.90%
Expense Risk Fees 0.10%
-----

Total Annual Expenses 1.44%
</TABLE>

Example

<TABLE>
<CAPTION>
If you surrender your contract at the end of the applicable
time period: 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets:

Single Stipulated Payment Contract $ 162 $ 189 $ 217 $ 297

Periodic Stipulated Payment Contracts:

Stipulated Payment Period:
12 years or more $ 162 $ 189 $ 217 $ 297

9 to 11 years $ 162 $ 189 $ 217 $ 297

6 to 8 years $ 123 $ 151 $ 180 $ 263

2 to 5 years $ 103 $ 131 $ 162 $ 247
</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

The Table of Deductions and Charges is intended to assist Contract Owners
in understanding the various fees and expenses that they bear directly or
indirectly. Additional deductions may be made from Stipulated Payments for any
premium taxes payable by The Franklin on the consideration received from the
sale of the Contracts. See "Premium Taxes," below. For a more detailed
description of such fees and expenses, see "Deductions and Charges under the
Contracts," below. The example assumes that a single Stipulated Payment of
$1,000 is made at the beginning of the periods shown. (It should be noted that
The Franklin will not actually issue a Single Stipulated Payment Contract unless
the single payment is at least $2,500.) This assumption applies even with
respect to Periodic Stipulated Payment Contracts, which would normally require
additional payments. The example also assumes a constant investment return of 5%
and the expenses might be different if the return of the Fund averaged 5% over
the periods shown but fluctuated during such periods. The amounts shown in the
example represent the aggregate amounts that would be paid over the life of a
Contract if the Contract were surrendered at the end of the applicable time
periods.

<PAGE>

SUMMARY

THE CONTRACTS

The individual variable annuity contracts (the "Contracts") being offered
by this Prospectus are designed for retirement planning for individuals. They
are not designed for use in connection with employer-related plans or qualified
plans and trusts (including Individual Retirement Annuities) accorded special
tax treatment under the Code. The basic purpose of the Contracts is to provide
Annuity Payments which will vary with the investment performance of Franklin
Life Variable Annuity Fund B (the "Fund"). The Contracts provide Annuity
Payments for life commencing on an initial Annuity Payment Date selected by the
Contract Owner; other Settlement Options are provided. In the event of death
prior to the initial Annuity Payment Date, the contract value is paid to the
Beneficiary. Periodic Stipulated Payment Contracts and Single Stipulated Payment
Contracts are offered. See "Introduction," and "The Contracts," below. At any
time within 10 days after receipt of a Contract, the Contract Owner may return
the Contract and receive a refund of any premium paid on the Contract.
Additional refund rights apply to Periodic Stipulated Payment Contracts having a
Stipulated Payment Period of more than five years. See "Withdrawal by the
Contract Owner," below.

Contracts held by a person (such as a corporation or partnership) who is
not a natural person are subject to special federal income tax treatment and the
income on such Contracts allocable to Stipulated Payments made after February
28, 1986 may, subject to certain exceptions, be taxable to the Contract Owner in
the year earned. This special rule does not apply to Contracts held by natural
persons. See "Federal Income Tax Status," below.

THE FUND AND ITS INVESTMENT OBJECTIVES

INVESTMENT ADVISER; PRINCIPAL UNDERWRITER

DEDUCTIONS AND CHARGES

The deductions and charges applicable to a Contract are illustrated in the Table
of Deductions and Charges that appears immediately before this summary. In the
case of Periodic Stipulated Payment Contracts, a deduction, which varies
depending upon the length of the Stipulated Payment period agreed upon in the
Contract and the Contract Year with respect to which the payment is scheduled
to be made, is made for sales and administrative expenses. Over the entire life
of a 12-year Periodic Stipulated Payment Contract, total deductions equal to
4.33% of all periodic payments are made for sales expenses and total deductions
equal to 4.67% of all periodic payments are made for administrative expenses
(for a combined total of 9%); the combined total deductions amount to 9.89% of
the net amount invested assuming no premium taxes are applicable (4.76% for
sales expenses and 5.13% for administrative expenses). During the first four
years of a 12-year contract, however, combined total deductions amount to
17.65%. In the case of a Single Stipulated Payment Contract, a deduction
equal to 5% of the total single payment is made for sales expenses and
a deduction of $100 is made for

<PAGE>

administrative expenses (for a combined total, in the case of a minimum Single
Stipulated Payment Contract sold, of 9%). In the case of a minimum Single
Stipulated Payment Contract sold, the combined deductions amount to 9.89% of
the net amount invested assuming no premium taxes are applicable (5.49% for
sales expenses and 4.40% for administrative expenses). Any applicable state or
local taxes on the Stipulated Payments (currently, up to 5%) also are deducted
from the Single or Periodic Stipulated Payments. The amount remaining after
deductions is allocated to the Fund. See "Sales and Administration Deductions,"
"Transfers to Other Contracts," and "Premium Taxes," below.

The Contracts include The Franklin's undertaking that deductions for sales
and administrative expenses will not be increased regardless of the actual
expenses incurred, and that the Variable Annuity Payments will be paid for the
lifetime of the Variable Annuitant (and, in the case of a joint and last
survivor annuity, for the joint lives of the persons specified) commencing on
the selected initial Annuity Payment Date based on the mortality assumptions
contained in the Contract, regardless of the actual mortality experience among
the Variable Annuitants. In exchange for these undertakings, a charge of 1.002%
of net asset value on an annual basis is made daily against the Fund
(consisting of 0.900% for The Franklin's assurances of annuity rates or
mortality factors and 0.102% for The Franklin's assurances of expense factors).
A charge of 0.438% of net asset value on an annual basis is also made daily
against the Fund for investment management services by The Franklin. The charges
for annuity rate assurances, expense assurances and investment management
services thus aggregate 1.440% of net asset value on an annual basis. See
"Mortality and Expense Risk Charge," and "Investment Management Service Charge,"
below.

MINIMUM PERMITTED INVESTMENT

The minimum single Stipulated Payment is $2,500. The minimum Periodic
Stipulated Payment Contract sold is one under which the periodic Stipulated
Payment (after an initial $20 payment) is currently $10 ($120 on an annual
basis). See "Purchase Limits," below.

NEW CONTRACTS NO LONGER BEING ISSUED

The Fund no longer issues new Contracts.

REDEMPTION

A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the Contract's initial Annuity
Payment Date, may redeem all or part of the Contract and receive the Cash Value
(equal to the number of Accumulation Units credited to the part of the
Contract redeemed) times the value of an Accumulation Unit at the end of the
Valuation Period in which the request for redemption is received less federal
income tax withholding, if applicable. For information as to Accumulation
Units, see "Value of the Accumulation Unit," below. Subject to certain
limitations, the Contract Owner may elect to have all or a portion of the
amount due upon a total redemption of a Contract applied under certain
Settlement Options or applied toward the purchase of other annuity or insurance
products offered by The Franklin. Federal tax penalties may apply to certain
redemptions. See "Redemption," "Transfers to and from Other Contracts,"
"Settlement Options, "The Contracts," and "Federal Income Tax Status," below.

TERMINATION BY THE FRANKLIN

The Franklin currently reserves the right to terminate Contracts the Cash
Value of which has been less than $500 for three years if the Stipulated
Payments in the amount of $120 have not been made in each of the three contract
years of such period, but The Franklin has agreed not to exercise this right in
certain cirumstances. See "Termination by The Franklin," below.

<PAGE>

FRANKLIN LIFE VARIABLE ANNUITY FUND B
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
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1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income $2.025 $1.777 $2.043 $1.569 $1.305 $1.120 $1.197 $1.303 $1.271 $1.102
Expenses 1.447 1.169 .935 .850 .841 .766 .691 .595 .541 .463
----------------------------------------------------------------------------------------------------
Net Investment income .578 .608 1.108 .719 .464 .354 .506 .708 .730 .639
Net realized and unrealized
gain (loss) on securities 23.136 13.251 14.278 (.943) 1.697 1.236 13.776 (1.871) 7.822 .016
----------------------------------------------------------------------------------------------------
Net change in accumulation
unit value 23.714 13.859 15.386 (.224) 2.161 1.590 14.282 (1.163) 8.552 .655
Accumulation unit value:
Beginning of year 86.875 73.016 57.630 57.854 55.693 54.103 39.821 40.984 32.432 31.777
----------------------------------------------------------------------------------------------------
End of year $110.589 $86.875 $73.016 $57.630 $57.854 $55.693 $54.103 $39.821 $40.984 $32.432
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Ratio of expenses to average
net assets 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net investment income
to average net assets .58% .75% 1.71% 1.22% .80% .67% 1.05% 1.71% 1.94% 1.99%
Portfolio turnover rate .67% 3.35% 22.26% 82.18% 61.50% 60.64% 24.18% 28.41% 64.08% 81.20%
Number of accumulation units
outstanding at end of year 16,323 18,648 21,059 23,165 26,542 29,973 31,205 48,192 53,877 61,038
----------------------------------------------------------------------------------------------------
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</TABLE>

FINANCIAL STATEMENTS

The Financial Statements for the Fund and The Franklin and the reports of
the independent auditors and accountants for the Fund and The Franklin are
included in the Statement of Additional Information.

<PAGE>

INTRODUCTION

FRANKLIN LIFE VARIABLE ANNUITY FUND B

INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY

The Contracts offered by this Prospectus are designed primarily to assist
in retirement planning for individuals. They are not designed for use in
connection with employer-related plans or qualified plans and trusts (including
Individual Retirement Annuities) accorded special tax treatment under the Code.
The Contracts provide Annuity Payments for life commencing on a selected Annuity
Payment Date; other Settlement Options are available. The amount of the
Annuity Payments will vary with the investment performance of the assets of the
Fund, a separate account which has been established by The Franklin Life
Insurance Company ("The Franklin") under Illinois insurance law. For the
primary investment objective of the Fund, see "Investment Policies and
Restrictions of the Fund," below.

The Contract Owner may elect to have a portion of the Stipulated Payment or
Payments applied by The Franklin for the purchase of a Fixed-Dollar Annuity.
Fixed-Dollar Annuity Contracts do not, however, participate in the Fund and the
Contracts are transferred to the general account of The Franklin. In cases
where both a Fixed-Dollar and a Variable Annuity are provided under the same
Contract, either annuity may be terminated and the Cash Value obtained or other
Settlement Option elected by the Contract Owner, at any time prior to
commencement of annuity instalments by The Franklin; under these circumstances,
the other annuity may be continued in effect, provided that the annual
Stipulated Payment allocated to the other annuity satisfies The Franklin's
usual underwriting practices. These practices presently require that each
periodic Stipulated Payment (other than the first payment, which must be at
least $20) which purchases the Variable Annuity be at least $10. See generally
"Redemption," and "Settlement Options," below.

Unless otherwise indicated in this Prospectus, the discussion of the
Contracts herein refers to Variable Annuity Contracts, or to the Variable
Annuity portion in cases where both a Variable and a Fixed-Dollar Annuity are
provided in the same Contract, and not to any Fixed-Dollar Annuity. Provisions
relating to a Fixed-Dollar Annuity and a Variable Annuity are separate, and
neither is dependent upon the other in its operations.

<PAGE>

DESCRIPTION OF THE SEPARATE ACCOUNT

The Fund was established as a separate account on April 1, 1970 by
resolution of the Board of Directors of The Franklin pursuant to the provisions
of the Illinois Insurance Code. The Fund is an open-end diversified management
investment company registered with the Securities and Exchange Commission under
the Investment Company Act of 1940. Such registration does not involve
supervision of the management or investment practices or policies of the Fund
or of The Franklin by the Commission. The Board of Managers of the Fund must
be elected annually by Contract Owners. A majority of the members of the Board
of Managers are persons who are not otherwise affiliated with The Franklin. See
"Management," below. The Fund meets the definition of a "Separate Account" under
the federal securities laws.

Under the provisions of the Illinois Insurance Code: (i) the income, gains
or losses of the Fund are credited to or charged against the amounts allocated
to the Fund in accordance with the terms of the Contracts, without regard to the
other income, gains or losses of The Franklin; and (ii) the assets of the Fund
are not chargeable with liabilities arising out of The Franklin's other
business activities, including liabilities of any other separate account which
may be established. These assets are held with relation to the Contracts
described in this Prospectus and such other Variable Annuity contracts as may
be issued by The Franklin and designated by it as participating in the Fund.
All obligations arising under the Contracts, including the promise to make
Annuity Payments, are general corporate obligations of The Franklin.
Accordingly, all of The Franklin's assets (except those allocated to other
separate accounts which have been or may be established) are available to meet
its obligations and expenses under the Contracts participating in the Fund.

The Franklin is taxed as a "life insurance company" under the Code. The
Fund is subject to tax as part of The Franklin for federal income tax purposes.
However, the operations of the Fund are considered separately from the other
operations of The Franklin in computing The Franklin's tax liability and the
Fund is not affected by federal income taxes paid by The Franklin with respect
to its other operations. The operations of the Fund are treated separately from
the other operations of The Franklin for accounting and financial statement
purposes. Under existing law, no federal income tax is payable by The Franklin
on investment income and realized capital gains of the Fund. See "Federal
Income Tax Status," below.

DEDUCTIONS AND CHARGES UNDER THE CONTRACTS

The Franklin deducts the charges described below to cover costs and
expenses, services provided, and risks assumed under the Contracts. The amount
of a charge may not necessarily correspond to the costs associated with
providing the services or benefits indicated by the designation of the charge or
associated with the particular Contract. For example, the sales deductions may
not fully cover all of the sales and distribution expenses actually incurred by
The Franklin, and proceeds from other charges, including the mortality and
expense risk charge, may be used in part to cover such expenses.

A. SALES AND ADMINISTRATION DEDUCTIONS

Deductions will be made as follows for sales expenses with respect to the
Contracts and administrative expenses with respect to the Contracts and the
Fund:

(1) Under Single Stipulated Payment Contracts, a deduction of $100 is made
from the single payment for administrative expenses. In addition, a sales
expense deduction of 5% of the total payment is made from the single Stipulated
Payment. In the case of the minimum Single Stipulated Payment Contract sold
(which is $2,500), the combined deductions for administrative expenses and sales
expenses amount to 9.89% of the net amount invested (5.49% for sales expenses
and 4.40% for administrative expenses) assuming no premium taxes are applicable.

<PAGE>

(2) Under Periodic Stipulated Payment Contracts, a sales and administration
deduction is made from each Stipulated Payment. The amount of the deduction
varies depending upon the length of the stipulated payment period agreed upon in
the Contract and the Contract Year with respect to which a payment is scheduled
to be made. The deductions are applied whether the Stipulated Payment is made on
time or in arrears. Prepayments will not be accepted. The following tables
indicate the deductions made:

<TABLE>
<CAPTION>
STIPULATED PAYMENT PERIOD OF 12 OR MORE YEARS
- ---------------------------------------------------------------------------------------------------------------
AS PERCENTAGE OF AS PERCENTAGE OF
NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT:
---------------------------------------- -----------------------------------------
SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL
CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 17.65% 0.00% 17.65% 15% 0% 15%
2 to 4 5.88% 11.76% 17.65% 5% 10% 15%
5 5.56% 5.56% 11.11% 5% 5% 10%
6 to 10 3.19% 3.19% 6.38% 3% 3% 6%
11 or subsequent 1.04% 3.13% 4.17% 1% 3% 4%
AGGREGATE OVER ALL
YEARS FOR A
12-YEAR CONTRACT: 4.76% 5.13% 9.89% 4.33% 4.67% 9%

STIPULATED PAYMENT PERIOD OF 9-11 YEARS
- ---------------------------------------------------------------------------------------------------------------
AS PERCENTAGE OF AS PERCENTAGE OF
NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT:
---------------------------------------- -----------------------------------------
SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL
CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION
- ---------------------------------------------------------------------------------------------------------------
1 11.78% 5.88% 17.65% 10% 5% 15%
2 5.88% 11.76% 17.65% 5% 10% 15%
3 to 4 5.56% 5.56% 11.11% 5% 5% 10%
5 to 11 3.19% 3.19% 6.38% 3% 3% 6%
AGGREGATE OVER ALL
YEARS FOR A
9-YEAR CONTRACT: 4.88% 4.88% 9.76% 4.44% 4.44% 8.89%

STIPULATED PAYMENT PERIOD OF 6-8 YEARS
- ---------------------------------------------------------------------------------------------------------------
AS PERCENTAGE OF AS PERCENTAGE OF
NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT:
---------------------------------------- -----------------------------------------
SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL
CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION
- ---------------------------------------------------------------------------------------------------------------
1 6.74% 5.62% 12.36% 6% 5% 11%
2 5.62% 6.74% 12.36% 5% 6% 11%
3 to 4 5.56% 5.56% 11.11% 5% 5% 10%
5 or subsequent 3.19% 3.19% 6.38% 3% 3% 6%
AGGREGATE OVER ALL
YEARS FOR A
6-YEAR CONTRACT: 4.95% 4.95% 9.89% 4.50% 4.50% 9%
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
STIPULATED PAYMENT PERIOD OF 2-5 YEARS
- ---------------------------------------------------------------------------------------------------------------
AS PERCENTAGE OF AS PERCENTAGE OF
NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT:
---------------------------------------- -----------------------------------------
SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL
CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 to 4 4.40% 5.49% 9.89% 4% 5% 9%
5 3.19% 3.19% 6.38% 3% 3% 6%
AGGREGATE OVER ALL
YEARS FOR A
2-YEAR CONTRACT: 4.40% 5.49% 9.89% 4% 5% 9%
</TABLE>

NOTE: The foregoing tables assume that no premium taxes are payable in the
jurisdiction in question. See discussion under "Premium Taxes," below.
Percentage figures may not add due to rounding.

Deductions for sales expenses are made pursuant to a Sales Agreement with
Franklin Financial Services Corporation ("Franklin Financial"). See
"Distribution of the Contracts," below, and in the Statement of Additional
Information. Deductions for administrative expenses, and for mortality and
expense risk assurances discussed under "Mortality and Expense Risk Charge,"
below, are made pursuant to an Administration Agreement dated March 23, 1972
between the Fund and The Franklin. The Administration Agreement is described
under "Investment Advisory and Other Services" in the Statement of Additional
Information.

The Franklin will not accept more than the stipulated dollar amounts of
payments on any Contract except in the case of a Contract having a Stipulated
Payment period of 12 or more years. In the case of monthly Stipulated Payment
Contracts, where the Stipulated Payment per month (subsequent to the initial
payment) is less than $20, the initial monthly payment must be at least $20, and
the total payments to be received during the first Contract Year will be twelve
times the amount of the Stipulated Payment per month (subsequent to the initial
payment). This will be done either by ending the first Contract Year earlier
than twelve months after the receipt of the initial Stipulated Payment or by
omitting certain monthly payments which otherwise would follow the initial
payment. The purpose of this procedure is to prevent the imposition of total
deductions over the life of the contract in an amount in excess of the amounts
set forth in the tables above opposite the items "Aggregate over all years" for
sample Contracts.

The table below illustrates, in the case of assumed Contracts for 10 years
and for 15 years providing for stipulated monthly payments amounting to $50 per
month, the allocation of the cumulative payments and deductions at the end of
certain specified periods of time. In Contracts for less than nine years, the
amounts deducted from the earlier Stipulated Payments are less than those
deducted from the Stipulated Payments in the earlier periods for the Contracts
illustrated in the table, and, accordingly, in those Contracts proportionately
more of the total Stipulated Payments would be invested at the end of one, two
and five years than in the case of the illustrations given.

10 YEAR CONTRACT

<TABLE>
<CAPTION>
AT THE END OF. . . . . . . . . 10 YEARS 1 YEAR 2 YEARS 5 YEARS
(120 PAYMENTS) (13 PAYMENTS) (25 PAYMENTS) (61 PAYMENTS)
- -----------------------------------------------------------------------------------------------------------------------------------

Amount % Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL PAYMENTS . . . . . . . . . $6,000.00 100.00% $650.00 100.00% $1,250.00 100.00% $3,050.00 100.00%
DEDUCT:
SALES EXPENSE DEDUCTION . . . . 258.00 4.30% 62.50 9.61% 92.50 7.40% 169.50 5.555%
ADMINISTRATION DEDUCTION. . . . 258.00 4.30% 35.00 5.39% 92.50 7.40% 169.50 5.555%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEDUCTIONS. . . . . . . . $ 516.00 8.60% $ 97.50 15.00% $ 185.00 14.80% $ 339.00 11.110%
NET AMOUNT INVESTED. . . . . . . $5,484.00 91.40% $552.50 85.00% $1,065.00 85.20% $2,711.00 88.890%
</TABLE>

13
<PAGE>

15 YEAR CONTRACT

<TABLE>
<CAPTION>
AT THE END OF . . . . . . . . . 15 YEARS 1 YEAR 2 YEARS 5 YEARS
(180 PAYMENTS) (13 PAYMENTS) (25 PAYMENTS) (61 PAYMENTS)
- -----------------------------------------------------------------------------------------------------------------------------------

Amount % Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL PAYMENTS . . . . . . . . . $9,000.00 100.00% $650.00 100.00% $1,250.00 100.00% $3,050.00 100.00%
DEDUCT:
SALES EXPENSE DEDUCTION . . . . 330.00 3.67% 92.50 14.23% 122.50 9.80% 211.50 6.935%
ADMINISTRATION DEDUCTION. . . . 390.00 4.33% 5.00 0.77% 65.00 5.20% 211.50 6.935%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEDUCTIONS. . . . . . . . $ 720.00 8.00% $ 97.50 15.00% $ 187.50 15.00% $ 423.00 13.870%
NET AMOUNT INVESTED. . . . . . . $8,280.00 92.00% $552.50 85.00% $1,062.50 85.00% $2,627.00 86.130%
</TABLE>

NOTE: The foregoing table assumes that no premium taxes are payable in the
jurisdiction in question. See the discussion under "Premium Taxes,"
below. The percentages shown are percentages of the total payments
made.

The total deductions made in respect of sales expenses of Franklin
Financial in 1995, 1996 and 1997 were $825, $370 and $402, respectively, and all
such amounts were retained on behalf of Franklin Financial.

The administration deductions are designed to cover the actual expenses of
administering the Contracts and the Fund. The aggregate dollar amounts of the
administration deductions for the fiscal years ended December 31, 1995, 1996 and
1997 were $1,316, $632 and $689, respectively.

B. PREMIUM TAXES

At the time any premium taxes are payable by The Franklin on the
consideration received from the sale of the Contracts, the amount thereof will
be deducted from the Stipulated Payments. Premium taxes ranging up to 5% are
charged by various jurisdictions in which The Franklin is transacting business
and in which it may, after appropriate qualification, offer Contracts.

C. MORTALITY AND EXPENSE RISK CHARGE

While Annuity Payments will reflect the investment performance of the Fund,
they will not be affected by adverse mortality experience or by any excess in
the actual expenses of the Contracts and the Fund over the maximum
administration deductions provided for in the Contracts. The Franklin assumes
the risk that Annuity Payments will continue for a longer period than
anticipated because the Variable Annuitant lives longer than expected (or the
Variable Annuitants as a class do so) and also assumes the risk that the
administration deductions may be insufficient to cover the actual expenses of
the administration of the Contracts and of the Fund (except those expenses
listed under "Investment Management Service Charge," immediately below, which
the Fund will bear). The Franklin assumes these risks for the duration of the
Contract and the annuity rate, mortality and expense risk deductions and
charges set forth herein will not be increased beyond the stated maximum with
respect thereto regardless of the actual mortality and expense experience. The
mortality risk charge is imposed regardless of whether or not the payment option
selected involves a life contingency.

For assuming these risks, The Franklin imposes a daily charge against the
value of the Accumulation Unit and the Annuity Unit. (For further information
as to the Accumulation Unit and the Annuity Unit, see "Deferred Variable
Annuity Accumulation Period" and "Annuity Period," below.) These charges are at
the combined annual rate of 1.002% (.002745% on a daily basis), of which .900%
is for annuity rate and mortality assurances and .102% is for expense
assurances. If the money collected from this charge is not needed, it will be
to The Franklin's gain and may be used to cover contract distribution expenses.

During 1995, 1996 and 1997, The Franklin earned and was paid $14,273,
$15,752 and $17,759, respectively, by reason of these charges. Such charges
during 1997 were equal to 1.002% of average net assets.

<PAGE>

D. INVESTMENT MANAGEMENT SERVICE CHARGE

The Franklin acts as investment manager of the Fund. For acting as such,
The Franklin makes a charge against the Fund at the annual rate of 0.438% of
the Fund's assets, computed by imposing a daily charge of 0.0012% against the
value of the Accumulation Unit and of the Annuity Unit in determining those
values. The investment management services are rendered and the charge is made
pursuant to an Investment Management Agreement executed and dated January 31,
1995, pursuant to approval by the Contract Owners at their annual meeting held
on April 17, 1995, and renewal to January 31, 1999 by the Board of Managers of
the Fund at its meeting on January 19, 1998. The Investment Management
Agreement is described under "Investment Advisory and Other Services" in the
Statement of Additional Information.

During 1995, 1996 and 1997, The Franklin earned and was paid $6,240, $6,886
and $7,765, respectively, under the Investment Management Agreement then in
effect.

E. TRANSFERS TO OTHER CONTRACTS

Contracts may be redeemed prior to the death of the Variable Annuitant and
the initial Annuity Payment Date and the Cash Value (less the required amount
of federal income tax withholding, if any) may be applied to the purchase of
certain other Variable Annuities, Fixed-Dollar Annuities or life insurance
contracts issued by The Franklin. Franklin Life Variable Annuity Fund A and
Franklin Life Money Market Variable Annuity Fund C, other separate accounts of
The Franklin funding Variable Annuity contracts, no longer issue new Variable
Annuity contracts.

It is not clear whether gain or loss will be recognized for federal income
tax purposes upon the redemption of a Contract, another annuity contract or
life insurance contract issued by The Franklin for purposes of applying the
redemption proceeds to the purchase of another contract issued by The Franklin.
Federal tax penalties may also apply to such redemptions. Since the income and
withholding tax consequences of such redemption and purchase depend on many
factors, any person contemplating redemption of a Contract or another contract
issued by The Franklin for purposes of purchasing a different contract issued by
The Franklin (or any other contract) is advised to consult a qualified tax
advisor prior to the time of redemption. Contract Owners who are not natural
persons should also consider whether such a redemption would cause them to lose
certain advantages applicable to stipulated payments made on or before February
28, 1986. See "Federal Income Tax Status-The Contracts," below.

F. MISCELLANEOUS

The Fund's total expenses for 1997 were $25,524, or 1.440% of average
net assets during 1997.

THE CONTRACTS

A. GENERAL

Certain significant provisions of the Contracts and administrative
practices of The Franklin with respect thereto are discussed in the following
paragraphs.

Contract Owner inquiries may be directed to the Equity Administration
Department of The Franklin at the address or telephone number set forth on
the cover of this Prospectus.

1. ANNUITY PAYMENTS

Variable Annuity Payments are determined on the basis of (i) an annuity
rate table specified in the Contract, which reflects the age and sex of the
Variable Annuitant and the type of Settlement Option selected, and (ii) the
investment performance of the Fund. In the case of Deferred Variable
Annuities, the annuity rate table is set forth in the Contract. In the case
of Immediate Variable Annuities, the table is that used by The Franklin on the

<PAGE>

date of issue of the Contract. The amount of the Annuity Payments will not be
affected by mortality experience adverse to The Franklin or by an increase in
The Franklin's expenses related to the Fund or the Contracts in excess of the
expense deductions provided for in the Contracts. The Variable Annuitant under
an annuity with a life contingency or one providing for a number of Annuity
Payments certain will receive the value of a fixed number of Annuity Units
each month, determined as of the initial Annuity Payment Date on the basis of
the applicable annuity rate table and the then value of his or her account. The
value of Annuity Units, and thus the amounts of the monthly Annuity Payments,
will, however, reflect investment gains and losses and investment income
occurring after the initial Annuity Payment Date, and thus the amount of the
Annuity Payments will vary with the investment experience of the Fund. See
"Annuity Period," below.

2. DECREASE BY CONTRACT OWNER IN AMOUNT OF PERIODIC STIPULATED PAYMENTS;
INCREASE BY CONTRACT OWNER IN NUMBER OF PERIODIC STIPULATED PAYMENTS

Stipulated Payments can be paid on an annual, semi-annual or quarterly
schedule or, with The Franklin's consent, monthly. The first Stipulated Payment
is due as of the date of issue and each subsequent Stipulated Payment is due on
the first day following the interval covered by the next preceding Stipulated
Payment and on the same date each month as the date of issue. Subject to the
limitations described under "Purchase Limits," below, the amount of a periodic
Stipulated Payment may be decreased by the Contract Owner on any date a
Stipulated Payment is due. Submission of a Stipulated Payment in an amount less
than that of the previous Stipulated Payment, subject to the aforesaid purchase
limits, will constitute notice of the election of the Contract Owner to make
such change. After such a decrease, the Contract Owner is permitted to increase
his periodic Stipulated Payments up to, but not in excess of, the amount
originally provided in the Contract. Unless otherwise agreed to by The
Franklin, the mode of Stipulated Payment may be changed only on a Contract
Anniversary.

In the case of Contracts having a Stipulated Payment period of 12 years or
more, the Contract Owner may continue making Stipulated Payments after the
agreed amount of Stipulated Payments has been made, subject to the limitation
that no more than twice the amount of Stipulated Payments specified in the
Contract will be received by The Franklin, and The Franklin reserves the right
not to accept the Stipulated Payments after age 75. The deductions for sales and
administrative expenses from these additional Stipulated Payments will be that
applicable to Stipulated Payments in the final agreed year for Stipulated
Payments as set forth in the table as to Stipulated Payment periods of 12 or
more years under "Sales and Administration Deductions," above. No similar
privilege is available with respect to Contracts having a Stipulated Payment
period of less than 12 years.

3. ASSIGNMENT OR PLEDGE

A Contract may be assigned by the Contract Owner or pledged by him or her
as collateral security as provided in the Contract. The Franklin will make
Contract loans only as provided under "Contract Loans," below. Assignments or
pledges of the Contract and Contract loans will be treated as distributions
that may be taxable. Moreover, in certain instances, pledges or assignments of
the Contract and Contract Loans may result in the imposition of certain tax
penalties. See "Federal Income Tax Status-The Contracts," below.

Persons contemplating the assignment or pledge of a Contract are advised to
consult a qualified tax advisor concerning the federal income tax consequences
thereof.

4. PURCHASE LIMITS

No single Stipulated Payment may be less than $2,500. Currently, no
periodic Stipulated Payment may be less than $120 on an annual basis, $60 on a
semiannual basis, and $30 on a quarterly basis; and, in the case of monthly
Stipulated Payment contracts, the initial payment must be at least $20 and each
subsequent periodic payment at least $10. Under the terms of the Contract, The
Franklin may increase the minimum periodic Stipulated Payment to $20 ($240 on an
annual basis).

5. TERMINATION BY THE FRANKLIN

The Franklin currently reserves the right to terminate any Contract if
total Stipulated Payments paid are less

16
<PAGE>

than $120 in each of three consecutive Contract Years (excluding the first
Contract Year) and if the Cash Valueis less than $500 at the end of such
three-year period. Under the terms of the Contract, The Franklin may terminate
such Contract if total Stipulated Payments paid are less than $240 in each of
such three consecutive Contract Years and if the Cash Value is less than $500
at the end of such three-year period. The Franklin must give 31 days' notice
by mail to the Contract Owner of such termination. The Franklin will not
exercise any right to terminate such Contract if the value of the Contract
declines to less than $500 as a result of a decline in the market value of the
securities held by the Fund.

Upon termination as described above, The Franklin will pay to the Contract
Owner the Cash Value of the Contract, less federal income tax withholding and
any indebtedness, if applicable. For certain tax consequences upon such
payment, see "Federal Income Tax Status," below.

6. WITHDRAWAL BY THE CONTRACT OWNER

A Contract Owner has the right to revoke the purchase of a Contract within
10 days after receipt of the Contract, and upon such revocation will be entitled
to a return of the entire amount paid.

In addition, with respect to any Periodic Stipulated Payment Contract
having a Stipulated Payment period of more than five years, The Franklin will
send to the Contract Owner of such Contract, within 60 days after the Date of
Issue, a statement of charges to be deducted from the Stipulated Payments and a
notice of the right to withdraw from the Contract, which may be exercised by
surrendering the Contract within 45 days after the mailing of the notice. In
the case of such surrender, the Contract Owner will be entitled to the Cash
Value of the Contract, plus an amount, payable by The Franklin or by Franklin
Financial Services Corporation, distributor of the Contracts, equal to the
difference between the gross payments made on the Contract and the net amount
invested. The Franklin has guaranteed the obligations of Franklin Financial
Services Corporation in this respect and accordingly, in connection with The
Franklin's ability to meet these obligations, the financial statements of The
Franklin contained herein should be considered. Payments upon such surrender
may be subject to federal income tax withholding and federal tax penalties.
See "Income Tax Withholding," below and "Federal Income Tax Status-The
Contracts," below.

Any request for revocation or withdrawal must be made by mailing or
hand-delivering the Contract and a written request for revocation or withdrawal
within the applicable time period either to The Franklin Life Insurance
Company, Cashiers Department, #1 Franklin Square, Springfield, Illinois 62713,
or to the agent from whom the Contract was purchased. In general, notice of
revocation given by mail is deemed to be given on the date of the postmark, or,
if sent by certified or registered mail, the date of certification or
registration.

7. NEW CONTRACTS NO LONGER BEING ISSUED

The Fund no longer issues new Contracts.

B. DEFERRED VARIABLE ANNUITY ACCUMULATION PERIOD

1. CREDITING ACCUMULATION UNITS; DEDUCTIONS FOR SALES AND ADMINISTRATIVE
EXPENSES

During the accumulation period-the period before the initial Annuity
Payment Date-deductions from Stipulated Payments for sales and administrative
expenses are made as specified under "Deductions and Charges Under the
Contracts," above. In addition, any applicable premium taxes, also as specified
above under that caption, are deducted from the Stipulated Payments. The balance
of each Stipulated Payment is credited to the Contract Owner in the form of
Accumulation Units.

<PAGE>

are complete upon receipt. If the application and such information are not
complete upon receipt, The Franklin, within five days after the receipt of an
original application and initial payment at the Home Office of The Franklin,
will attempt to complete the application and will either accept the application
or reject the application and return the initial payment.

2. VALUATION OF A CONTRACT OWNER'S CONTRACT

3. VALUE OF THE ACCUMULATION UNIT

The value of an Accumulation Unit was set at $10 effective July 1, 1971.
Accumulation Units currently are valued each Valuation Date (each day in which
there is a sufficient degree of trading in the securities in which the Fund
invests that the value of an Accumulation Unit might be materially affected by
changes in the value of the Fund's investments, other than a day during which
no Contract or portion thereof is tendered for redemption and no order to
purchase or transfer a Contract is received by the Fund, as of the close of
trading on that day). After the close of trading on a Valuation Date, or on a
day when Accumulation Units are not valued, the value of an Accumulation Unit
is equal to its value as of the immediately following Valuation Date. The
value of an Accumulation Unit on the last day of any Valuation Period is
determined by multiplying the value of an Accumulation Unit on the last day of
the immediately preceding Valuation Period by the Net Investment Factor
(defined below) for the current Valuation Period.

The net investment rate for the Valuation Period is then determined by
deducting, currently, .003945% (1.440% on an annual basis) for each day of the
Valuation Period as a charge against the gross investment rate. This charge is
made by The Franklin for providing investment management services, annuity
rate or mortality assurances and expense assurances. See "Deductions and
Charges Under the Contracts," above.

The net investment factor for the Valuation Period is the sum of 1.00000000
plus the net investment rate for the Valuation Period ("Net Investment
Factor").

4. VALUATION OF FUND ASSETS

In determining the value of the assets of the Fund, each security traded
on a national securities exchange is

<PAGE>

valued at the last reported sale price on the Valuation Date. If there has been
no sale on such day, then thevalue of such security is taken to be the current
bid price at the time as of which the value is being ascertained. Any security
not traded on a securities exchange but traded in the over-the-counter market
is valued at the current bid price on the Valuation Date. Any securities or
other assets for which market quotations are not readily available are valued
at fair value as determined in good faith by the Board of Managers.

5. REDEMPTION

A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the initial Annuity Payment Date,
may redeem the Contract in whole, or in part, by submission of the Contract
and a written request for its redemption to The Franklin's Home Office, and will
receive the Cash Value of the part of the Contract redeemed. The Cash Value of
a Contract or part thereof redeemed prior to the initial Annuity Payment Date
is the number of Accumulation Units credited to the Contract (or that part so
redeemed) times the value of an Accumulation Unit at the end of the Valuation
Period in which the request for redemption is received. Except in the limited
circumstances described below, the payment of the Cash Value will be made
within seven days after the date a properly completed and documented request
for redemption is received by The Franklin at its Home Office. The right of
redemption may be suspended or the date of payment postponed during any periods
when the New York Stock Exchange is closed (other than customary weekend and
holiday closings); when trading in the markets the Fund normally utilizes is
restricted, or an emergency exists as determined by the Securities and Exchange
Commission so that disposal of the Fund's investments or determination of its
net asset value is not reasonably practicable; or for such other periods as the
Securities and Exchange Commission by order may permit to protect Contract
Owners.

In lieu of a single payment of the amount due upon redemption of a
Contract, the Contract Owner may elect, at any time prior to the initial
Annuity Payment Date and during the lifetime of the Variable Annuitant, to have
all or any portion of the amount due applied under any available Settlement
Option. See "Settlement Options," below. However, no Settlement Option may be
elected upon redemption without surrender of the entire Contract.

The payment of the Cash Value of a redeemed Contract either in a single
payment or under an available Settlement Option may be subject to federal
income tax withholding and federal tax penalties. See "Federal Income Tax
Status," below.

6. PAYMENT OF ACCUMULATED VALUE AT TIME OF DEATH

In the event of the death of the Variable Annuitant prior to the initial
Annuity Payment Date, death benefits payable to the surviving beneficiary will
be paid by The Franklin within seven days of receipt by The Franklin of written
notice of such death. The death proceeds payable will be the Cash Value of the
Contract determined as of the date on which written notice of death is received
by The Franklin by mail if such date is a Valuation Date; if such date is not a
Valuation Date, the determination will be made on the next following Valuation
Date. There is no assurance that the Cash Value of a Contract will equal or
exceed the Stipulated Payments made. For the method of valuation of
Accumulation Units, see "Crediting Accumulation Units; Deductions for Sales and
Administration Expenses," above.

The Code imposes certain distribution requirements which affect the payment
of death benefits. See "Settlement Options," below. Subject to these
requirements, the Contract Owner may, at any time prior to the initial Annuity
Payment Date, elect that all or any portion of such death proceeds be paid to
the Beneficiary under any one of the available Settlement Options. If the
Contract Owner has not made such an election, the Beneficiary may do so after
the death of the Variable Annuitant. The Contract Owner or the Beneficiary,
whichever selects the method of settlement, may designate contingent
Beneficiaries to receive any other amounts due should the first Beneficiary die
before completion of the specified payments. If neither the Contract

<PAGE>

Owner nor the Beneficiary elects payment of death proceeds under an available
Settlement Option, payment will be made to the Beneficiary in a single sum.

Death proceeds may be applied to provide variable payments, fixed-dollar
payments or a combination of both.

The payment of death proceeds may be subject to federal income tax
withholding. See "Income Tax Withholding," below.

7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS

Upon a failure to make a Stipulated Payment under a Periodic Stipulated
Payment Contract, subject to The Franklin's power of termination described
under "Termination by The Franklin," above, and subject to the right of The
Franklin to pay the value of the Contract Owner's account in a single sum at
the initial Annuity Payment Date if the value on such date is less than $2,000,
the Contract Owner may elect, prior to the death of the Variable Annuitant and
prior to the initial Annuity Payment Date, either of the following options:

(a) to exercise any of the available Settlement Options described under
"Settlement Options," below, or redeem the Contract as described under
"Redemption," above; or

(b) to have the Contract continued from the date of failure to make a
Stipulated Payment as a paid-up annuity to commence on the initial Annuity
Payment Date stated in the Contract.

If no option is elected by the Contract Owner within 31 days after failure
to make a Stipulated Payment, the Contract will automatically be continued
under the paid-up annuity option.

Under a single stipulated payment deferred contract, the Contract Owner may
terminate his Contract and exercise any of the Settlement Options described
below at any time prior to the initial Annuity Payment Date.

8. REINSTATEMENT (AS TO PERIODIC STIPULATED PAYMENT CONTRACTS)

A Contract Owner, by making one Stipulated Payment, may reinstate a
Periodic Stipulated Payment Contract as to which there has been a failure to
make a Stipulated Payment, if the Contract at the time of the payment is being
continued as a paid-up annuity. However, such reinstatement does not
automatically reinstate the benefits provided by any riders to the Contract
providing life insurance or disability benefits. Following reinstatement, the
Contract Owner may exercise any of the options upon failure to make Stipulated
Payments or Settlement Options described herein. Sales and administration
deductions from Stipulated Payments made upon or after reinstatement will be
equivalent to those that would have been made if the payments had been made at
the time originally stipulated.

9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF
BENEFICIARIES

While the Contract is in force the Contract Owner may (by filing a written
request at the Home Office of The Franklin) change the Beneficiary or
Settlement Option, or, if agreed to by The Franklin, change to a mode of payment
different from one of the Settlement Options.

<PAGE>

10. SETTLEMENT OPTIONS

At any time prior to the initial Annuity Payment Date and during the
lifetime of the Variable Annuitant, the Contract Owner may elect to have all
or a portion of the amount due in settlement of the Contract applied under any
of the available Settlement Options described below. If the Contract Owner
fails to elect a Settlement Option, payment automatically will be made in the
form of a life annuity. See "First Option," below, and "Deferred Variable
Annuity Contracts," below.

Annuity Payments under a Settlement Option are made to the Variable
Annuitant during his or her lifetime, or for such shorter period that may apply
under the particular Settlement Option. Upon the death of the original Variable
Annuitant after the initial Annuity Payment Date, any remaining Annuity
Payments that are due under the Settlement Option elected will be continued to
the Beneficiary or, if elected by the Contract Owner (or, if so designated by
the Contract Owner, by the Beneficiary), the Cash Value of the Contract, as
described under such Settlement Option below, will be paid to the Beneficiary
in one lump sum. Upon the death of any Beneficiary to whom payments are being
made under a Settlement Option, a single payment equal to the then remaining
Cash Value of the Contract, if any, will be paid to the executors or
administrators of the Beneficiary, unless other provision has been specified
and accepted by The Franklin. For a discussion of payments if no Beneficiary is
surviving at the death of the Variable Annuitant, see "Change of Beneficiary or
Mode of Payment of Proceeds; Death of Beneficiaries," immediately above.

Available Settlement Options may be selected on a fixed or variable basis
or a combination thereof, except the Seventh Option, which is available on a
fixed basis only. Under an Option which is paid on a fixed basis, there is no
sharing in the investment experience of the Fund and, upon commencement of
payments, participation in the Fund terminates (the subject Contract will be
transferred to the general account of The Franklin). Settlement under the
First, Second, Third, Fourth or Fifth Option below is subject to satisfactory
proof of age of the person or persons to whom the Annuity Payments are to be
made.

The minimum amount of proceeds which may be applied under any Settlement
Option for any person is $2,000 and proceeds of a smaller amount may be paid in
a single sum in the discretion of The Franklin. Further, if at any time
payments under a Settlement Option become less than $25 per payment, The
Franklin has the right to change the frequency of payment to such intervals as
will result in payments of at least $25.

Persons contemplating election of the Fifth, Sixth or Seventh Option should
consult a qualified tax advisor to determine whether the continuing right of
redemption under any such Option might be deemed for tax purposes to result in
the "constructive receipt" of the Cash Value of the Contract or proceeds
remaining on deposit with The Franklin.

In general, certain distribution requirements are imposed by the Code in the
case of annuity contracts issued after January 18, 1985 in order for the
contracts to qualify as "annuity contracts" under the Code. Certain questions
exist about the application of these rules to distributions from the Contracts
and their effect on Settlement Option availability thereunder.

<PAGE>

Under these distribution requirements, if the Contract Owner of a Contract
issued after January 18, 1985 dies on or after the date Annuity Payments
commence but before the entire interest in the Contract has been distributed,
then the remaining portion of such interest must be distributed at least as
rapidly as under the method of distribution being used as of the date of his or
her death. Also, if the Contract Owner of such a Contract dies before the
commencement of Annuity Payments, then the entire interest in the Contract must
be distributed within five years after the date of death. Under a special
exception, this 5-year distribution rule is deemed satisfied if (i) any portion
of the Contract Owner's interest is payable to a designated beneficiary, (ii)
that interest is distributed to the designated beneficiary over the life of
such beneficiary (or over a period not extending beyond the beneficiary's life
expectancy) and (iii) such distributions begin not later than one year after
the death of the Contract Owner. If the designated beneficiary is the surviving
spouse of the Contract Owner and such surviving spouse dies before Annuity
Payments to the spouse commence, the surviving spouse will be treated as the
Contract Owner for purposes of these distribution rules. Also, if the Contract
Owner is not an individual, then the Variable Annuitant shall be treated as the
Contract Owner in applying these distribution requirements and a change in the
Variable Annuitant shall be treated as the death of the Contract Owner.

The effect of the distribution requirements described above is that, in the
case of Contracts issued after January 18, 1985, Settlement Option availability
will be limited as necessary to comply with the applicable distribution rules.
For example, under these rules, it appears that the First Option (Life Annuity)
would not be available to a designated beneficiary under such a Contract unless
distributions to the beneficiary begin not later than one year after the date
of the Contract Owner's death. Other Settlement Options may be restricted or
unavailable as well under the distribution rules. All Settlement Options under
Contracts issued after January 18, 1985 are offered subject to the limitations
of the distribution rules. Persons contemplating the purchase of a Contract
should consult a qualified tax advisor concerning the effect of the
distribution rules on the Settlement Option or Options he or she is
contemplating.

SECOND OPTION-LIFE ANNUITY WITH 120, 180, OR 240 MONTHLY PAYMENTS CERTAIN.
An annuity payable monthly during the lifetime of the Variable Annuitant
including the commitment that if, at the death of the Variable Annuitant,
Annuity Payments have been made for less than 120 months, 180 months or 240
months (as selected by the Contract Owner in electing this Option), Annuity
Payments shall be continued during the remainder of the selected period to the
Beneficiary. The cash value under this Settlement Option is the present value
of the current dollar amount of any unpaid Annuity Payments certain.

For example, if $10,000 were applied on the first Annuity Payment Date to
the purchase of an annuity under this Option, the Annuity Unit value at the
initial Annuity Payment Date were $2.00, the number of Annuity Units
represented by each Annuity Payment were 30.55, 10 Annuity Payments were paid
prior to the date of the Variable Annuitant's death and the value of an Annuity
Unit on the Valuation Date following the Variable Annuitant's death were $2.05,
the amount paid to the Beneficiary would be $9,623.73, computed as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
$10,000
(------ - (30.55 X 10)) X $2.05 = (5,000 - 305.5) X $2.05 = 4,694.5 X $2.05 = $9,623.73
$2.00
</TABLE>

<PAGE>

FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. An annuity payable
monthly during the joint lifetime of the Variable Annuitant and a secondary
variable annuitant, and thereafter during the remaining lifetime of the
survivor, ceasing with the last Annuity Payment due prior to the death of the
survivor. Since there is no minimum number of guaranteed payments under this
Option, it would be possible under this Option to receive only one Annuity
Payment if both the Variable Annuitant and the secondary variable annuitant
died before the second Annuity Payment Date, or to receive only two Annuity
Payments if both the Variable Annuitant and the secondary variable annuitant
died after the second Annuity Payment Date but before the third Annuity
Payment Date, and so forth.

It should be noted that, while this Option does not involve a life
contingency, charges for annuity rate assurances, which include a factor for
mortality risks, are included in the computation of Annuity Payments due under
this Option. Further, although not contractually required to do so, The
Franklin currently follows a practice, which may be discontinued at any time,
of permitting persons receiving Annuity Payments under this Option to elect to
convert such payments to a Variable Annuity involving a life contingency under
the First, Second, Third or Fourth Options, above, if, and to the extent, such
other Options are otherwise available to such person.

SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. The amount due will be
paid to the Variable Annuitant in equal annual, semiannual, quarterly or monthly
Annuity Payments of a designated dollar amount (not less than $75 a year per
$1,000 of the original amount due) until the remaining balance (adjusted each
Valuation Period by the Net Investment Factor for the period) is less than the
amount of one Annuity Payment, at which time such balance will be paid and will
be the final Annuity Payment under this Option. Upon the death of the Variable
Annuitant, payments will be continued to the Beneficiary until such remaining
balance is paid. The cash value under this Settlement Option is the amount of
proceeds then remaining with The Franklin. A Contract under which Annuity
Payments are being made under this Settlement Option may be redeemed at any time
by the Contract Owner for the aforesaid cash value.

Annuity Payments made under the Sixth Option may, under certain
circumstances, be converted into a Variable Annuity involving a life
contingency. See the last paragraph under the Fifth Option, immediately above,
which applies in its entirety to the Sixth Option as well.

SEVENTH OPTION-INVESTMENT INCOME. The amount due may be left on deposit
with The Franklin in its general account and a sum will be paid annually,
semiannually, quarterly or monthly, as selected by the Contract Owner in
electing this Option, which shall be equal to the net investment rate of 3%
stipulated as payable upon fixed-dollar amounts for the period multiplied by
the amount remaining on deposit. Upon the death of the Variable Annuitant, the
aforesaid payments will be continued to the Beneficiary. The sums left on
deposit with The Franklin may be withdrawn at any time.

Periodic payments received under this Option may be treated like interest for
federal income tax purposes. Interest payments are fully taxable and are not
subject to the general rules applicable to the taxation of annuities described
in "Federal Income Tax Status," below. Persons contemplating election of this
Seventh Option are advised to consult a qualified tax advisor concerning the
availability and tax effect of its election.

<PAGE>

11. TRANSFER OF FIXED-DOLLAR ANNUITY VALUES TO ACQUIRE VARIABLE ANNUITY
ACCUMULATION UNITS

Where a Deferred Variable Annuity and a Fixed-Dollar Annuity have been
issued on the same Contract, on any Contract Anniversary during the accumulation
period of the Contract, the Contract Owner may have the unloaned cash value of
his Fixed-Dollar Annuity transferred in whole or in part to his Variable Annuity
to purchase Variable Annuity Accumulation Units at net asset value, without any
sales or administrative deductions. However, any such partial transfer of cash
value must be at least $500. (A similar privilege, but available four times in
one contract year, permits transfer of Variable Annuity Accumulation Unit values
to establish values under a Fixed-Dollar Annuity issued on the same Contract.)

12. CONTRACT LOANS

While the Contract is in force, prior to the initial Annuity Payment Date or
the death of the Variable Annuitant, The Franklin will make a contract loan on
the sole security of the Contract.

Upon receiving a request for a contract loan, The Franklin will convert
Accumulation Units under the Contract to a fixed-dollar contract loan account in
an amount necessary to provide a sufficient "loan value" for the proposed loan.
The maximum amount which may be borrowed on a Contract (the "loan value") is
that amount which, when added to any existing contract loan and interest on the
total contract loan to the next Contract Anniversary, will equal what the Cash
Value of the contract loan account would be on such anniversary. The Contract,
except to the extent so converted, has no loan value and The Franklin will not
make loans or arrange for the making of loans thereon.

The Accumulation Units in the contract loan account do not participate in
the investment experience of the Fund, but receive interest credits at the rate
then paid by The Franklin upon Fixed-Dollar Annuity accumulations. At the
current time, that rate is 4-1/2% per annum during the first five contract
years, 4% per annum for the sixth through tenth contract years, and 3-1/2% per
annum thereafter.

Where the Contract Owner has both a Variable Annuity and a Fixed-Dollar
Annuity under the same Contract, unless he otherwise indicates, a contract loan
request will be considered a request for a loan on each annuity and will be
allocated pro rata according to the loan values available under each annuity.

Whenever the total contract loan is equal to or exceeds the Cash Value, the
Contract shall terminate, but in no event shall such termination take effect
until 31 days after notice shall have been mailed to the last known address of
the Contract Owner and any known assignee.

On Contracts currently being issued in South Carolina the interest rate on
the principal of the contract loan is 7.4% per annum payable in advance to the
end of the current Contract Year, and annually in advance thereafter. In all
other states the rate is adjustable. This means that the rate may be changed
each policy year, effective on the Contract Anniversary. The adjustable loan
interest rate will be reflective of the rates then available to The Franklin for
corporate bonds as indicated by the "Moody's Corporate Bond Yield Average."
Interest not paid when due will be added to the principal of the loan and bear
the same rate of interest. Upon a repayment of the contract loan prior to the
date through which interest has been paid in advance, the Contract Owner will
receive a pro rata credit for the unearned interest.

It should be noted that the annual rate of interest charged on contract
loans is in excess of the interest credited by The Franklin upon the contract
loan account; thus, there is, in effect, a continuing net charge against the
Contract Owner of the difference between the two rates while the contract loan
is outstanding.

<PAGE>

The whole or any part of the contract loan may be repaid at any time while
the Contract is in force prior to its maturity. Where variable Accumulation
Units have been converted into a contract loan account prior to the making of a
contract loan, repayments of the loan will result in the conversion of
accumulation units under the contract loan account to variable Accumulation
Units at net asset value without any sales or administration deduction, unless
the Contract Owner elects that such conversion shall not take place. The
Contract Owner has the power to designate whether a payment made by him or her
is to be applied as a Stipulated Payment (within the limitations on Stipulated
Payments set forth under "Annuity Payments," above, "Decrease by Contract Owner
in Amount of Periodic Stipulated Payments; Increase by Contract Owner in Number
of Periodic Stipulated Payments," above) or as a repayment in the contract loan
account. In the case of payments by a Contract Owner having a contract loan
outstanding which are not identified, The Franklin will make inquiry as to the
intention of the Contract Owner.

Contract loans will be treated as distributions that may be taxable. See
"Federal Income Tax Status," below. Any Contract Owner contemplating obtaining a
contract loan is advised to consult a qualified tax advisor concerning the
possibly unfavorable federal income tax treatment of contract loan proceeds and
interest payments with respect thereto.

C. ANNUITY PERIOD

1. ELECTING ANNUITY PAYMENTS AND SETTLEMENT OPTION; COMMENCEMENT OF ANNUITY
PAYMENTS

(a) DEFERRED VARIABLE ANNUITY CONTRACTS

A Contract Owner selects a Settlement Option and an initial Annuity Payment
Date prior to the issuance of the Deferred Variable Annuity Contract. The
Contract Owner may defer the initial Annuity Payment Date and continue the
Contract to a date not later than the Contract Anniversary on which the attained
age of the Variable Annuitant is 75. The Franklin will require satisfactory
proof of age of the Variable Annuitant prior to the initial Annuity Payment
Date.

(b) IMMEDIATE VARIABLE ANNUITY CONTRACTS

The Franklin offers three forms of Immediate Variable Annuity Contracts: the
life annuity, the life annuity with 120, 180 or 240 monthly payments certain and
the joint and last survivor life annuity. For a description of these forms of
annuity, see the First, Second and Fourth Options under "Settlement Options,"
above.

Under an Immediate Variable Annuity, the first Annuity Payment is made to
the Variable Annuitant one month after the Effective Date of the Contract,
unless the period selected by the Contract Owner for the frequency of Annuity
Payments is more than one month, in which case the first Annuity Payment will be
made after a period equal to the period so selected from the Effective Date
(subject in every case to the survival of the Variable Annuitant, except in
cases where a guaranteed payment period is provided).

2. THE ANNUITY UNIT

The Annuity Unit is a measure used to value the First Option (including the
automatic life annuity) and the Second, Third, Fourth and Fifth Options, if
elected on a variable basis.

The value of the Annuity Unit as of July 1, 1971 was fixed at $1.00 and for
each day thereafter is determined by multiplying the value of the Annuity Unit
on the preceding day by the "Annuity Change Factor" for the Valuation Period
ending on the tenth preceding day or by 1.0 if no Valuation Period ended on
the tenth preceding day. The "Annuity Change Factor" for any Valuation Period
is equal to the amount determined by dividing the Net Investment Factor for
that Valuation Period by a number equal to 1.0 plus the interest rate for the
number of calendar days in such Valuation Period at the effective annual rate
of 3-1/2%. The division by 1.0 plus an interest factor of 3-1/2% in calculating
the Annuity Change Factor is effected in order to cancel out the assumed net
investment rate of 3-1/2% per year which is built into the annuity tables
specified in the Contract.

<PAGE>

See "Determination of Amount of First Monthly Annuity Payment (Deferred
Variable Annuity Contracts Only)," below, and "Assumed Net Investment Rate,"
below.

3. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)

When Annuity Payments commence under a Deferred Variable Annuity Contract,
the value of the Contract Owner's account is determined as the product of the
value of an Accumulation Unit on the first Annuity Payment Date and the number
of Accumulation Units credited to the Contract Owner's account as of such
Annuity Payment Date.

The tables for the First, Second, Third and Fourth Options are determined
from the Progressive Annuity Table assuming births in the year 1900 and a net
investment rate of 3-1/2% a year. The tables for the Fifth Option are based on
a net investment rate of 3% for the General Account and 3-1/2% for the Separate
Account. The total first monthly Annuity Payment is determined by multiplying
the number of thousands of dollars of Cash Value of the Contract Owner's
Contract by the amount of the first monthly Annuity Payment per $1,000 of
value from the tables in the Contract.

The amount of the first monthly Annuity Payment, determined as above, is
divided as of the initial Annuity Payment Date by the value of an Annuity Unit
to determine the number of Annuity Units represented by the first Annuity
Payment. Annuity Units are valued as of a Valuation Date not less than 10 days
prior to the initial Annuity Payment Date, pursuant to the procedure discussed
under "The Annuity Unit," above. Thus, there will be a double effect of the
investment experience of the Fund during the 10-day period referred to in the
preceding sentence, since that experience will be included (as part of the
value of an Accumulation Unit) in valuing the Contract Owner's Contract on the
initial Annuity Payment Date and (as part of the changes in value of an
Annuity Unit) in determining the second monthly Annuity Payment. Also, the
number of Annuity Units (and hence the amount of Annuity Payments) will be
affected by the net asset values of the Fund approximately 10 days prior to the
initial Annuity Payment Date even though changes in those net asset values
have occurred during that 10-day period, and even though the value of the
Accumulation Units used to determine the Cash Value of the Contract will
reflect those changes. See "Amount of Second and Subsequent Monthly Annuity
Payments (Deferred Variable Annuity Contracts Only)," immediately below.

Each Contract contains a provision that the first monthly Annuity Payment
will not be less than 103% of the first monthly Annuity Payment available under
a then currently issued Immediate Variable Annuity of The Franklin if a single
Stipulated Payment were made equal to the value which is being applied under
the Contract to provide annuity benefits. This provision assures the Variable
Annuitant that if at the initial Annuity Payment Date the annuity rates then
applicable to new Immediate Variable Annuity Contracts are significantly more
favorable than the annuity rates provided in his or her Contract, the Variable
Annuitant will be given the benefit of the new annuity rates.

4. AMOUNT OF SECOND AND SUBSEQUENT MONTHLY ANNUITY PAYMENTS (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)

<PAGE>

5. DETERMINATION OF AMOUNT OF ANNUITY PAYMENTS (IMMEDIATE VARIABLE ANNUITY
CONTRACTS ONLY)

Annuity Units are valued as of a Valuation Date not less than 10 days prior
to the date of issue of the Contract, pursuant to the procedure discussed under
"The Annuity Unit," above. Thus, the number of Annuity Units (and hence the
amount of the Annuity Payments) will be affected by the net asset value of the
Fund approximately 10 days prior to the Date of Issue of the Contract, even
though changes in those net asset values have occurred during that 10-day
period.

The Annuity Change Factors used by The Franklin for Immediate Variable
Annuity Contracts assume a net investment rate of 3-1/2%.

6. ASSUMED NET INVESTMENT RATE

The objective of a Variable Annuity Contract is to provide level Annuity
Payments during periods when the economy, price levels and investment returns
are relatively stable and to reflect as increased Annuity Payments only the
excess investment results flowing from inflation, increases in productivity or
other factors increasing investment returns. The achievement of this objective
will depend in part upon the validity of the assumption in the annuity factor
that a 3-1/2% net investment rate would be realized in the periods of relative
stability assumed. A higher rate assumption would mean a higher initial Annuity
Payment but a more slowly rising series of subsequent Annuity Payments in the
event of a rising actual investment rate (or a more rapidly falling series of
subsequent Annuity Payments in the event of a lower actual investment rate). A
lower assumption would have the opposite effect. If the actual net investment
rate is at the annual rate of 3-1/2%, the Annuity Payments under Contracts
whose Annuity Payments are measured by Annuity Units will be level.

INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND

The following are the fundamental investment policies of the Fund:

(1) The primary objective of the Fund in making investments is long-term
appreciation of capital. Occasional investment for the purpose of seeking
short-term capital appreciation may also be made.

(2) Realization of current investment return is a secondary objective,
subordinate to the primary objective.

(3) Any investment income and realized capital gains (net of any capital
gains tax) will be retained and reinvested.

<PAGE>

(4) The Fund's policy is to be substantially fully invested. Generally, the
Fund's investments will consist of equity securities, mainly common stocks. The
purchase of common stocks may be made both in rising and declining markets. When
it is determined, however, that investments of other types may be advantageous
in reaching the Fund's objectives, on the basis of combined considerations of
risk, income and appreciation, investments may be made in bonds, debentures,
notes or other evidences of indebtedness, issued publicly or placed privately,
of a type customarily purchased for investment by institutional investors,
including United States Government securities, in corporate preferred stock or
in certificates of deposit, or funds may be retained in cash. Such debt
securities may, or may not, be convertible into stock or be accompanied by
stock purchase options or warrants.

(5) Temporary investments may be made in United States Government
securities, certificates of deposit, short-term corporate debt securities
(subject to fundamental restriction (3), below) and other similar securities,
pending investment in the above mentioned securities.

While The Franklin is obligated to make Annuity Payments in accordance with
selected Settlement Options, the amount of the Annuity Payments is not
guaranteed but is a variable amount. Since, historically, the value of
a diversified portfolio of common stocks held for an extended period of time has
tended to rise during periods of inflation and growth in the economy, the
Annuity Payments under a Variable Annuity should tend to conform more closely to
changes in the cost of living and the level of the economy than payments under a
Fixed-Dollar Annuity would do. However, there is no assurance that this
objective can be attained. There have been times when the cost of living has
increased while securities prices have decreased and times when the cost of
living and the level of the economy have gone up or down with no direct
correlation to the value of securities in general or to any particular type or
class of securities. The value of investments held in the Fund will fluctuate
daily and is subject to the risk of changing economic conditions as well as the
risks inherent in the ability of management to anticipate changes in those
conditions. The value of investments in common stock has historically
fluctuated more greatly than the value of investments in securities such as
bonds, debentures, notes, other evidences of indebtedness, preferred stock and
certificates of deposit, and hence investments in common stocks offer greater
opportunities for appreciation and greater risk of depreciation. There is no
assurance that the Cash Value of the Contract during the years prior to the
Variable Annuitant's retirement or the aggregate amount received during the
years following the initial Annuity Payment Date will equal or exceed the
Stipulated Payments on the Contract.

The investment policies of the Fund include a provision that investments may
be made in securities other than common stocks if they are advantageous in
reaching the Fund's objectives, on the basis of combined considerations of
risk, income and appreciation. No assurance can be given, however, that
investment in such other securities will accomplish such objectives.
Investments may be made in bonds, debentures, notes or other evidences of
indebtedness, issued publicly or placed privately, of a type customarily
purchased for investment by institutional investors, including United States
Government securities, and may also be made in corporate preferred stock or in
certificates of deposit, or funds may be retained in cash. Such debt securities
may, or may not, be convertible into stock or be accompanied by stock purchase
options or warrants. Funds may also be temporarily invested in United States
Government securities, certificates of deposit, short-term corporate debt
securities (subject to certain restrictions) and other similar securities,
pending long-term investment. Although debt securities and preferred stocks of
the type in which the Fund would invest are generally considered to present
less risk than common stocks, the value of such securities is subject to market
fluctuations as a result of money market rates, the demand for such securities
and factors relating to the individual issuers of such securities. In the event
the Fund invests in such securities, such factors may limit the ability of the
Fund to convert such securities to cash and reinvest in other types of
securities. Historically, the Fund has not invested significant amounts in debt
securities or preferred stocks except for short-term investments in debt
securities pending ultimate long-term application of funds for investment
purposes.

The following are the fundamental investment restrictions applicable to the
Fund:

28
<PAGE>

(2) The Fund will not issue senior securities, except that the Fund may
borrow money as set forth in paragraph (3) immediately below.

(4) The Fund will not underwrite securities of other issuers, except that
the Fund may acquire portfolio securities under circumstances where, if sold,
it might be deemed to be an underwriter for purposes of the Securities Act of
1933. No such securities will be acquired except where parties other than the
Fund shall have agreed to bear any and all costs of registration under the
Securities Act of 1933. (However, it should be noted that even though an
agreement to register has been obtained, enforcement of such an agreement may
prove unfeasible or may involve delays which could adversely affect the Fund's
ability to resell such securities or the price at which such securities might
be resold.) No more than 10% of the value of the Fund's assets will at any time
be invested in such securities.

(5) The Fund will not engage in the purchase and sale of interests in real
estate, except that the Fund may engage in the purchase and sale of readily
marketable interests in real estate investment trusts or similar securities,
which may be deemed to represent indirect interests in real estate.

(6) The Fund will not engage in the making of loans to other persons,
except that the Fund may acquire privately placed corporate debt securities of
a type customarily purchased by institutional investors. Such securities, if
required to be registered under the Securities Act of 1933 prior to public
distribution, will be included in the 10% limitation specified in fundamental
restriction (4), above. The foregoing does not restrict the purchase by the
Fund of a portion of an issue of publicly distributed bonds, debentures or
other securities, whether or not the purchase is made upon the original
issuance of such securities.

(7) The Fund will not engage in the purchase or sale of commodities or
commodity contracts.

(8) The Fund will not purchase the securities of any one issuer, other
than obligations issued or guaranteed by the United States Government and its
agencies or instrumentalities, if such purchase would cause more than 5% of the
Fund's assets to be invested in the securities of such issuer, except that up
to 25% of the Fund's total assets taken at current value may be invested
without regard to such 5% limitation.

(9) The Fund will not acquire more than 10% of the outstanding voting
securities of any one issuer, other than obligations issued or guaranteed by
the United States Government and its agencies or instrumentalities, except that
up to 25% of the Fund's total assets taken at current value may be invested
without regard to such 10% limitation.

The fundamental investment policies and the fundamental investment
restrictions stated above may not be changed without approval by a vote of a
majority of the votes available to the Contract Owners. This means that the
policies or restrictions in question may not be changed without the approval of
the lesser of (a) the Contract Owners holding 67% or more of the voting power
of the Contract Owners present or represented at a meeting if Contract Owners
holding more than 50% of the total voting power of all Contract Owners in the
Fund are present or represented by proxy, or (b) Contract Owners holding more
than 50% of the total voting power of all Contract Owners in the Fund.

The following investment restrictions are not fundamental and may be
changed by action of the Board of Managers of the Fund:

<PAGE>

(11) The Fund will not invest in companies for the purpose of exercising
control or management.

(12) The Fund will not invest in the securities of other investment
companies.

(13) The Fund will not purchase securities on margin, except for such
short-term credits as are necessary for the clearance of transactions.

(14) The Fund will not make short sales of securities.

FEDERAL INCOME TAX STATUS

INTRODUCTION

The Contracts are designed for retirement planning for individuals. The
federal income tax treatment of the Contracts and payments received thereunder
depends on various factors, including, among other factors, the tax status of
The Franklin and the form in which payments are received. The discussion of
federal income taxes contained in this Prospectus, which focuses on rules
applicable to Contracts purchased under this Prospectus, is general in nature
and is based on existing federal income tax law, which is subject to change.
The tax discussion is not intended as tax advice. The applicable federal income
tax law is complex and contains many special rules and exceptions in addition
to the general rules summarized herein. For these reasons, various questions
about the applicable rules exist. Accordingly, each person contemplating the
purchase of a Contract is advised to consult with a qualified tax advisor
concerning federal income taxes and any other federal, state or local taxes
that may be applicable.

THE FRANKLIN

Investment income and realized capital gains on the assets of the Fund are
reinvested by The Franklin for the benefit of the Fund and are taken into
account in determining the value of Accumulation Units and Annuity Units. As a
result, such income and gains are applied to increase reserves applicable to
the Fund. Under the Code, no federal income tax is payable by The Franklin on
such investment income or on realized capital gains of the Fund on assets held
in the Fund. However, if changes in the federal tax laws or interpretations
thereof result in The Franklin being taxed on income or gains attributable to
the Fund, then The Franklin may impose a charge against the Fund (with respect
to some or all Contracts) in order to set aside provisions to pay such taxes.

THE CONTRACTS

Payments received under a Contract are subject to tax under Code Section
72. Under the Code, an increase in the value of the Contract Owner's Contract
ordinarily is not taxable to the Contract Owner until received by him or her as
annuity payments, a lump sum or a partial redemption. A special rule, however,
applies to certain annuity contracts held by a person (such as a corporation or
partnership) who is not a natural person. With respect to contributions (i.e.,
Stipulated Payments) made after February 28, 1986 to a Contract held by a
non-natural person, the Contract is not treated as an "annuity contract" for
certain federal income tax purposes and

<PAGE>

the income on the Contract for any taxable year allocable to such contributions
is treated as ordinary income taxable to the Contract Owner during such year.
This special rule, however, does not apply to any annuity contract which, among
other exceptions: (1) is an immediate annuity that is purchased with a single
premium or annuity consideration, that has an annuity starting date commencing
no later than one year from the date of the purchase of the Contract and which
provides for a series of substantially equal periodic payments (to be made not
less frequently than annually) during the annuity period; (2) is acquired by
the estate of a decedent by reason of the decedent's death; or (3) is held by a
trust or other entity as an agent for a natural person. Non-natural persons now
holding or contemplating the future purchase of a Contract are advised to
consult a qualified tax advisor concerning the tax consequences of such holding
or purchase.

If payments under a Contract are received in the form of an annuity, then,
in general, each payment is taxable as ordinary income to the extent that such
payment exceeds the portion of the cost basis of the annuity contract that is
allocable to that payment. Payment of the proceeds of an annuity contract in a
lump sum either before or at maturity is taxable as ordinary income to the
extent the lump sum exceeds the cost basis of the annuity contract. If the
Variable Annuitant's life span exceeds his or her life expectancy, the Variable
Annuitant's cost basis will eventually be recovered, and any payments made
after that point will be fully taxable. If, however, the Annuity Payments
cease after the initial Annuity Payment Date by reason of the death of the
Variable Annuitant, the amount of any unrecovered cost basis in the Contract
will generally be allowed as a deduction to the Variable Annuitant for his or
her last taxable year.

A payment received on account of a partial redemption of an annuity
contract generally is taxable as ordinary income in whole or part. Also, if
prior to the initial Annuity Payment Date, (i) an annuity contract is assigned
or pledged, (ii) a contract loan is obtained or (iii) a Contract issued after
April 22, 1987 is transferred without adequate consideration, then the amount
assigned, pledged, borrowed or transferred may similarly be taxable. Special
rules may apply with respect to investments in a Contract made before August
14, 1982. Because the applicable tax treatment is complex, a qualified tax
advisor should be consulted prior to a partial withdrawal, assignment, pledge,
contract loan or contract transfer.

In addition, under a provision of federal tax law effective for annuity
contracts entered into after October 21, 1988, all annuity contracts (other than
contracts held in connection with certain qualified plans and trusts (including
Individual Retirement Annuities) accorded special treatment under the Code)
issued by the same company (or affiliates) to the same contract owner during any
calendar year will generally be treated as one annuity contract for the purpose
of determining the amount of any distribution not in the form of an annuity that
is includable in gross income. This rule may have the effect of causing more
rapid taxation of the distributed amounts from such combination of contracts.
It is not certain how this rule will be applied or interpreted by the Internal
Revenue Service. In particular, it is not clear if or how this rule applies to
Immediate Variable Annuities or "split" annuity arrangements. Accordingly, a
qualified tax advisor should be consulted about the application and effect of
this rule.

Further, in general, in the case of a payment received under a Contract, a
penalty may be imposed equal to 10% of the taxable portion of the payment.
However, the 10% penalty does not apply in various circumstances. For example,
the penalty is generally inapplicable to payments that are: (i) made on or
after age 59-1/2; (ii) allocable to investments in the Contract before August
14, 1982; (iii) made on or after the death of the Contract Owner (or when the
Contract Owner is not an individual, the death of the Variable Annuitant); (iv)
made incident to disability; (v) part of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or the
life expectancy) of the Variable Annuitant or the joint lives (or joint life
expectancies) of the Variable Annuitant and his or her beneficiary; or (vi)
made under a Contract purchased with a single premium and which has an annuity
starting date commencing no later than one year from the purchase date of the
annuity and which provides for a series of substantially equal periodic payments
(to be made not less frequently than annually) during the annuity period.

<PAGE>

A Contract will not be treated as an annuity contract for purposes of
certain Code sections, including Section 72, for any period (and any subsequent
period) for which the investments made by the Fund attributableto such Contract
are not, in accordance with Code Section 817(h) and the Treasury regulations
thereunder, adequately diversified. Although certain questions exist about the
diversification standards, The Franklin believes that the Fund presently
satisfies those standards and intends that the Fund will continue to be
adequately diversified for those purposes.

In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includible in the
variable contract owner's gross income. The Internal Revenue Service has stated
in published rulings that a variable contract owner will be considered the owner
of separate account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning diversification, that those regulations
"do not provide guidance concerning the circumstances in which investor control
for the investments of a segregated asset account may cause the investor [i.e.,
the Owner], rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular Sub-Accounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no
guidance has been issued.

The ownership rights under the Contract are similar to, but different in
certain respects from those described by the Internal Revenue Service in rulings
in which it was determined that contract owners were not owners of separate
account assets. For example, a Contract Owner has additional flexibility in
allocating premium payments and account values. These differences could result
in a Contract Owner being treated as the owner of a pro rata portion of the
assets of the Fund. In addition, The Franklin does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Franklin therefore reserves the
right to modify the Contract as necessary to attempt to prevent a Contract Owner
from being considered the owner of a pro rata share of the assets of the Fund.

In order to be treated as an annuity contract for federal income tax
purposes, section 72(s) of the Code requires the Contracts to provide that (a)
if any Contract Owner dies on or after the annuity date but prior to the time
the entire interest in the Contract has been distributed, the remaining portion
of such interest will be distributed at least as rapidly as under the method of
distribution being used as of the date of such owner's death; and (b) if any
Contract Owner dies prior to the annuity date, the entire interest in the
Contract will be distributed within five years after the date of such owner's
death. These requirements will be considered satisfied as to any portion of an
owner's interest which is payable to or for the benefit of a "designated
beneficiary" and which is distributed over the life of such "designated
beneficiary" or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of the
Contract Owner's death. The "designated beneficiary" refers to a natural
person designated by the owner as a Beneficiary and to whom ownership of the
Contract passes by reason of death. However, if the "designated beneficiary"
is the surviving spouse of the deceased Contract Owner, the Contract may be
continued with the surviving spouse as the new Contract Owner.

The Contracts contain provisions which are intended to comply with the
requirements of section 72(s) of the Code, although no regulations interpreting
these requirements have yet been issued. The Franklin intends to review such
provisions and modify them if necessary to assure that they comply with the
requirements of Code section 72(s) when clarified by regulation or otherwise.

FUTURE LEGISLATION

Although the likelihood of legislative change is uncertain, there is
always the possiblity that the tax treatment of the Contracts could change by
legislation or other means. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the federal
taxation of the Contracts. It is also possible that any change could be
retroactive (that is, effective prior to the date of the change). A tax
adviser should be consulted with respect to legislative developments and their
effect on the Contract.

32
<PAGE>

INCOME TAX WITHHOLDING

Withholding of federal income tax is generally required from distributions
from the Contracts to the extent the distributions are taxable and are not
otherwise subject to withholding as wages ("Distributions"). See "The
Contracts" immediately above, regarding the taxation of Distributions.
However, except in the case of certain payments delivered outside the United
States or any possession of the United States, no withholding is required from
any Distribution if the payee properly elects, in accordance with prescribed
procedures, not to have withholding apply.

In the absence of a proper election not to have withholding apply, the
amount to be withheld from a Distribution depends on the type of payment being
made. Generally, in the case of periodic payments, the amount to be withheld
from each payment is the amount that would be withheld therefrom under
specified wage withholding tables if the payment were a payment of wages for
the appropriate payroll period. In the case of most other Distributions,
including partial redemptions and lump sum payments, the amount to be withheld
is equal to 10% of the amount of the Distribution.

MANAGEMENT

The affairs of the Fund are conducted in accordance with Rules and
Regulations adopted by the Board of Managers. Under the Rules and Regulations,
the Board of Managers is authorized to take various actions on behalf of the
Fund, including the entry into contracts for the purpose of services with
respect to the Fund under circumstances where the approval of such contracts is
not required to be submitted to the Contract Owners. Subject to the authority
of the Board of Managers, officers and employees of The Franklin are
responsible for overall management of the Fund's business affairs.

VOTING RIGHTS

All Contract Owners will have the right to vote upon:

(1) The initial approval of any investment management agreement and any
amendment thereto.

(2) Ratification of an independent auditor for the Fund.

(3) Any change in the fundamental investment policies or fundamental
investment restrictions of the Fund.

(4) Election of members of the Board of Managers of the Fund (cumulative
voting is not permitted).

(5) Termination of the investment management agreement (such termination
may also be effected by the Board of Managers).

(6) Any other matter submitted to them by the Board of Managers.

<PAGE>

related to such Contract, divided by (ii) the value of an Accumulation Unit.
Accordingly, the voting rights of a Contract Owner will decline during the
Annuity Payment period as the amount of assets in the Fund required to meet the
Annuity Payments decreases and, in addition, will decline as the value of an
Accumulation Unit increases. Fractional votes will be counted.

The number of votes which each Contract Owner may cast at a meeting shall
be determined as of a record date to be chosen by the Board of Managers within
120 days of the date of the meeting. At least 20 days' written notice of the
meeting will be given to Contract Owners of record. To be entitled to vote or
to receive notice, a Contract Owner must have been such on the record date.

DISTRIBUTION OF THE CONTRACTS

Franklin Financial Services ("Franklin Financial") Corporation serves as
"principal underwriter" (as that term is defined in the Investment Company Act
of 1940) for the Contracts pursuant to a Sales Agreement with the Fund. The
Sales Agreement is described under "Distribution of The Contracts" in the
Statement of Additional Information. Franklin Financial, located at #1 Franklin
Square, Springfield, Illinois 62713, is organized under the laws of the State
of Delaware and is a wholly-owned subsidiary of The Franklin.

STATE REGULATION

For certain provisions of Illinois law applicable to the Fund's
investments, see "Investment Policies and Restrictions of the Fund," above.

REPORTS TO OWNERS

FUNDAMENTAL CHANGES

<PAGE>

the Investment Company Act of 1940 (including operation as a "unit investment
trust"); (b) the Fund may be deregistered under the Investment Company Act of
1940 in the event such registration is no longer required; or (c) the
provisions of the Contracts may be modified to comply with other applicable
federal or state laws. In the event of any such fundamental change, The
Franklin may make appropriate amendments to the Contracts to give effect to
such change or take such other action as may be necessary in this respect.

The Board of Managers of the Fund, and the respective Board of Managers of
each of Franklin Life Variable Annuity Fund A ("Fund A") and Franklin Life
Money Market Variable Annuity Fund C ("Fund C"), have approved resolutions
whereby Contract Owners will be asked during 1998 to approve or to disapprove
an Agreement and Plan of Reorganization (the "Agreement") and related
transactions (together, the Agreement and related transactions are the
"Reorganization") whereby: (i) the Fund will be restructured into a single unit
investment trust consisting of three subaccounts; (ii) the assets of each of
the Fund, Fund A and Fund C will be liquidated and the proceeds transferred to
one of the three subaccounts in the restructured Fund (so that the interests of
Contract Owners and of Fund A and Fund C contract owners will continue as
interests in the restructured Fund); and (iii) each subaccount will invest
exclusively in shares of a specified mutual fund portfolio.

Contract Owners will be provided with a proxy statement describing the
Reorganization in detail. If the Reorganization is approved, then immediately
following the consummation of the Reorganization, each Contract Owner will have
an interest in a number of units in a subaccount of the restructured Fund
having a value equal to the value of that Contract Owner's interest in a Fund
immediately prior to the Reorganization.

YEAR 2000 TRANSITION

Like all financial services providers, The Franklin utilizes systems that
may be affected by Year 2000 transition issues and it relies on service
providers, including banks, custodians, and investment managers that also may
be affected. The Franklin and its affiliates have developed, and are in the
process of implementing, a Year 2000 transition plan, and are confirming that
their service providers are also so engaged. The resources that are being
devoted to this effort are substantial. It is difficult to predict with
precision whether the amount of resources ultimately devoted, or the outcome of
these efforts, will have any negative impact on The Franklin. However, as of
the date of this prospectus, it is not anticipated that Contract Owners will
experience negative effects on their investment, or on the services provided in
connection therewith, as a result of Year 2000 transition implementation. The
Franklin currently anticipates that its systems will be Year 2000 compliant on
or about December 31, 1998, but there can be no assurance that The Franklin
will be successful, or that interaction with other service providers will not
impair The Franklin's services at that time.

LEGAL PROCEEDINGS

In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and
sales practices, and a number of these lawsuits have resulted in substantial
settlements. The Franklin is a defendant in certain purported class action
lawsuits. These claims are being defended vigorously by The Franklin. Given
the uncertain nature of litigation and the early stages of this litigation, the
outcome of these actions cannot be predicted at this time. The Franklin
nevertheless believes that the ultimate outcome of all such pending litigation
should not have a material adverse effect on the Fund or on The Franklin's
financial position; however, it is possible that settlements or adverse
determinations in one or more of these actions or other future proceedings
could have a material adverse effect on The Franklin's results of operations
for a given period. No provision has been made in the consolidated financial
statements related to this pending litigation because the amount of loss, if
any, from these actions cannot be reasonably estimated at this time.

<PAGE>

proceedings will not have a material adverse effect on the Fund or on The
Franklin's results of operations and financial position. However, it should be
noted that the frequency of large damage awards, including large punitive
damage awards, that bear little or no relation to actual economic damages
incurred by plaintiffs in jurisdictions like Alabama continues to increase and
creates the potential for an unpredictable judgment in any given suit.

REGISTRATION STATEMENT

A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Contracts offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning the Fund, The Franklin and the Contracts offered hereby.
Statements contained in this Prospectus as to the content of Contracts and
other legal instruments are summaries. For a complete statement of the terms
thereof, reference is made to such instruments as filed.

OTHER VARIABLE ANNUITY CONTRACTS

The Franklin may offer, under other prospectuses, other variable annuity
contracts having interests in the Fund and containing different terms and
conditions from those offered hereby.

<PAGE>

TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<CAPTION>
PAGE IN STATEMENT OF
ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------
<S> <C>
General Information................................... 2
Investment Objectives................................. 2
Management............................................ 3
Investment Advisory and Other Services................ 4
Distribution of The Contracts......................... 6
Portfolio Turnover and Brokerage...................... 7
Safekeeper of Securities.............................. 7
Legal Matters......................................... 8
Experts............................................... 8
Index to Financial Statements......................... F-1
</TABLE>

<PAGE>

PROSPECTUS

FRANKLIN LIFE
VARIABLE ANNUITY FUND B

INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(NOT FOR USE IN CONNECTION WITH
QUALIFIED TRUSTS OR PLANS)

ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713

Complete and return this form to:

The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Attention: Box 1018
(800) 528-2011, extension 2591

Please send me the Statement of Additional Information dated April 30, 1998 for
Franklin Life Variable Annuity Fund B.

________________________________________________________________________________
(Name)

________________________________________________________________________________
(Street)

________________________________________________________________________________
(City) (State) (Zip Code)

<PAGE>

APPENDIX D

FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
PROSPECTUS

<PAGE>

FRANKLIN LIFE MONEY MARKET
VARIABLE ANNUITY FUND C

PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS

#1 Franklin Square
Springfield, Illinois 62713
Telephone (800) 528-2011

THIS PROSPECTUS DESCRIBES INDIVIDUAL IMMEDIATE AND DEFERRED VARIABLE ANNUITY
CONTRACTS FOR USE AS INDIVIDUAL RETIREMENT ANNUITIES OR IN CONNECTION WITH
TRUSTS AND RETIREMENT OR DEFERRED COMPENSATION PLANS WHICH MAY OR MAY NOT
QUALIFY FOR SPECIAL FEDERAL TAX TREATMENT UNDER THE INTERNAL REVENUE CODE (SEE
"FEDERAL INCOME TAX STATUS'' BELOW FOR MORE INFORMATION). THE BASIC PURPOSE OF
THE VARIABLE CONTRACTS IS TO PROVIDE ANNUITY PAYMENTS WHICH WILL VARY WITH THE
INVESTMENT PERFORMANCE OF FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
(THE "FUND''). THE FUND NO LONGER OFFERS NEW CONTRACTS.

THE PRIMARY INVESTMENT OBJECTIVE OF THE FUND IS LONG-TERM COMPOUNDING OF
INCOME THROUGH RETENTION AND REINVESTMENT OF INCOME FROM INVESTMENTS IN A
DIVERSIFIED PORTFOLIO OF SHORT-TERM MONEY MARKET SECURITIES YIELDING A HIGH
LEVEL OF CURRENT INCOME TO THE EXTENT CONSISTENT WITH THE PRESERVATION OF
CAPITAL AND THE MAINTENANCE OF LIQUIDITY. THERE IS NO ASSURANCE THAT THIS
OBJECTIVE WILL BE ATTAINED.

AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED
BY THE UNITED STATES GOVERNMENT.

THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998.

<PAGE>

<TABLE>
<CAPTION>
TABLE OF CONTENTS

Page
<S> <C>
Special Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table of Deductions and Charges. . . . . . . . . . . . . . . . . . . . . . 5
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Per-Unit Income and Changes in Accumulation Unit Value . . . . . . . . . . 9
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Description of the Separate Account. . . . . . . . . . . . . . . . . . . . 11
Deductions and Charges Under the Contracts . . . . . . . . . . . . . . . . 11
A. Administration Deductions. . . . . . . . . . . . . . . . . . . . 11
B. Premium Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 12
C. Mortality and Expense Risk Charge. . . . . . . . . . . . . . . . 12
D. Investment Management Service Charge . . . . . . . . . . . . . . 12
E. Contingent Deferred Sales Charge . . . . . . . . . . . . . . . . 12
F. Transfers to Other Contracts . . . . . . . . . . . . . . . . . . 13
G. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . 14
The Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
A. General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
B. Deferred Variable Annuity Accumulation Period. . . . . . . . . . 16
C. Annuity Period . . . . . . . . . . . . . . . . . . . . . . . . . 23
Investment Policies and Restrictions of the Fund . . . . . . . . . . . . . 25
Federal Income Tax Status. . . . . . . . . . . . . . . . . . . . . . . . . 31
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
The Franklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
The Contracts: Qualified Plans. . . . . . . . . . . . . . . . . . . . 31
A. Qualified Pension, Profit-Sharing and Annuity Plans. . . . . . . 32
B. H. R. 10 Plans (Self-Employed Individuals) . . . . . . . . . . . 32
C. Section 403(b) Annuities . . . . . . . . . . . . . . . . . . . . 32
D. Individual Retirement Annuities. . . . . . . . . . . . . . . . . 33
The Contracts: Non-Qualified Plans. . . . . . . . . . . . . . . . . . 34
Required Distributions. . . . . . . . . . . . . . . . . . . . . . . . 35
Aggregation of Contracts. . . . . . . . . . . . . . . . . . . . . . . 35
Future Legislation. . . . . . . . . . . . . . . . . . . . . . . . . . 36
Income Tax Withholding. . . . . . . . . . . . . . . . . . . . . . . . 36
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Distribution of the Contracts. . . . . . . . . . . . . . . . . . . . . . . 38
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Reports to Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Fundamental Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Year 2000 Transition . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Other Variable Annuity Contracts; Effect of Non-Qualification. . . . . . . 40
Yield Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Table of Contents of Statement of Additional Information . . . . . . . . . 41
Appendix. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON HAS BEEN AUTHORIZED BY THE
FRANKLIN LIFE INSURANCE COMPANY, FRANKLIN FINANCIAL SERVICES CORPORATION OR
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C TO MAKE ANY REPRESENTATIONS
IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
AND IN ANY AUTHORIZED SUPPLEMENTAL SALES MATERIAL.

2
<PAGE>

SPECIAL TERMS

The following is a glossary of certain terms used in this Prospectus:

ACCUMULATION UNIT-A measure used to determine the value of a Contract Owner's
interest in the Fund prior to the initial Annuity Payment Date.

ANNUITY UNIT-A measure used to determine the value of Annuity Payments after the
first.

BANK DRAFT-A draft preauthorized by the Contract Owner and a bank of his or her
selection in the amount of a periodic Stipulated Payment, which, at the time
each periodic Stipulated Payment is due, is submitted by The Franklin directly
to such bank for payment.

BENEFICIARY-The person or persons designated by the Contract Owner to whom any
payment due on death is payable.

CASH VALUE-The value of all Accumulation Units or Annuity Units attributable to
a Contract.

CODE-The Internal Revenue Code of 1986, as amended.

CONTRACT-An individual variable annuity contract issued by Franklin Life Money
Market Variable Annuity Fund C that is offered by this Prospectus.

CONTRACT ANNIVERSARY-An anniversary of the Effective Date of the Contract.

CONTRACT OWNER-Except in cases where the Contract is issued to a trustee of a
qualified employees' trust or pursuant to a qualified annuity plan, the Contract
Owner is the individual Variable Annuitant to whom the Contract is issued. In
cases where the Contract is issued to a trustee of a qualified employees' trust
or pursuant to a qualified annuity plan, the Contract Owner will be respectively
the trustee or the employer establishing such trust or plan, and the employee
named as the Variable Annuitant of such Contract is referred to herein as the
employee. When the term "Contract Owner" is used in the context of voting
rights, it includes the owners of all contracts which depend in whole or in part
on the investment performance of the Fund.

CONTRACT YEAR-Each year starting with the Effective Date and each Contract
Anniversary thereafter.

EFFECTIVE DATE-The date shown on the Schedule Page of the Contract as the date
the first Contract Year begins.

FIXED-DOLLAR ANNUITY-An annuity contract which provides for Annuity Payments
which remain fixed as to dollar amount throughout the Annuity Payment period.

3
<PAGE>

HOME OFFICE-The Home Office of The Franklin located at #1 Franklin Square,
Springfield, Illinois 62713.

IMMEDIATE VARIABLE ANNUITY-An annuity contract which provides for Annuity
Payments to commence immediately rather than at some future date.

INDIVIDUAL RETIREMENT ANNUITY-An annuity contract described in Section 408(b) of
the Code. Individual Retirement Annuities may also qualify as Simplified
Employee Pensions.

NON-QUALIFIED CONTRACTS-Contracts issued under Non-Qualified Plans.

NON-QUALIFIED PLANS-Retirement or deferred compensation plans or arrangements
which do not receive favorable tax treatment under the Code.

PERIODIC STIPULATED PAYMENT CONTRACT-An annuity contract which provides that
payments made to purchase the contract will be made in periodic instalments
rather than in a single sum.

QUALIFIED CONTRACTS-Contracts issued under Qualified Plans.

QUALIFIED PLANS-Retirement plans which receive favorable tax treatment under the
Code and which are described on page 10, below.

ROLLOVER CONTRIBUTION-A transfer pursuant to Sections 402(c), 403(a)(4),
403(b)(8) or 408(d)(3) of the Code.

SETTLEMENT OPTION OR OPTIONS-Alternative terms under which payment of the
amounts due in settlement of the Contracts may be received.

SIMPLIFIED EMPLOYEE PENSION-An Individual Retirement Annuity which meets the
additional requirements of Section 408(k) of the Code.

STIPULATED PAYMENTS-The payment or payments provided to be made to The Franklin
under a Contract.

THE FRANKLIN-The Franklin Life Insurance Company, an Illinois legal reserve
stock life insurance company.

VALUATION PERIOD-The period commencing on a Valuation Date and ending on the
next Valuation Date.

4
<PAGE>

TABLE OF DEDUCTIONS AND CHARGES

Contract Owner Transaction Expenses

Deferred Sales Load (as a percentage of the lesser of (i) the Cash Value of
the part of the Contract surrendered or (ii) the Stipulated Payments made
during the immediately preceding 72 months represented by the part of the
Contract surrendered (or the Stipulated Payment in the case of a Single
Stipulated Payment Contract))

<TABLE>
<CAPTION>
Contract Total Partial
Year Redemption Redemption
---- ---------- ----------
<S> <C> <C> <C>
Single Stipulated Payment 1 6.00% 6.00%
Contract 2 6.00% 6.00%
3 4.00% 4.00%
4 2.00% 4.00%
5 and 0.00% 4.00%
thereafter
Periodic Stipulated Payment 1 8.00% 8.00%
Contract 2 8.00% 8.00%
3 8.00% 8.00%
4 6.00% 6.00%
5 4.00% 4.00%
6 2.00% 4.00%
7 and 0.00% 4.00%
thereafter
</TABLE>

Administration Fee (as a charge against purchase
payments)

<TABLE>
<S> <C>
Single Stipulated Payment Contract $100

Periodic Stipulated Payment Contract $20 per Contract Year plus $1 per
Stipulated Payment ($.50 if by Bank
Draft or by employer or military
preauthorized automatic deduction)
Annual Expenses
(as a percentage of average net assets)

Management Fees 0.38%

Mortality and Expense Risk Fees
Mortality Fees 0.90%
Expense Risk Fees 0.17%
-----
Total Annual Expenses 1.45%
-----
</TABLE>

Example

<TABLE>
<S> <C> <C> <C> <C>
If you surrender your contract at the end of the
applicable time period: 1 year 3 years 5 years 10 years
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets:
</TABLE>

5
<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Single Stipulated Payment Contract $ 169 $ 181 $ 171 $ 255

Periodic Stipulated Payment Contracts: $ 181 $ 191 $ 221 $ 359

If you do not surrender your contract: 1 year 3 years 5 years 10 years

You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets:

Single Stipulated Payment Contract $ 113 $ 141 $ 171 $ 255

Periodic Stipulated Payment Contracts: $ 36 $ 106 $ 177 $ 359
</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

6
<PAGE>

- --------------------------------------------------------------------------------
SUMMARY

THE CONTRACTS

The individual variable annuity contracts (the "Contracts") being offered by
this Prospectus are for use as Individual Retirement Annuities or in connection
with trusts and retirement or deferred compensation plans which may or may not
qualify for special tax treatment under the Code. See "Federal Income Tax
Status," below. The basic purpose of the Contracts is to provide Annuity
Payments which will vary with the investment performance of Franklin Life Money
Market Variable Annuity Fund C (the "Fund"). The Contracts provide Annuity
Payments for life commencing on an initial Annuity Payment Date selected by the
Contract Owner; other Settlement Options are provided. See "Introduction," and
"The Contracts," below. At any time within 10 days after receipt of a
Contract, the Contract Owner may return the Contract and receive a refund of any
premium paid on the Contract. See "Right to Revocation of Contract," below.

THE FUND AND ITS INVESTMENT OBJECTIVES

The Fund is an open-end diversified management investment company. The
primary investment objective of the Fund is long-term compounding of income
through retention and reinvestment of income from investments in a diversified
portfolio of short-term money market securities, yielding a high level of
current income to the extent consistent with the preservation of capital and the
maintenance of liquidity. There is no assurance that this objective will be
attained. In keeping with the primary investment objective of investing in
short-term money market securities, at least 80% of the Fund's portfolio will be
invested in securities with maturities or remaining maturities of one year or
less and not more than 20% will be invested in securities with maturities or
remaining maturities of between one and two years. While preservation of capital
is a primary investment objective of the Fund and the money market securities in
which the Fund invests generally are considered to have low principal risk, such
securities are not completely risk-free. There is the risk of the failure of
issuers to meet their principal and interest obligations. Commercial paper
generally carries the highest risk of money market securities. The Fund may
invest in Eurodollar C.D.'s and in securities issued by the Government of Canada
and Canadian banks, which involve certain risks relating to marketability,
possible adverse political and economic developments and possible restrictions
on international currency transactions. See "Investment Policies and
Restrictions of the Fund," below.

SPECIAL INVESTMENT CONSTRAINTS

It is anticipated that the combination of the restrictions on the amount that
the Fund may invest in the securities of any one issuer and the relatively small
and decreasing size of the Fund's assets will make it more difficult for the
Fund's investment adviser to secure appropriate commercial paper investments,
which have historically constituted a substantial portion of the Fund's
investments. It is possible that the shrinking pool of commercial paper
investments available to the Fund due to its size may impair the future
investment performance of the Fund. See "Investment Policies and Restrictions
of the Fund - Special Investment Constraints," below.

INVESTMENT ADVISER; PRINCIPAL UNDERWRITER

DEDUCTIONS AND CHARGES

The deductions and charges applicable to a Contract are illustrated in the
Table of Deductions and Charges that appears immediately before this summary.
There are no deductions for sales charges made from Stipulated Payments under
the Contracts. However, a contingent deferred sales charge, applied against the
lesser of the Cash Value or Stipulated Payments made during the immediately
preceding 72 months, is deducted in the event of certain redemptions. In the
case of Periodic Stipulated Payment Contracts, such charges for total
redemptions start at 8% for the first three Contract Years and then decline by
2% increments per year through the sixth Contract Year, with no such
charge being imposed after the end of the sixth Contract Year. In the case of
Single Stipulated Payment Contracts, such charges for total redemptions start at
6% for the first two Contract Years and then decline by 2% increments per year
through the fourth Contract Year, with no such charge being imposed after the
end of the fourth Contract Year. The contingent deferred sales charges applied
to partial redemptions are identical to those applied to total redemptions,
except that such charges remain at a constant 4% subsequent to the fifth
Contract Year in the case of Periodic Stipulated Payment Contracts, and the
third Contract Year in the case of Single Stipulated Payment

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

7
<PAGE>

Contracts. Contingent deferred sales charges are waived in the case of partial
redemptions of an amount in any 12-month period up to 10% of Cash Value as of
the date of the first partial redemption during such 12-month period, death of
the Variable Annuitant and where proceeds of a total redemption are used to
purchase another Variable Annuity, Fixed-Dollar Annuity or life insurance
contract issued by The Franklin. See "Contingent Deferred Sales Charge,"
"Redemption," and "Transfers to Other Contracts," below.

A deduction of $20 per Contract Year (subject to increase by The Franklin to
a maximum of $30 per Contract Year) and a transaction fee of $1.00 per
Stipulated Payment ($.50 if by Bank Draft or by employer or military
preauthorized automatic deduction from compensation) in the case of Periodic
Stipulated Payment Contracts, and a one-time deduction of $100 in the case of
Single Stipulated Payment Contracts, is made from Stipulated Payments for
administrative expenses. Any applicable state or local premium taxes on the
Stipulated Payments (currently up to 5%) are also deducted from the single or
periodic Stipulated Payments. The amount remaining after all such deductions and
fees is allocated to the Fund. See "Redemption," "Administration Deductions,"
"Contingent Deferred Sales Charge," and "Premium Taxes," below.

The charges for annuity rate and mortality assurances, expense assurances and
investment management services currently aggregate 1.440% on an annual basis and
are made daily against the net asset value of the Fund. These charges consist of
.900% for The Franklin's assurance of annuity rates or mortality factors, .165%
(subject to increase by The Franklin up to a maximum of .850%) for The
Franklin's assurances of expense factors, and .375% (subject to increase by The
Franklin up to a maximum of .500%) for investment management services by The
Franklin. See "Mortality and Expense Risk Charge," and "Investment Management
Service Charge," below.

MINIMUM PERMITTED INVESTMENT

Subject to limited exceptions, the minimum single Stipulated Payment is
$2,500. The minimum Periodic Stipulated Payment Contract sold is one under which
the periodic Stipulated Payment is $30 ($360 on an annual basis). See "Purchase
Limits," below.

NEW CONTRACTS NO LONGER BEING ISSUED

The Fund no longer issues new Contracts.

REDEMPTION

A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the Contract's initial Annuity
Payment Date, may, subject to any limitations on early settlement contained in
an applicable Qualified Plan and subject to limitations on early withdrawals
imposed in connection with Section 403(b) annuity purchase plans (see "Federal
Income Tax Status," below), redeem all or part of the Contract and receive the
Cash Value (equal to the number of Accumulation Units credited to the part of
the Contract redeemed times the value of an Accumulation Unit at the end of the
Valuation Period in which the request for redemption is received) less any
applicable contingent deferred sales charge, unpaid administration deductions,
and federal income tax withholding. Partial redemptions must be in amounts not
less than $500. For information as to Accumulation Units, see "Value of the
Accumulation Unit," below. Subject to certain limitations, the Contract Owner
may elect to have all or a portion of the amount due upon a total redemption of
a Contract applied under certain Settlement Options or applied toward the
purchase of other annuity or insurance products offered by The Franklin. Federal
tax penalties may apply to certain redemptions. See "Redemption," "Contingent
Deferred Sales Charge," "Transfers to and from Other Contracts," "Settlement
Options," and "Federal Income Tax Status," below.

TERMINATION BY THE FRANKLIN

The Franklin reserves the right to terminate Contracts if Stipulated Payments
are less than $360 in each of three consecutive Contract Years (excluding the
first Contract Year) and if the Cash Value less any surrender charge is less
than $500 at the end of such three-year period. Different termination provisions
apply in the case of Individual Retirement Annuities. See "Termination by The
Franklin," below.

8
<PAGE>

FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income $ 1.204 $ 1.162 $ 1.203 $ .846 $ .617 $ .746 $ 1.140 $ 1.501 $ 1.542 $ 1.186
Expenses .337 .326 .309 .303 .294 .286 .278 .265 .244 .230
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income .867 .836 .894 .543 .323 .460 .862 1.236 1.298 .956
Net increase in accumulation
unit value .867 .836 .894 .543 .323 .460 .862 1.236 1.298 .956
Acumulation unit value:
Beginning of year 22.866 22.030 21.136 20.593 20.270 19.819 18.948 17.712 16.414 15.458
End of year $23.733 $22.866 $22.030 $21.136 $20.593 $20.270 $19.810 $18.948 $17.712 $16.414
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------

Ratio of expenses to average
net assets 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net investment
income to average
net assets 3.73% 3.71% 4.17% 2.58% 1.58% 2.32% 4.46% 6.71% 7.65% 5.98%
Number of accumulation
units outstanding
at end of year 80,944 87,386 104,641 132,646 159,929 210,310 247,150 270,271 307,850 362,718
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

FINANCIAL STATEMENTS

The financial statements for the Fund and The Franklin and the reports of the
independent auditors and accountants for the Fund and The Franklin are included
in the Statement of Additional Information.

9
<PAGE>

INTRODUCTION

FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY

The Qualified and Non-Qualified Contracts offered by this Prospectus are
designed primarily to assist in retirement planning for individuals. The
Contracts provide Annuity Payments for life commencing on a selected Annuity
Payment Date; other Settlement Options are available. The amount of the Annuity
Payments will vary with the investment performance of the assets of the Fund, a
separate account which has been established by The Franklin under Illinois
insurance law. For the primary investment objective of the Fund, see "Investment
Policies and Restrictions of the Fund," below.

The Qualified Contracts described in this Prospectus will not knowingly be
sold other than for use:

(2) in connection with qualified pension, profit-sharing and annuity plans
established by self-employed persons ("H.R. 10 Plans");

(3) in connection with annuity purchase plans adopted by public school
systems and certain tax-exempt organizations pursuant to Section 403(b) of the
Code; or

(4) as Individual Retirement Annuities described in Section 408(b) of the
Code, including Simplified Employee Pensions described in Section 408(k) of the
Code.

Pursuant to this Prospectus, The Franklin offers two types of Qualified and
Non-Qualified Contracts: those under which Annuity Payments to the Variable
Annuitant commence immediately-"Immediate Variable Annuities"-and those under
which Annuity Payments to the Variable Annuitant commence in the
future-"Deferred Variable Annuities." Deferred Variable Annuities may be
purchased either with periodic Stipulated Payments or with a single Stipulated
Payment, while Immediate Variable Annuities may only be purchased with a single
Stipulated Payment. Periodic Stipulated Payment Contracts are written to provide
various agreed periods during which the Stipulated Payments are to be made, with
a minimum of two years.

The Franklin is a legal reserve stock life insurance company organized under
the laws of the State of Illinois in 1884. The Franklin issues individual life
insurance, annuity and accident and health insurance policies, group annuities
and group life insurance and offers a variety of whole life, life, retirement
income and level and decreasing term insurance plans. Its Home Office is located
at #1 Franklin Square, Springfield, Illinois 62713.

American General Corporation ("American General") through its wholly-owned
subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding
shares of common stock of the Franklin. The address of AGC Life is American
General Center, Nashville, Tennessee 37250-0001. The address of American
General is 2929 Allen Parkway, Houston, Texas 77019-2155.

The discussion of Contract terms herein in many cases summarizes those terms.
Reference is made to the full text of the Contract forms, which are filed with
the Securities and Exchange Commission as exhibits to the Registration Statement
under the Securities Act of 1933 and the Investment Company Act of 1940 of which
this Prospectus is a part. The exercise of certain of the Qualified Contract
rights herein described may be subject to the terms and conditions of any
Qualified Plan under which such Qualified Contract may be purchased. This
Prospectus contains no information concerning any such Qualified Plan. Further
information relating to some Qualified Plans may be obtained from the disclosure
documents required to be distributed to employees under the Employee Retirement
Income Security Act of 1974.

10
<PAGE>

DESCRIPTION OF THE SEPARATE ACCOUNT

The Fund was established as a separate account on July 23, 1981 by resolution
of the Board of Directors of The Franklin pursuant to the provisions of the
Illinois Insurance Code. The Fund is an open-end diversified management
investment company registered with the Securities and Exchange Commission under
the Investment Company Act of 1940. Such registration does not involve
supervision of the management or investment practices or policies of the Fund or
of The Franklin by the Commission. The Board of Managers of the Fund must be
elected annually by Contract Owners. A majority of the members of the Board of
Managers are persons who are not otherwise affiliated with The Franklin. See
"Management," below. The Fund meets the definition of a "Separate Account"
under the federal securities laws.

Under the provisions of the Illinois Insurance Code: (i) the income, gains
or losses of the Fund are credited to or charged against the amounts allocated
to the Fund in accordance with the terms of the Contracts, without regard to the
other income, gains or losses of The Franklin; and (ii) the assets of the Fund
are not chargeable with liabilities arising out of The Franklin's other business
activities, including liabilities of any other separate account which may be
established. These assets are held with relation to the Contracts described in
this Prospectus and such other Variable Annuity contracts as may be issued by
The Franklin and designated by it as participating in the Fund. All obligations
arising under the Contracts, including the promise to make Annuity Payments, are
general corporate obligations of The Franklin. Accordingly, all of The
Franklin's assets (except those allocated to other separate accounts which have
been or may be established) are available to meet its obligations and expenses
under the Contracts participating in the Fund.

The Franklin is taxed as a "life insurance company" under the Code. The Fund
is subject to tax as part of The Franklin for federal income tax purposes.
However, the operations of the Fund are considered separately from the other
operations of The Franklin in computing The Franklin's tax liability and the
Fund is not affected by federal income taxes paid by The Franklin with respect
to its other operations. The operations of the Fund are treated separately from
the other operations of The Franklin for accounting and financial statement
purposes. Under existing law, no federal income tax is payable by The Franklin
on investment income and realized capital gains of the Fund. See "Federal Income
Tax Status," below.

DEDUCTIONS AND CHARGES UNDER THE CONTRACTS

The Franklin deducts the charges described below to cover costs and expenses,
services provided, and risks assumed under the Contracts. The amount of a
charge may not necessarily correspond to the costs associated with providing the
services or benefits indicated by the designation of the charge or associated
with the particular Contract. For example, the contingent deferred sales charge
may not fully cover all of the sales and distribution expenses actually incurred
by The Franklin, and proceeds from other charges, including the mortality and
expense risk charge, may be used in part to cover such expenses.

A. ADMINISTRATION DEDUCTIONS

Deductions from Stipulated Payments will be made as follows for
administrative expenses with respect to the Contracts and the Fund such as
preparation of the Contracts, custodial and transfer fees, salaries, rent,
postage, telephone and legal, accounting and periodic reporting fees:

(1) Under Single Stipulated Payment Contracts, a one-time deduction of $100.

(2) Under Periodic Stipulated Payment Contracts, a deduction of $20 per
Contract Year (subject to increase at any time by The Franklin to a maximum of
$30 per Contract Year) and a transaction fee of $1.00 per Stipulated Payment
($.50 if by Bank Draft or by employer or military preauthorized automatic
deduction from compensation).

The above deductions for administrative expenses, and charges for mortality
and expense risk assurances discussed under "Mortality and Expense Risk
Charge," below, are made pursuant to an Administration Agreement dated December
3, 1981 between the Fund and The Franklin. The Administration Agreement is
described under "Investment Advisory and Other Services" in the Statement of
Additional Information.

11
<PAGE>

The administration deductions are designed to cover the actual expenses of
administering the Contracts and the Fund. The aggregate dollar amounts of the
administration deductions for the fiscal years ended December 31, 1995, 1996 and
1997 were $1,060, $820 and $1,512, respectively.

B. PREMIUM TAXES

At the time any premium taxes are payable by The Franklin on the
consideration received from the sale of the Contracts, the amount thereof
will be deducted from the Stipulated Payments. Premium taxes ranging up to 5%
are charged by various jurisdictions in which The Franklin is transacting
business and in which it may, after appropriate qualification, offer
Contracts.

C. MORTALITY AND EXPENSE RISK CHARGE

While Annuity Payments will reflect the investment performance of the Fund,
they will not be affected by adverse mortality experience or by any excess in
the actual expenses of the Contracts and the Fund over the maximum
administration deductions provided for in the Contracts. The Franklin assumes
the risk that Annuity Payments will continue for a longer period than
anticipated because the Variable Annuitant lives longer than expected (or the
Variable Annuitants as a class do so) and also assumes the risk that the
administration deductions may be insufficient to cover the actual expenses of
the administration of the Contracts and of the Fund (except those expenses
listed under "Investment Management Service Charge," immediately below, which
the Fund will bear). The Franklin assumes these risks for the duration of the
Contract and the annuity rate, mortality and expense risk deductions and charges
set forth herein will not be increased beyond the stated maximum with respect
thereto regardless of the actual mortality and expense experience. The mortality
risk charge is imposed regardless of whether or not the payment option selected
involves a life contingency.

For assuming these risks, The Franklin imposes a daily charge against the
value of the Accumulation Unit and the Annuity Unit. (For further information as
to the Accumulation Unit and the Annuity Unit, see "Deferred Variable Annuity
Accumulation Period" and "Annuity Period," below.) These charges are at the
current combined annual rate of 1.065% (.002918% on a daily basis), of which
.900% is for annuity rate and mortality assurances and .165% (subject to
increase at any time by The Franklin up to a maximum of 1.750%) is for expense
assurances. If the money collected from this charge is not needed, it will be
to The Franklin's gain and may be used to cover contract distribution expenses.

During 1995, 1996 and 1997, The Franklin earned and was paid $27,136, $23,215
and $20,938, respectively, by reason of these charges. Such charges during 1997
were equal to 1.065% of average net assets.

D. INVESTMENT MANAGEMENT SERVICE CHARGE

The Franklin acts as investment manager of the Fund. For acting as such, The
Franklin makes a charge against the value of the Accumulation Unit and of the
Annuity Unit at an annual rate of up to .500%. The Franklin has agreed to forego
initially a portion of this charge and currently makes a charge against the
value of the Accumulation Unit and of the Annuity Unit at the annual rate of
.375% (.001027% on a daily basis). This charge may be increased up to .500% on
an annual basis only upon at least 30 days' prior written notice to Contract
Owners. The investment management services are rendered and the charge is made
pursuant to an Investment Management Agreement executed and dated January 31,
1995, pursuant to approval by the Contract Owners at their annual meeting held
on April 17, 1995, and renewal to January 31, 1999 by the Board of Managers of
the Fund at its meeting on January 19, 1998. The Investment Management Agreement
is described under "Investment Advisory and Other Services" in the Statement of
Additional Information.

During 1995, 1996 and 1997, The Franklin earned and was paid $9,551, $8,171
and $7,370, respectively, under the Investment Management Agreement then in
effect.

E. CONTINGENT DEFERRED SALES CHARGE

There are no deductions for sales charges made from Stipulated Payments
under the Contracts. However, commissions on the sale of the Contracts are
paid by The Franklin to agents of Franklin Financial Services

12
<PAGE>
Corporation pursuant to an Agreement dated December 3, 1981. See "Distribution
of the Contracts" in the Statement of Additional Information. In addition,
Franklin Financial Services Corporation incurs certain sales expenses, such as
sales literature preparation and related costs, in connection with the sale of
the Contracts pursuant to a Sales Agreement dated January 31, 1995. Because the
Contracts are normally purchased for the long term, it is expected that these
costs will be recovered over time. If, however, a Contract is totally or
partially redeemed in certain circumstances prior to the initial Annuity Payment
Date, a means is provided for Franklin Financial Services Corporation to recover
sales expenses at that time.

Upon redemption of a Periodic Stipulated Payment Contract, the charges
determined as follows will be applied against the lesser of the Cash Value of
the part of the Contract redeemed or the Stipulated Payments made during the
immediately preceding 72 months represented by that part of the Contract
redeemed:

<TABLE>
<CAPTION>
Contract Percentage Charge
Year Total Redemption Partial Redemption
- --------------------------------------------------------------------------------
<S> <C> <C>
1 8% 8%
2 8% 8%
3 8% 8%
4 6% 6%
5 4% 4%
6 2% 4%
7 and thereafter 0% 4%
</TABLE>

Upon redemption of a Single Stipulated Payment Contract, the charges
determined as follows will be applied against the lesser of the Cash Value of
the part of the Contract redeemed or the Stipulated Payment:

<TABLE>
<CAPTION>
Contract Percentage Charge
Year Total Redemption Partial Redemption
- --------------------------------------------------------------------------------
<S> <C> <C>
1 6% 6%
2 6% 6%
3 4% 4%
4 2% 4%
5 and thereafter 0% 4%
</TABLE>

The above charges are not, however, applied to distributions made upon the
death of the Variable Annuitant, to partial redemption of an amount in any
twelve-month period up to 10% of the Cash Value as of the date of the first
partial redemption in such twelve-month period, or to certain transfers
described below. Partial redemptions must be in amounts not less than $500.

In no event will the total amount of contingent deferred sales charges paid
under a Contract exceed 9% of total Stipulated Payments made under such Contract
in the first twelve Contract Years (or such fewer Contract Years over which
Stipulated Payments are made).

The deferred sales charges were $108 during 1995. There were no deferred
sales charges during 1996 and 1997. Franklin Financial Services Corportion
paid no allowances to unaffiliated dealers in connection with the sale of the
Contracts during 1995, 1996 and 1997.

F. TRANSFERS TO OTHER CONTRACTS

Subject to any limitations in a Qualified Plan, Contracts may be
redeemed prior to the death of the Variable Annuitant and the initial Annuity
Payment Date and the Cash Value (less the required amount of federal income
tax withholding, if any) may be applied to the purchase of certain other
Variable Annuities, Fixed-Dollar Annuities or life insurance contracts issued
by The Franklin. Franklin Life Variable Annuity Fund A and Franklin Life
Variable Annuity Fund B, other separate accounts of The Franklin funding
Variable Annuity contracts, no longer issue new contracts. If a Contract is
fully redeemed and such Cash Value is immediately applied to the purchase of
such other contracts, no contingent deferred sales charge for redeeming the
Fund C Contract will apply. Any sales deductions under such

13
<PAGE>

other contracts will apply to amounts transferred as if such amounts were a
single stipulated payment under such other contracts (however, total sales
deductions on the transferred funds will in no instance exceed 9% of all
Stipulated Payments made under the Fund C Contract with respect to such
transferred funds); provided, however, that if such a transfer occurs after the
sixth Contract Year in the case of Periodic Stipulated Payment Contracts or the
fourth Contract Year in the case of Single Stipulated Payment Contracts, The
Franklin will waive the sales deductions of such other contract with respect
to such transferred funds.

It is not clear whether gain or loss will be recognized for federal income
tax purposes upon the redemption of a Fund C Contract, another annuity contract
or life insurance contract issued by The Franklin for purposes of applying the
redemption proceeds to the purchase of another contract issued by The Franklin.
Federal tax penalties may also apply to such redemptions. Since the income and
withholding tax consequences of such redemption and purchase depend on many
factors, any person contemplating redemption of a Fund C Contract or another
contract issued by The Franklin for purposes of purchasing a different contract
issued by The Franklin (or any other contract) is advised to consult a qualified
tax advisor prior to the time of redemption.

G. MISCELLANEOUS

The Fund's total expenses for 1997 were $28,308, or 1.44% of average net
assets during 1997.

THE CONTRACTS

A. GENERAL

Certain significant provisions of the Contracts and administrative practices
of The Franklin with respect thereto are discussed in the following paragraphs.

Contract Owner inquiries may be directed to the Equity Administration
Department of The Franklin at the address or telephone number set forth on the
cover of this Prospectus.

1. ANNUITY PAYMENTS

Variable Annuity Payments are determined on the basis of (i) an annuity
rate table specified in the Contract, and (ii) the investment performance of
the Fund. In the case of Deferred Variable Annuity Contracts, the annuity
rate table is set forth in the Contract (but see below). In the case of
Immediate Variable Annuities, the table is that used by The Franklin on the
date of issue of the Contract. The amount of the Annuity Payments will not
be affected by mortality experience adverse to The Franklin or by an increase
in The Franklin's expenses related to the Fund or the Contracts in excess of
the expense deductions provided for in the Contracts. The Variable Annuitant
under an annuity with a life contingency or one providing for a number of
Annuity Payments certain will receive the value of a fixed number of Annuity
Units each month, determined as of the initial Annuity Payment Date on the
basis of the applicable annuity rate table and the then value of his or her
account. The value of Annuity Units, and thus the amounts of the monthly
Annuity Payments, will, however, reflect investment gains and losses and
investment income occurring after the initial Annuity Payment Date, and thus
the amount of the Annuity Payments will vary with the investment experience
of the Fund. See "Annuity Period," below.

Court decisions, particularly ARIZONA GOVERNING COMMITTEE v. NORRIS, have
held that the use of gender-based mortality tables to determine benefits
under an employer-related retirement or benefit plan may violate Title VII of
the Civil Rights Act of 1964 ("Title VII"). These cases indicate that plans
sponsored by employers subject to Title VII generally may not provide
different benefits for similarly-situated men and women.

The Contracts described in this Prospectus incorporate annuity rate tables
which reflect the age and sex of the Variable Annuitant and the Settlement
Option selected. Such sex-distinct tables continue to be appropriate for use,
for example, under Contracts which are not purchased in connection with an
"employer-related" plan subject to NORRIS (such as individual retirement
annuities not sponsored by an employer). However, in order to enable subject
employers to comply with NORRIS, The Franklin will provide "unisex" annuity
rate tables for use under Contracts purchased in connection with
"employer-related" plans. Persons contemplating purchase of a Contract, as
well as current Contract Owners, should consult a legal advisor regarding the
applicability and implications of NORRIS in connection with their purchase
and ownership of a Contract.

14
<PAGE>

2. INCREASE OR DECREASE BY CONTRACT OWNER IN AMOUNT OR NUMBER OF PERIODIC
STIPULATED PAYMENTS

Stipulated Payments can be paid on an annual, semi-annual or quarterly
schedule or, with The Franklin's consent, monthly. The first Stipulated Payment
is due as of the date of issue and each subsequent Stipulated Payment is due on
the first day following the interval covered by the next preceding Stipulated
Payment and on the same date each month as the date of issue. The Contract
Owner may increase the amount of a Stipulated Payment on an annualized basis
under a Periodic Stipulated Payment Contract (except in the case of an
Individual Retirement Annuity, which cannot be increased above the amounts
described under "Purchase Limits," immediately below) up to an amount on an
annualized basis equal to ten times the amount of the first Stipulated Payment
on an annualized basis. Similarly, subject to the limitations described under
"Purchase Limits," immediately below, the amount of a periodic Stipulated
Payment may be decreased by the Contract Owner on any date a Stipulated Payment
is due. Unless otherwise agreed to by The Franklin, the mode of Stipulated
Payment may be changed only on a Contract Anniversary.

3. ASSIGNMENT OR PLEDGE

A Qualified Contract may not be assigned by the Contract Owner except when
issued to a trustee in connection with certain types of plans designed to
qualify under Section 401 of the Code or when made pursuant to a qualified
domestic relations order rendered by a state court in satisfaction of family
support obligations. In general, a pledge or assignment made with respect to
certain Qualified Contracts may, depending on such factors as the amount pledged
or assigned, be treated as a taxable distribution. See "Individual Retirement
Annuities," below, for special rules applicable thereto. Moreover, in certain
instances, pledges or assignments of a Qualified Contract may result in the
imposition of certain tax penalties. See generally "The Contracts: Qualified
Plans," below.

A Non-Qualified Contract may be assigned by the Contract Owner or pledged by
him or her as collateral security as provided in the Non-Qualified Contract.
Assignments or pledges of a Non-Qualified Contract will be treated as
distributions that may be taxable. Moreover, in certain instances, pledges or
assignments of a Non-Qualified Contract may result in the imposition of certain
tax penalties. See "The Contracts: Non-Qualified Plans," below.

Persons contemplating the assignment or pledge of a Qualified Contract or a
Non-Qualified Contract are advised to consult a qualified tax advisor concerning
the federal income tax consequences thereof.

4. PURCHASE LIMITS

No periodic Stipulated Payment may be less than $30 ($360 on an annual
basis). No single Stipulated Payment may be less than $2,500, except that in
the case of a deferred Single Stipulated Payment Contract to be used as an
Individual Retirement Annuity funded with a Rollover Contribution, the total
Stipulated Payment applicable to the Variable Annuity, prior to
administration deductions, must be at least $1,000 unless with consent of The
Franklin a smaller single Stipulated Payment is permitted. In the case of a
Qualified Contract issued for use as an Individual Retirement Annuity, annual
premium payments may not, in general, exceed $2,000. However, if the
Individual Retirement Annuity is a Simplified Employee Pension, annual
premium payments may not exceed $30,000. Single Stipulated Payment Contracts
are not available as Individual Retirement Annuities except for those funded
with Rollover Contributions and except for those to be used as Simplified
Employee Pensions.

5. TERMINATION BY THE FRANKLIN

The Franklin reserves the right to terminate any Contract, other than a
Contract issued for use as an Individual Retirement Annuity, if total Stipulated
Payments paid are less than $360 in each of three consecutive Contract Years
(excluding the first Contract Year) and if the Cash Value less any surrender
charge is less than $500 at the end of such three-year period. The Franklin must
give 31 days' notice by mail to the Contract Owner of such termination. The
Franklin will not exercise any right to terminate such Contract if the value of
the Contract declines to less than $500 as a result of a decline in the market
value of the securities held by the Fund.

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Upon termination as described above, The Franklin will pay to the Contract
Owner the Cash Value of the Contract, less any unpaid administration deductions.
For certain tax consequences upon such payment, see "Federal Income Tax
Status," below.

6. RIGHT TO REVOCATION OF CONTRACT

A Contract Owner has the right to revoke the purchase of a Contract within 10
days after receipt of the Contract, and upon such revocation will be entitled to
a return of the entire amount paid. The request for revocation must be made by
mailing or hand-delivering the Contract within such 10-day period either to The
Franklin Life Insurance Company, Cashiers Department, #1 Franklin Square,
Springfield, Illinois 62713, or to the agent from whom the Contract was
purchased. In general, notice of revocation given by mail is deemed to be given
on the date of the postmark, or, if sent by certified or registered mail, the
date of certification or registration.

7. NEW CONTRACTS NO LONGER BEING ISSUED

The Fund no longer issues new Contracts.

B. DEFERRED VARIABLE ANNUITY ACCUMULATION PERIOD

1. CREDITING ACCUMULATION UNITS; DEDUCTION FOR ADMINISTRATIVE EXPENSES

During the accumulation period-the period before the initial Annuity
Payment Date-deductions from Stipulated Payments for administrative expenses
are made as specified under "Deductions and Charges Under the Contracts,"
above. In addition, any applicable premium taxes, also as specified above
under that caption, are deducted from the Stipulated Payments. The balance of
each Stipulated Payment is credited to the Contract Owner in the form of
Accumulation Units.

The number of a Contract Owner's Accumulation Units is determined by dividing
the net amount of Stipulated Payments credited to his or her Contract by the
value of an Accumulation Unit at the end of the Valuation Period during which
the Stipulated Payment is received, except that, in the case of the original
application for a Variable Annuity Contract, the value of an Accumulation Unit
within two business days after receipt of the application will be used if the
application and all information necessary to process the application are
complete upon receipt. If the application and such information are not complete
upon receipt, The Franklin, within five days after the receipt of an original
application and initial payment at the Home Office of The Franklin, will attempt
to complete the application and will either accept the application or reject the
application and return the initial payment.

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<PAGE>

2. VALUATION OF A CONTRACT OWNER'S CONTRACT

The Cash Value of a Contract at any time prior to the initial Annuity Payment
Date can be determined by multiplying the total number of Accumulation Units
credited to the account by the current Accumulation Unit value. The Contract
Owner bears the investment risk, that is, the risk that market values may
decline. There is no assurance that the Cash Value of the Contract will equal or
exceed the Stipulated Payments made. A Contract Owner may obtain from the Home
Office of The Franklin information as to the current value of an Accumulation
Unit and the number of Accumulation Units credited to his or her Contract.

3. VALUE OF THE ACCUMULATION UNIT

The value of an Accumulation Unit was set at $10 effective July 1, 1981.
Accumulation Units currently are valued each Valuation Date (each day in which
there is a sufficient degree of trading in the securities in which the Fund
invests that the value of an Accumulation Unit might be materially affected by
changes in the value of the Fund's investments, other than a day during which no
Contract or portion thereof is tendered for redemption and no order to purchase
or transfer a Contract is received by the Fund, as of the close of trading on
that day). After the close of trading on a Valuation Date, or on a day when
Accumulation Units are not valued, the value of an Accumulation Unit is equal to
its value as of the immediately following Valuation Date. The value of an
Accumulation Unit on the last day of any Valuation Period is determined by
multiplying the value of an Accumulation Unit on the last day of the immediately
preceding Valuation Period by the Net Investment Factor (defined below) for the
current Valuation Period.

At each Valuation Date a gross investment rate for the Valuation Period then
ended is determined from the investment performance of the Fund for the
Valuation Period. Such rate is equal to (i) accrued investment income for the
Valuation Period, plus capital gains and minus capital losses for the period,
whether realized or unrealized, on the assets of the Fund (adjusted by a
deduction for the payment of any applicable state or local taxes as to the
income or capital gains of the Fund) divided by (ii) the value of the assets of
the Fund at the beginning of the Valuation Period. The gross investment rate may
be positive or negative.

The net investment rate for the Valuation Period is then determined by
deducting, currently, .003945% (1.440% on an annual basis) for each day of the
Valuation Period as a charge against the gross investment rate. This charge is
made by The Franklin for providing investment management services, annuity rate
or mortality assurances and expense assurances and may be increased by The
Franklin to a maximum of 2.250% on an annual basis. See "Deductions and Charges
Under the Contracts," above.

The net investment factor for the Valuation Period is the sum of 1.00000000
plus the net investment rate for the Valuation Period ("Net Investment
Factor").

The net investment rate may be negative if the combined capital losses,
Valuation Period deductions and increase in the tax reserve exceed investment
income and capital gains. Thus, the net investment factor may be less than
1.00000000, and the value of an Accumulation Unit at the end of a Valuation
Period may be less than the value for the previous Valuation Period.

4. VALUATION OF FUND ASSETS

The value of the assets of the Fund is the value of the securities held by
the Fund plus any cash or other assets minus all liabilities.

The money market securities in which the Fund invests are traded primarily in
the over-the-counter market. Portfolio securities will be valued using the best
method currently available as determined by the Board of Managers of the Fund.
Securities with a maturity or remaining maturity of 60 days or less (including
master demand notes) are valued on an amortized cost basis. Under this method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of securities purchased with more than 60 days remaining to
maturity, the market value on the 61st day prior to maturity); thereafter the
Fund assumes a constant proportionate amortization in value until maturity of
any discount or premium, regardless of the impact of fluctuating interest rates
on the market value of the security. In periods of declining interest rates,
the daily yield on portfolio securities valued on an amortized cost basis

17
<PAGE>

may tend to be higher than the yield derived by using a method of valuation
based upon market prices and estimates; in periods of rising interest rates, the
daily yield on portfolio securities valued on an amortized cost basis may tend
to be lower than the yield derived by using a method of valuation based upon
market prices and estimates. For purposes of valuation, the maturity of a
variable rate certificate of deposit is deemed to be the next coupon date on
which the interest rate is to be adjusted. Securities with a remaining maturity
of more than 60 days currently are valued on each Valuation Date generally at
the mean between the most recent bid and asked prices or yield equivalent as
obtained from dealers that make markets in such securities. Investments for
which market quotations are not readily available as of the close of trading on
relevant markets on each Valuation Date are valued at prices deemed best to
reflect their fair value as determined in good faith by or under the direction
of the Board of Managers of the Fund in a manner authorized by the Board of
Managers and applied on a consistent basis. The Board of Managers of the Fund
has determined that the fair value of Eurodollar certificates of deposit
generally will be the market price thereof at the close of trading on European
exchanges, unless events between such close and the close of trading on the New
York Stock Exchange require a different valuation, in which case the Board of
Managers will promptly consider what other method of valuation should be applied
to determine fair value.

The Board of Managers monitors on an ongoing basis the methods of valuation
used to determine what action, if any, should be taken to assure that portfolio
securities of the Fund are valued at fair value as determined in good faith by
the Board of Managers.

5. REDEMPTION

A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the initial Annuity Payment Date,
may, subject to any limitations on early settlement contained in an applicable
Qualified Plan, redeem the Contract, in whole or in part (but, if in part, not
less than $500), by submission of the Contract and a written request for its
redemption to The Franklin's Home Office, and will receive the Cash Value of the
part of the Contract redeemed, less any applicable contingent deferred sales
charges and unpaid administration deductions referred to under "Deductions and
Charges Under the Contracts," above. Early withdrawal of certain amounts
attributable to Contracts issued pursuant to an annuity purchase plan meeting
the requirements of Code Section 403(b) may be prohibited. See "Federal Income
Tax Status," below. The Cash Value of a Contract or part thereof redeemed prior
to the initial Annuity Payment Date is the number of Accumulation Units credited
to the Contract (or that part so redeemed) times the value of an Accumulation
Unit at the end of the Valuation Period in which the request for redemption is
received. Except in limited circumstances discussed below, the payment of the
Cash Value will be made within seven days after the date a properly completed
and documented request for redemption is received by The Franklin at its Home
Office. The right of redemption may be suspended or the date of payment
postponed during any periods when the New York Stock Exchange is closed (other
than customary weekend and holiday closings); when trading in the markets the
Fund normally utilizes is restricted, or an emergency exists as determined by
the Securities and Exchange Commission so that disposal of the Fund's
investments or determination of its net asset value is not reasonably
practicable; or for such other periods as the Securities and Exchange Commission
by order may permit to protect Contract Owners.

In lieu of a single payment of the amount due upon redemption of a Contract,
the Contract Owner may elect, at any time prior to the initial Annuity Payment
Date and during the lifetime of the Variable Annuitant, to have all or any
portion of the amount due applied under any available Settlement Option. See
"Settlement Options," below. However, no Settlement Option may be elected upon
redemption without surrender of the entire Contract.

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<PAGE>

6. PAYMENT OF ACCUMULATED VALUE AT TIME OF DEATH

In the event of the death of the Variable Annuitant prior to the initial
Annuity Payment Date, death benefits payable to the surviving Beneficiary will
be paid by The Franklin within seven days of receipt by The Franklin of written
notice of such death. The death proceeds payable will be the Cash Value of the
Contract determined as of the date on which written notice of death is received
by The Franklin by mail if such date is a Valuation Date; if such date is not a
Valuation Date, the determination will be made on the next following Valuation
Date. There is no assurance that the Cash Value of a Contract will equal or
exceed the Stipulated Payments made. No contingent deferred sales charge is made
in the case of such death. For payment of death proceeds in the event no
Beneficiary is surviving at the death of the Variable Annuitant, see "Change of
Beneficiary or Mode of Payment of Proceeds; Death of Beneficiaries," below. The
Code imposes certain requirements concerning payment of death benefits payable
before the initial Annuity Payment Date in the case of Qualified Contracts.
Under those Contracts, death benefits will be paid as required by the Code and
as specified in the governing plan documents. The terms of such documents should
be consulted to determine the death benefits and any limitations the plan may
impose. You should consult your legal counsel and tax advisor regarding these
requirements.

Subject to the foregoing the Contract Owner may, at any time prior to the
initial Annuity Payment Date, elect that all or any portion of such death
proceeds be paid to the Beneficiary under any one of the available Settlement
Options. See "Settlement Options," below. If the Contract Owner has not made
such an election, the Beneficiary may do so after the death of the Variable
Annuitant. The Contract Owner or the Beneficiary, whichever selects the method
of settlement, may designate contingent Beneficiaries to receive any other
amounts due should the first Beneficiary die before completion of the specified
payments. If neither the Contract Owner nor the Beneficiary elects payment of
death proceeds under an available Settlement Option, payment will be made to the
Beneficiary in a single sum.

Death proceeds may be applied to provide variable payments, fixed-dollar
payments or a combination of both.

The payment of death proceeds may be subject to federal income tax
withholding. See "Income Tax Withholding," below

In the event of the death of the Variable Annuitant after the initial Annuity
Payment Date, payments under a Contract will be made as described in "Settlement
Options," below.

7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS

(a) to exercise any of the available Settlement Options described under
"Settlement Options," below, or redeem the Contract as described under
"Redemption," above; or

(b) to have the Contract continued from the date of failure to make a
Stipulated Payment as a paid-up annuity to commence on the initial Annuity
Payment Date stated in the Contract.

If no option is elected by the Contract Owner within 31 days after failure to
make a Stipulated Payment, the Contract will automatically be continued under
the paid-up annuity option.

8. REINSTATEMENT (AS TO PERIODIC STIPULATED PAYMENT CONTRACTS)

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<PAGE>

9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF
BENEFICIARIES

10. SETTLEMENT OPTIONS

At any time prior to the initial Annuity Payment Date and during the lifetime
of the Variable Annuitant, the Contract Owner may elect to have all or a portion
of the amount due in settlement of the Contract applied under any of the
available Settlement Options described below. If the Contract Owner fails to
elect a Settlement Option, payment automatically will be made in the form of a
life annuity. See "First Option," below, and "Deferred Variable Annuity
Contracts," below.

Annuity Payments under a Settlement Option are made to the Variable Annuitant
during his or her lifetime, or for such shorter period that may apply under the
particular Settlement Option. Upon the death of the original Variable Annuitant
after the initial Annuity Payment Date, any remaining Annuity Payments that are
due under the Settlement Option elected will be continued to the Beneficiary or,
if elected by the Contract Owner (or, if so designated by the Contract Owner, by
the Beneficiary), the Cash Value of the Contract, as described under such
Settlement Option below, will be paid to the Beneficiary in one lump sum. Upon
the death of any Beneficiary to whom payments are being made under a Settlement
Option, a single payment equal to the then remaining Cash Value of the Contract,
if any, will be paid to the executors or administrators of the Beneficiary,
unless other provision has been specified and accepted by The Franklin. For a
discussion of payments if no Beneficiary is surviving at the death of the
Variable Annuitant, see "Change of Beneficiary or Mode of Payment of Proceeds;
Death of Beneficiaries," immediately above.

Available Settlement Options may be selected on a fixed or variable basis or
a combination thereof, except the Seventh Option, which is available on a fixed
basis only. Under an Option which is paid on a fixed basis, there is no sharing
in the investment experience of the Fund and, upon commencement of payments,
participation in the Fund terminates (the subject Contract will be transferred
to the general account of The Franklin). Settlement under the First, Second,
Third, Fourth or Fifth Option below is subject to satisfactory proof of age of
the person or persons to whom the Annuity Payments are to be made.

The minimum amount of proceeds which may be applied under any Settlement
Option for any person is $2,000 and proceeds of a smaller amount may be paid in
a single sum in the discretion of The Franklin, except in the case of a deferred
Single Stipulated Payment Contract funded with a Rollover Contribution not in
excess of $2,000. See "Purchase Limits," above. Further, if at any time
payments under a Settlement Option become less than $25 per payment, The
Franklin has the right to change the frequency of payment to such intervals as
will result in payments of at least $25.

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<PAGE>

The distribution rules which Qualified Plans must satisfy in order to be
tax-qualified under the Code may limit the utilization of certain Settlement
Options, or may make certain Settlement Options unavailable, in the case of
Qualified Contracts issued in connection therewith. Similarly, the distribution
rules which Non-Qualified Contracts must satisfy in order to qualify as "annuity
contracts" under the Code may also limit available Settlement Options under
Non-Qualified Contracts. These distribution rules could affect such factors as
the commencement of distributions and the period of time over which
distributions may be made. All Settlement Options are offered subject to the
limitations of the distribution rules.

The Statement of Additional Information describes certain limitations on
Settlement Options based on The Franklin's current understanding of the
distribution rules generally applicable to Non-Qualified Contracts and to
Qualified Contracts purchased under this Prospectus for use as Individual
Retirement Annuities or issued in connection with Section 403(b) annuity
purchase plans. See "Limitations on Settlement Options" in the Statement of
Additional Information. Persons considering the purchase of a Contract and
Contract Owners contemplating election of a Settlement Option are urged to
obtain and read the Statement of Additional Information. Various questions
exist, however, about the application of the distribution rules to distributions
from the Contracts and their effect on Settlement Option availability
thereunder. Persons contemplating the purchase of a Contract should consult a
qualified tax advisor concerning the effect of the distribution rules on the
Settlement Option or Options he or she is contemplating.

Neither this Prospectus nor the Statement of Additional Information, however,
describes limitations on Settlement Options based on applicable distribution
rules in the case of Qualified Contracts issued in connection with qualified
pension and profit-sharing plans under Section 401(a) of the Code and annuity
plans under Section 403(a) of the Code. Under those Contracts, available
Settlement Options are limited to those Options specified in the governing plan
documents. The terms of such documents should be consulted to determine
Settlement Option availability and any other limitations the plan may impose on
early redemption of the Qualified Contract, payment in settlement thereof, or
similar matters. Generally, limitations comparable to those described in the
Statement of Additional Information for Individual Retirement Annuities and
Section 403(b) annuity purchase plans also apply with respect to such qualified
pension, profit-sharing and annuity plans (including H.R. 10 Plans).

FIRST OPTION-LIFE ANNUITY. An annuity payable monthly during the lifetime of
the Variable Annuitant, ceasing with the last Annuity Payment due prior to the
death of the Variable Annuitant. This Option offers the maximum level of monthly
Annuity Payments since there is no guarantee of a minimum number of Annuity
Payments or provision for any continued payments to a Beneficiary upon the death
of the Variable Annuitant. It would be possible under this Option for the
Variable Annuitant to receive only one Annuity Payment if he or she died before
the second Annuity Payment Date, or to receive only two Annuity Payments if he
or she died after the second Annuity Payment Date but before the third Annuity
Payment Date, and so forth.

SECOND OPTION-LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN. An
annuity payable monthly during the lifetime of the Variable Annuitant including
the commitment that if, at the death of the Variable Annuitant, Annuity Payments
have been made for less than 120 months, 180 months or 240 months (as selected
by the Contract Owner in electing this Option), Annuity Payments shall be
continued during the remainder of the selected period to the Beneficiary. The
cash value under this Settlement Option is the present value of the current
dollar amount of any unpaid Annuity Payments certain.

THIRD OPTION-UNIT REFUND LIFE ANNUITY. An annuity payable monthly during the
lifetime of the Variable Annuitant, ceasing with the last Annuity Payment due
prior to the death of the Variable Annuitant, provided that, at the death of the
Variable Annuitant, the Beneficiary will receive a payment of the then dollar
value of the number of Annuity Units equal to the excess, if any, of (a) over
(b) where (a) is the total amount applied under this Option divided by the
Annuity Unit value at the initial Annuity Payment Date and (b) is the number of
Annuity Units represented by each Annuity Payment multiplied by the number of
Annuity Payments made.

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<PAGE>

FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. An amount payable monthly to
the Variable Annuitant for a number of years which may be from one to 30 (as
selected by the Contract Owner in electing this Option). At the death of the
Variable Annuitant, payments will be continued to the Beneficiary for the
remaining period. The cash value under this Settlement Option is the then
present value of the current dollar amount of any unpaid Annuity Payments
certain. A Contract under which Annuity Payments are being made under this
Settlement Option may be redeemed in whole or in part (but, if in part, not less
than $500) at any time by the Contract Owner for the aforesaid cash value of the
part of the Contract redeemed. See "Redemption," above.

SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. The amount due will be
paid to the Variable Annuitant in equal annual, semiannual, quarterly or monthly
Annuity Payments of a designated dollar amount (not less than $75 a year per
$1,000 of the original amount due) until the remaining balance (adjusted each
Valuation Period by the Net Investment Factor for the period) is less than the
amount of one Annuity Payment, at which time such balance will be paid and will
be the final Annuity Payment under this Option. Upon the death of the Variable
Annuitant, payments will be continued to the Beneficiary until such remaining
balance is paid. The cash value under this Settlement Option is the amount of
proceeds then remaining with The Franklin. A Contract under which Annuity
Payments are being made under this Settlement Option may be redeemed at any time
by the Contract Owner for the aforesaid cash value.

Annuity Payments made under the Sixth Option may, under certain
circumstances, be converted into a Variable Annuity involving a life
contingency. See the last paragraph under the Fifth Option, above, which
applies in its entirety to the Sixth Option as well.

SEVENTH OPTION-INVESTMENT INCOME. The amount due may be left on deposit with
The Franklin in its general account and a sum will be paid annually,
semiannually, quarterly or monthly, as selected by the Contract Owner in
electing this Option, which shall be equal to the net investment rate of 3%
stipulated as payable upon fixed-dollar amounts for the period multiplied by the
amount remaining on deposit. Upon the death of the Variable Annuitant, the
aforesaid payments will be continued to the Beneficiary. The sums left on
deposit with The Franklin may be withdrawn at any time.

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<PAGE>

Periodic payments received under this Option may be treated like interest for
federal income tax purposes. Interest payments are fully taxable and are not
subject to the general rules applicable to the taxation of annuities described
in "Federal Income Tax Status," below. Persons contemplating election of this
Seventh Option are advised to consult a qualified tax advisor concerning the
availability and tax effect of its election.

C. ANNUITY PERIOD

1. ELECTING ANNUITY PAYMENTS AND SETTLEMENT OPTION; COMMENCEMENT OF ANNUITY
PAYMENTS

(a) DEFERRED VARIABLE ANNUITY CONTRACTS

A Contract Owner selects a Settlement Option and an initial Annuity Payment
Date prior to the issuance of the Deferred Variable Annuity Contract, except
that Qualified Contracts issued in connection with qualified pension and
profit-sharing plans (including H.R. 10 Plans) under Section 401(a) of the Code
and annuity plans (including H.R. 10 Plans) under Section 403(a) of the Code
provide for Annuity Payments to commence at the date and under the Settlement
Option specified in the plan. The Contract Owner may defer the initial Annuity
Payment Date and continue the Contract to a date not later than the Contract
Anniversary on which the attained age of the Variable Annuitant is 75 unless the
provisions of the Code or any governing Qualified Plan require Annuity Payments
to commence at an earlier date. See "Limitations on Settlement Options" in the
Statement of Additional Information. The Franklin will require satisfactory
proof of age of the Variable Annuitant prior to the initial Annuity Payment
Date.

(b) IMMEDIATE VARIABLE ANNUITY CONTRACTS

The Franklin offers three forms of Immediate Variable Annuity Contracts: the
life annuity, the life annuity with 120, 180 or 240 monthly payments certain and
the joint and last survivor life annuity. For a description of these forms of
annuity, see the First, Second and Fourth Options under "Settlement Options,"
above.

Under an Immediate Variable Annuity, the first Annuity Payment is made to the
Variable Annuitant one month after the Effective Date of the Contract, unless
the period selected by the Contract Owner for the frequency of Annuity Payments
is more than one month, in which case the first Annuity Payment will be made
after a period equal to the period so selected from the Effective Date (subject
in every case to the survival of the Variable Annuitant, except in cases where a
guaranteed payment period is provided).

2. THE ANNUITY UNIT

The Annuity Unit is a measure used to value the First Option (including the
automatic life annuity) and the Second, Third, Fourth and Fifth Options, if
elected, on a variable basis.

The value of the Annuity Unit as of July 1, 1981 was fixed at $1.00 and for
each day thereafter is determined by multiplying the value of the Annuity Unit
on the preceding day by the "Annuity Change Factor" for the Valuation Period
ending on the tenth preceding day or by 1.0 if no Valuation Period ended on the
tenth preceding day. The "Annuity Change Factor" for any Valuation Period is
equal to the amount determined by dividing the Net Investment Factor for that
Valuation Period by a number equal to 1.0 plus the interest rate for the number
of calendar days in such Valuation Period at the effective annual rate of
3-1/2%. The division by 1.0 plus an interest factor of 3-1/2% in calculating the
Annuity Change Factor is effected in order to cancel out the assumed net
investment rate of 3-1/2% per year which is built into the annuity tables
specified in the Contract. See "Determination of Amount of First Monthly Annuity
Payment (Deferred Variable Annuity Contracts Only)," below, and "Assumed Net
Investment Rate," below.

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3. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)

When Annuity Payments commence under a Deferred Variable Annuity Contract,
the value of the Contract Owner's account is determined as the product of the
value of an Accumulation Unit on the first Annuity Payment Date and the number
of Accumulation Units credited to the Contract Owner's account as of such
Annuity Payment Date.

The amount of the first monthly Annuity Payment, determined as above, is
divided as of the initial Annuity Payment Date by the value of an Annuity Unit
to determine the number of Annuity Units represented by the first Annuity
Payment. Annuity Units are valued as of a Valuation Date not less than 10 days
prior to the initial Annuity Payment Date, pursuant to the procedure discussed
under "The Annuity Unit," above. Thus, there will be a double effect of the
investment experience of the Fund during the 10-day period referred to in the
preceding sentence, since that experience will be included (as part of the value
of an Accumulation Unit) in valuing the Contract Owner's Contract on the initial
Annuity Payment Date and (as part of the changes in value of an Annuity Unit) in
determining the second monthly Annuity Payment. Also, the number of Annuity
Units (and hence the amount of Annuity Payments) will be affected by the net
asset values of the Fund approximately 10 days prior to the initial Annuity
Payment Date even though changes in those net asset values have occurred during
that 10-day period, and even though the value of the Accumulation Units used to
determine the Cash Value of the Contract will reflect those changes. See "Amount
of Second and Subsequent Monthly Annuity Payments (Deferred Variable Annuity
Contracts Only)," immediately below.

4. AMOUNT OF SECOND AND SUBSEQUENT MONTHLY ANNUITY PAYMENTS (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)

The number of Annuity Units credited to a Contract on the initial Payment
Date remains fixed during the annuity period, and as of each subsequent Annuity
Payment Date the dollar amount of the Annuity Payment is determined by
multiplying this fixed number of Annuity Units by the then value of an Annuity
Unit.

5. DETERMINATION OF AMOUNT OF ANNUITY PAYMENTS (IMMEDIATE VARIABLE ANNUITY
CONTRACTS ONLY)

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<PAGE>

tables then used by The Franklin for Immediate Variable Annuity Contracts, and
(2) dividing such product by the value of the Annuity Unit as of the date of
issue of the Contract. This number of Annuity Units remains fixed for each month
during the annuity period, and the dollar amount of the Annuity Payment is
determined as of each Annuity Payment Date by multiplying this fixed number of
Annuity Units by the value of an Annuity Unit as of each such Annuity Payment
Date.

As of the date of this Prospectus, The Franklin was using, in connection with
the determination of the number of Annuity Units per month purchased under
Immediate Variable Annuity Contracts, the 1955 American Annuity Table with
assumed 4-1/2% interest, the purchase rates in such table being increased by
0.5% (which percentage is decreased 0.2% for each year of age at the Effective
Date in excess of 70 years for male Variable Annuitants and in excess of 75
years for female Variable Annuitants). However, in lieu of such table, The
Franklin will provide "unisex" annuity rate tables for use under Contracts
purchased in connection with employer-related plans subject to the decision of
the Supreme Court in ARIZONA GOVERNING COMMITTEE v. NORRIS. See "Annuity
Payments," above.

The Annuity Change Factors used by The Franklin for Immediate Variable
Annuity Contracts assume a net investment rate of 3-1/2%.

6. ASSUMED NET INVESTMENT RATE

INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND

The long-term compounding of income from investments in a diversified
portfolio of short-term money market securities yielding a high level of current
income to the extent consistent with preservation of capital and the maintenance
of liquidity is the primary investment objective of the Fund. This objective
does not necessarily require investment in long-term securities since the nature
of annuity contracts themselves connotes a long-term relationship; the continual
retention and reinvestment of proceeds from matured short-term securities
provides the long-term compounding of income. The Board of Managers of the Fund
has determined that, in keeping with the primary investment objective of
investing in short-term money market securities, at least 80% of the Fund's
portfolio will be invested in securities having maturities or remaining
maturities of one year or less and not more than 20% will be invested in
securities having maturities or remaining maturities of between one and two
years. The Board of Managers of the Fund will give consideration to the
creditworthiness of the issuers of all money market securities in which the Fund
proposes to invest prior to such investment. The Fund's investment authority is
also limited by regulations of the Securities and Exchange Commission. See
"Legal Restrictions," below.

The following investment policies summarize the instruments in which the Fund
may invest in order to achieve its primary investment objective, all of which
will be in United States dollar obligations:

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(a) OBLIGATIONS OF THE UNITED STATES GOVERNMENT AND ITS AGENCIES:
Obligations issued by or guaranteed as to principal and interest by the United
States Government, its agencies or instrumentalities. These include a variety of
securities issued by the United States Treasury which are direct obligations of
the United States Government and which differ only in their interest rates,
maturities and times of issuance. Treasury Bills have a maturity of one year or
less, Treasury Notes have maturities of one to ten years and Treasury Bonds
generally have maturities of greater than five years. These also include
securities issued or guaranteed by United States Government agencies or
instrumentalities such as the Federal Home Loan Mortgage Corporation, Federal
Home Loan Bank, Federal National Mortgage Association, Government National
Mortgage Association and the Farmers Home Administration. Some obligations of
United States Government agencies and instrumentalities are supported by the
full faith and credit of the United States Treasury; others, by the right of the
issuer or guarantor to borrow from the United States Treasury; while still
others are supported only by the credit of the agency or instrumentality.
Accordingly, depending upon the particular obligations of United States agencies
and instrumentalities purchased, at any given time the Fund's investment in
these obligations may be supported only by the credit of such agencies or
instrumentalities.

(b) BANK OBLIGATIONS: Negotiable time deposits, negotiable certificates of
deposit (including certificates of deposit issued by London branches of United
States banks- "Eurodollar C.D.'s"), bankers' acceptances, and short-term notes
of banks (domestic or Canadian) having total assets in excess of one billion
dollars (U.S.) as of the date of their most recently published financial
statements (including foreign branches of domestic banks). While normally these
large domestic banks will be members of the Federal Reserve System and have
deposits insured by the Federal Deposit Insurance Corporation, these are not
investment requirements. Accordingly, the securities purchased by the Fund and
issued by domestic banks may or may not be insured by the Federal Deposit
Insurance Corporation, or, if insured, may not be insured for the full amount
purchased. (The purchase of obligations issued by foreign branches of domestic
banks, including Eurodollar C.D.'s, and by Canadian banks involves investment
considerations that are different in some respects from those associated with
obligations of domestic issuers, including the possible imposition of
withholding taxes on interest income or exchange controls, expropriation,
confiscatory taxation, the possible adoption of foreign governmental
restrictions which might adversely affect the payment of principal and interest
on such obligations, limitations on the removal of funds, or other adverse
political or economic developments. In addition, it may be more difficult to
obtain and enforce a judgment against a Canadian bank or foreign branch of a
domestic bank. To the extent the Fund purchases Eurodollar C.D.'s, consideration
will be given to their marketability and possible restrictions on international
currency transactions.) Eurodollar C.D.'s will be considered to be one industry
for the purpose of the fundamental restrictions set out below, and thus no more
than 25% of the Fund's assets at the time of purchase will be invested in
Eurodollar C.D.'s.

(c) SAVINGS ASSOCIATION OBLIGATIONS: Negotiable time deposits, negotiable
certificates of deposit, and other short-term notes of domestic mutual savings
banks and savings and loan associations having total assets in excess of one
billion dollars (U.S.) as of the date of their most recently published financial
statements. The deposits of these savings associations may or may not be insured
by the Federal Deposit Insurance Corporation or the Federal Savings and Loan
Insurance Corporation. Accordingly, the securities purchased by the Fund and
issued by savings associations may or may not be insured, or, if insured, may
not be insured for the full amount purchased.

(d) COMMERCIAL PAPER: Short-term obligations of domestic issuers which at
the time of investment are (i) rated A-1 or A-2 by Standard & Poor's Corporation
or Prime-1 or Prime-2 by Moody's Investors Service, Inc., or (ii) if not rated,
issued by a company which at the date of investment has any outstanding debt
securities rated at least AA by Standard & Poor's or Aa by Moody's. (See
Appendix for an explanation of these ratings.) Commercial paper obligations may
include variable amount master demand notes which are obligations that permit
the investment of fluctuating amounts by the Fund at varying rates of interest
pursuant to direct arrangements between the Fund, as lender, and the borrower.
These notes permit daily changes in the amounts borrowed. The Fund has the right
to increase the amount under the note at any time up to the full amount provided
by the note agreement, or to decrease the amount, and the borrower may repay up
to the full amount of the note without penalty. The borrower is typically a
large industrial or finance company which also issues commercial paper.
Generally these notes provide that the interest rate is set daily by the
borrower; the rate is usually the same or similar to the interest rate on
commercial paper being issued by the borrower. Because variable amount master
demand notes are direct lending arrangements between the lender and
borrower, it is not generally contemplated that such instruments will be traded,

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<PAGE>

and there is no secondary market for these notes, although they are redeemable
(and thus immediately repayable by the borrower) at the face value, plus accrued
interest, at any time. Accordingly, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. In
connection with master demand note arrangements, the Fund considers earning
power, cash flow and other liquidity ratios of the issuer. The Fund will only
invest in master demand notes of domestic issuers. If master demand notes are
rated by credit rating agencies, the Fund will invest in them only if such notes
meet the Fund's rating standards for investment in all commercial paper,
described above. If master demand notes are not rated, the Fund will invest in
such notes only if the issuer thereof has, at the date of investment, any
outstanding debt securities rated at least AA by Standard & Poor's or Aa by
Moody's. The Fund does not have any specific limits on the amount it may invest
in master demand notes. (See Appendix for an explanation of these ratings.)

(e) OTHER CORPORATE DEBT SECURITIES: Other marketable, nonconvertible
corporate debt securities of domestic issuers, including bonds and debentures,
which at the time of purchase have two years or less remaining to maturity and
are rated at least AA by Standard & Poor's or Aa by Moody's. (See Appendix for
an explanation of these ratings.)

(f) CANADIAN GOVERNMENT SECURITIES: United States dollar denominated
securities, such as bonds and Treasury bills, issued or guaranteed by the
Government of Canada, a province of Canada, or their instrumentalities or
political subdivisions. Some of these securities may be supported by the full
faith and credit of the Canadian Government while others may be supported
only by the credit of the province, instrumentality or political subdivision.
Accordingly, depending upon the particular securities issued by Canadian
provinces, instrumentalities or political subdivisions purchased, at any
given time the Fund's investment in these securities may be supported only by
the credit of such provinces, instrumentalities or political subdivisions.
See "Bank Obligations" above regarding investment considerations involving
Canadian issues.

(g) REPURCHASE AGREEMENTS: A short-term investment in which the purchaser
(i.e., the Fund) acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and at a set price, thereby
determining the yield during the purchaser's holding period. Repurchase
agreements usually are for short periods, such as one week or less, but may be
longer. The Fund may enter into repurchase agreements with a member bank of the
Federal Reserve System or a United States securities dealer. The Fund will not
enter into repurchase agreements of more than one week's duration if more than
10% of its total net assets would then be so invested-considering only the
remaining days to maturity of existing repurchase agreements. Repurchase
agreements are fully collateralized by the underlying debt securities and are
considered to be loans under the Investment Company Act of 1940. The underlying
securities could be any of those described above (normally securities of the
United States Government or its agencies and instrumentalities).

In addition, the Fund may lend portfolio securities to brokers, dealers and
financial institutions provided that cash, or equivalent collateral, equal to at
least 100% of the market value of the securities loaned is maintained by the
borrower with the Fund. During the time such securities are on loan, the
borrower will pay the Fund any income accruing thereon and the Fund may invest
the cash collateral and earn additional income or the Fund may receive an
agreed-upon fee from the borrower who has delivered equivalent collateral. Loans
will be subject to termination at the Fund's or the borrower's option. The Fund
will retain all rights of beneficial ownership as to the loaned portfolio
securities, including voting rights and rights to distributions, and will have
the right to regain record ownership of loaned securities to exercise such
beneficial rights. The Fund may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or equivalent collateral to the borrower or placing broker.

The Board of Managers of the Fund has set guidelines and standards for review
of investments in repurchase agreements and the creditworthiness of the seller
thereof, and monitors the actions of the Fund's investment advisor in entering
into repurchase agreements. Repurchase agreements may involve certain risks in
the event of bankruptcy or other default by the seller, including possible
delays and expenses in liquidating the collateral, decline in collateral value
and loss of interest.

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<PAGE>

The Fund will make portfolio investments primarily in anticipation of or in
response to changing economic and money market conditions and trends. Investment
yields on relatively short-term obligations such as will compromise the Fund's
portfolio are subject to substantial and rapid fluctuation. The value of the
Fund's assets generally will vary inversely to changes in interest rates. If
interest rates increase after a security is purchased, the security, if sold,
may return less than its cost. Thus, current yield levels should not be
considered representative of yields for any future period of time. Because of
the variability of interest rates and the risks inherent in investing in money
market securities, including those risks discussed above with respect to
securities of foreign branches of domestic banks and of Canadian banks, there
can be no assurance that the Fund's investment objective will be attained. In
addition, to the extent that investments are made in instruments of
non-governmental issuers (and of governmental issuers, except those instruments
backed by the full faith and credit of that government), these assets, despite
their favorable credit ratings, are subject to some risk of default. Moreover,
should many Contract Owners redeem their Contracts or transfer from the Fund to
some other annuity product of The Franklin at about the same time, the Fund
might have to sell portfolio securities at a time when it would be
disadvantageous to do so, and at a lower price than if such securities were held
to maturity. There can be no assurance that the Cash Value of the Contracts
during the years prior to the Variable Annuitant's initial Annuity Payment Date
or the aggregate amount received during the years following the initial Annuity
Payment Date will equal or exceed the Stipulated Payments made under the
Contracts.

Except as limited by the fundamental investment restrictions below, the
foregoing investment policies are not fundamental and the Board of Managers of
the Fund may change such policies without approval of the Contract Owners.
However, the primary investment objective is fundamental and may not be changed
without such approval.

The following are the fundamental investment restrictions applicable to the
Fund:

(1) The Fund will not concentrate its investments in any one industry or
group of related industries, and no more than 25% of the value of the Fund's
assets at the time of purchase will be invested in any one industry or group of
related industries, except that there is no limitation with respect to
investments in obligations issued or guaranteed by the United States Government
or its agencies or instrumentalities, or in bankers' acceptances, repurchase
agreements or certificates of deposit of domestic banks. For purposes of this
restriction, telephone, gas and electric utilities each shall be considered a
separate industry. In addition, banks, savings associations, personal credit
institutions, business credit institutions and insurance companies shall each be
considered a separate industry.

(2) The Fund will not issue senior securities, except that the Fund may
borrow money as set forth in paragraph (3), below.

(3) The Fund will not borrow money except for temporary or emergency
purposes, and any such borrowings will not be used to purchase investment
securities and will not exceed 5% of the value of the Fund's assets; provided,
however, that the Fund may borrow money up to one-third of its assets, not to
increase its income but to meet redemption requests which might otherwise
require untimely dispositions of portfolio securities. So long as such
borrowings exceed 5% of the value of the Fund's assets, the Fund will not make
any new investments. In addition, to the extent such borrowings exceed the 5%
limit and cause a subsequent reduction of the required asset coverage, the Fund
will reduce the amount of its borrowings to comply with the appropriate asset
coverage required under the Investment Company Act of 1940.

(4) The Fund will not pledge, hypothecate, mortgage or otherwise encumber
its assets except in an amount not in excess of 15% of the value of its assets
to secure borrowings made in accordance with investment restriction (3) above.

(5) The Fund will not underwrite securities of other issuers, except that
the Fund may acquire portfolio securities under circumstances where, if sold, it
might be deemed to be an underwriter for purposes of the Securities Act of 1933.
No such securities will be acquired except where parties other than the Fund
shall have agreed to bear any and all costs of registration under the Securities
Act of 1933. (However, it should be noted that even though an agreement to
register has been obtained, enforcement of such an agreement may prove
unfeasible or may involve delays which could adversely affect the Fund's ability
to resell such securities or the price at which such securities might be
resold.) No more than 10% of the value of the Fund's assets will at any time be
invested in such securities.

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<PAGE>

(6) The Fund will not engage in the purchase and sale of interests in real
estate, except that the Fund may engage in the purchase and sale of money market
securities secured by real estate or interests therein or securities issued by
companies that invest in real estate or interests therein.

(7) The Fund will not engage in the making of loans to other persons,
except that the Fund may acquire qualified debt obligations or other money
market securities and enter into repurchase agreements referred to above
(provided, however, that the aggregate value of repurchase agreements
maturing in more than seven days will not exceed 10% of the Fund's total
assets), and may lend its portfolio securities (provided that such loans do
not in the aggregate exceed 20% of the value of the Fund's assets) if such
loans are made according to the guidelines of the Securities and Exchange
Commission and the Board of Managers of the Fund, including maintaining
collateral from the borrower equal at all times to the current market value
of the securities loaned.

(8) The Fund will not engage in the purchase or sale of commodities or
commodity contracts or invest in oil, gas or other mineral exploration or
development programs.

(9) The Fund will not purchase securities (other than under repurchase
agreements of not more than seven days' duration-considering only the remaining
days to maturity of each existing repurchase agreement-or master demand notes)
for which there exists no readily available market, or for which there are legal
or contractual restrictions on resale (excepting from this restriction
securities that are subject to such resale restrictions but which, in the
judgment of The Franklin, are readily redeemable on demand), if as a result of
any such purchase, more than 10% of the value of the Fund's assets would be
invested in such securities.

(10) The Fund will not purchase securities on margin, except for such
short-term credits as are necessary for the clearance of transactions.

(11) The Fund will not make short sales of securities or write, purchase or
sell puts, calls, straddles, spreads or combinations thereof.

(12) The Fund will not purchase the securities of any one issuer, other than
obligations issued or guaranteed by the United States Government and its
agencies or instrumentalities, if such purchase would cause more than 5% of the
Fund's assets to be invested in the securities of such issuer, except that up to
25% of the Fund's total assets taken at current value may be invested without
regard to such 5% limitation.

(13) The Fund will not acquire more than 10% of the outstanding voting
securities of any one issuer, other than obligations issued or guaranteed by the
United States Government and its agencies or instrumentalities (for this
purpose, all indebtedness of an issuer shall be deemed a single class); except
that up to 25% of the Fund's total assets taken at current value may be invested
without regard to such 10% limitation.

The primary investment objective and the fundamental investment restrictions
stated above may not be changed without approval by a vote of a majority of the
votes available to the Contract Owners. This means that the objective or
restrictions in question may not be changed without the approval of the lesser
of (a) the Contract Owners holding 67% or more of the voting power of the
Contract Owners present or represented at a meeting if Contract Owners holding
more than 50% of the total voting power of all Contract Owners in the Fund are
present or represented by proxy, or (b) Contract Owners holding more than 50% of
the total voting power of all Contract Owners in the Fund.

The following investment restrictions are not fundamental and may be changed
by action of the Board of Managers of the Fund:

(14) All securities in which the Fund invests shall be permissible for the
Fund under the Illinois Insurance Code. The Illinois Insurance Code provides
that investments of a separate account, like the Fund, are free of the
restrictions or provisions generally applicable to insurance companies under
that Code, and does not currently provide any special investment restrictions
applicable to separate accounts. However, no investment permitted under the
Illinois Insurance Code is thereby exempted from the other investment
restrictions specified under this caption.

(15) The Fund will not invest in companies for the purpose of exercising
control or management.

29
<PAGE>

(16) The Fund will not invest in the securities of other investment
companies.

(17) The Fund will not invest more than 5% of the value of its assets in
securities of issuers (other than issuers of United States agency securities)
which, with their predecessors, have a record of less than three years'
continuous operation.

If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values of portfolio securities or net assets will not be considered a
violation.

LEGAL RESTRICTIONS

The Securities and Exchange Commission imposes restrictions on the investment
authority of money market funds, such as the Fund, which are more restrictive
than the policies and restrictions of the Fund described above. In general, such
restrictions provide that a money market fund may not purchase any instrument
with a remaining maturity greater than 13 months or maintain a dollar-weighted
average portfolio maturity which exceeds ninety days. In addition, money market
funds are limited to making investments in United States dollar-denominated
investments which its board of directors determines present minimal credit risk
and which are at the time of acquisition rated (or which have been issued by an
issuer that has been rated) in one of the two highest rating categories by at
least two national rating agencies or, if unrated, that the money market fund's
board of directors determines are of comparable quality to a security so rated.
Money market funds are also generally prohibited from acquiring a security if,
after such acquisition, (i) more than 5% of the money market fund's assets would
be invested in the securities of the issuer of the acquired security, or (ii) if
the acquired security is not rated in the highest category by at least two
national rating agencies or is not an unrated security of comparable quality,
more than 1% of the money market fund's assets would be invested in the
securities of the issuer of the acquired security or more than 5% of the money
market fund's assets would be invested in securities that are not rated in the
highest category by at least two national rating agencies or that are not of
comparable quality. The foregoing percentage restrictions do not apply to
securities issued or guaranteed as to principal by the United States or by an
instrumentality of the United States and such securities may be purchased with
remaining maturities of up to two years. The acquisition of a security that is
rated by only one national rating agency must be approved by the money market
fund's board of directors.

SPECIAL INVESTMENT CONSTRAINTS

The amount of assets that the Fund may invest in the securities of any one
issuer is restricted by the Fund's fundamental investment restrictions and the
regulations of the Securities and Exchange Commission and the Internal Revenue
Service. See "Federal Income Tax Status - The Contracts: Non-Qualified Plans,"
below. Under the most restrictive of these provisions, the Fund generally may
not invest more than 5% of its assets in the securities of any issuer, except
that it may invest up to 55% of its assets in securities issued or guaranteed as
to principal by the United States government. It is anticipated that the
combination of these restrictions and the relatively small and decreasing size
of the Fund's assets will make it more difficult for the Fund's investment
adviser to secure appropriate commercial paper investments, which have
historically constituted a substantial portion of the Fund's investments. As of
December 31, 1997, the Fund's total assets were $1,921,249 (compared to total
assets of $1,968,663 as of June 30, 1997 and total assets of $2,001,016 as of
December 31, 1996), and the maximum amount that the Fund was permitted to invest
in the commercial paper of any one issuer was approximately $96,062. Due to
market conditions, it is more difficult to purchase an issue of commercial paper
in an amount less than $100,000. It is possible that the shrinking pool of
commercial paper investments available to the Fund due to its size may impair
the future investment performance of the Fund.

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<PAGE>

FEDERAL INCOME TAX STATUS

INTRODUCTION

The Contracts are designed for use by individuals in connection with
Qualified Plans or Non-Qualified Plans under the Code. The federal income tax
treatment of the Contracts and payments received thereunder depends on various
factors, including, among other factors, the tax status of The Franklin, the
type of retirement plan or program in connection with which the Contracts are
used and the form in which payments are received. The discussion of federal
income taxes contained in this Prospectus, which focuses on rules applicable to
Contracts purchased under this Prospectus, is general in nature and is based on
existing federal income tax law, which is subject to change. The tax discussion
is not intended as tax advice. The applicable federal income tax law is complex
and contains many special rules and exceptions in addition to the general rules
summarized herein. For these reasons, various questions about the applicable
rules exist. Accordingly, each person contemplating the purchase of a Contract
is advised to consult with a qualified tax advisor concerning federal income
taxes and any other federal, state or local taxes that may be applicable.

THE FRANKLIN

Under the Code a life insurance company like The Franklin is generally taxed
at regular corporate rates, under a single-phase system, on its
specially-computed life insurance company taxable income. Some special rules
continue to apply, however, in the case of segregated asset accounts like the
Fund.

THE CONTRACTS: QUALIFIED PLANS

The Qualified Contracts are designed for use in connection with several types
of Qualified Plans, as described generally below.

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<PAGE>

A. QUALIFIED PENSION, PROFIT-SHARING AND ANNUITY PLANS

The Code imposes an additional tax of 10% on the taxable portion of any early
withdrawal from a Corporate Qualified Plan made by a Variable Annuitant before
age 59-1/2, death, or disability. The additional income tax on early withdrawals
will not apply however to certain distributions including (a) distributions
beginning after separation from service that are part of a series of
substantially equal periodic payments made at least annually for the life of the
Variable Annuitant or the joint lives of the Variable Annuitant and his or her
Beneficiary, and (b) distributions made to Variable Annuitants after attaining
age 55 and after separating from service. Further, additional penalties may
apply to distributions made on behalf of a "5-percent owner" (as defined by
Section 416(i)(1)(B) of the Code).

If a lump sum payment of the proceeds of a Contract qualifies as a "lump sum
distribution" under the Code, special tax rules (including limited capital gain
and income averaging treatment in some circumstances) may apply.

B. H.R. 10 PLANS (SELF-EMPLOYED INDIVIDUALS)

C. SECTION 403(b) ANNUITIES

Section 403(b) of the Code permits public schools and other tax-exempt
organizations described in Section 501(c)(3) of the Code to purchase annuity
contracts for their employees subject to special tax rules.

If the requirements of Section 403(b) are satisfied, amounts contributed by
the employer to purchase an annuity contract for an employee, and any gains
thereon, are not, subject to certain limitations, taxable to the employee until
distributed to the employee. However, these payments may be subject to FICA
(Social Security) taxes. Generally, the cost basis of an employee under a
Section 403(b) annuity contract will equal the amount of any non-deductible
contributions the employee made toward the contract plus any employer
contributions that were taxable to the employee because they exceeded excludable
amounts.

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<PAGE>

The 10% penalty tax on early withdrawals described under "Qualified Pension,
Profit-Sharing and Annuity Plans," immediately above, also applies to Section
403(b) annuity contracts.

D. INDIVIDUAL RETIREMENT ANNUITIES

1. SECTION 408(b) INDIVIDUAL RETIREMENT ANNUITIES

Under Sections 408(b) and 219 of the Code, special tax rules apply to
Individual Retirement Annuities. As described below, certain contributions to
such annuities (other than Rollover Contributions) are deductible within
certain limits and the gains on contributions (including Rollover Contributions)
are not taxable until distributed. Generally, the cost basis in an Individual
Retirement Annuity will equal the amount of non-deductible contributions (other
than rollovers), if any, made to the Individual Retirement Annuity. Under
special rules, all individual retirement plans will be treated as one plan for
purposes of these rules.

Section 408(b) sets forth various requirements that an annuity contract must
satisfy before it will be treated as an Individual Retirement Annuity. Although
final regulations that interpret some of these requirements have been adopted,
other regulations have been proposed that interpret the additional requirement
that, under a Section 408(b) Individual Retirement Annuity, the premiums may not
be fixed. These proposed regulations, which contain certain ambiguities, may,
of course, be changed before they are issued in final form. ACCORDINGLY, WHILE
THE FRANKLIN BELIEVES THAT THE CONTRACTS OFFERED BY THIS PROSPECTUS MEET THE
REQUIREMENTS OF SECTION 408(b), THE FINAL REGULATIONS AND THE CURRENTLY PROPOSED
REGULATIONS THEREUNDER, THERE CAN BE NO ASSURANCE THAT THE CONTRACTS QUALIFY AS
INDIVIDUAL RETIREMENT ANNUITIES UNDER SECTION 408(B) PENDING THE ISSUANCE OF
COMPLETE FINAL REGULATIONS UNDER THAT CODE SECTION.

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<PAGE>

2. SECTION 408(k) SIMPLIFIED EMPLOYEE PENSIONS

An Individual Retirement Annuity described in Section 408(b) of the Code
that also meets the special requirements of Section 408(k) qualifies as a
Simplified Employee Pension. Under a Simplified Employee Pension, employers
may contribute to the Individual Retirement Annuities of their employees
subject to the limitation in Section 408(j). An employee may exclude the
employer's contribution on his or her behalf to a Simplified Employee Pension
from gross income subject to certain limitations. Elective deferrals under a
Simplified Employee Pension are to be treated like elective deferrals under a
cash or deferred arrangement under Section 401(k) of the Code and are subject
to a $7,000 limitation, adjusted for inflation. In general, the employee may
also contribute and deduct an additional amount not in excess of the lesser
of (a) $2,000 or (b) 100% of compensation, subject to the phaseout discussed
above, if the Simplified Employee Pension meets the qualifications for an
Individual Retirement Annuity.

In general, except as stated in this section, the rules discussed in "Section
408(b) Individual Retirement Annuities," immediately above, apply to a
Simplified Employee Pension.

THE CONTRACTS: NON-QUALIFIED PLANS

In the case of Non-Qualified Contracts issued in connection with retirement
or deferred compensation plans which are Non-Qualified Plans, the provisions of
the Plan generally determine the tax treatment of Plan participants.

For example, contributions to, or deferred compensation in connection with,
Non-Qualified Plans may or may not be currently taxable to participants.

Payments received under a Non-Qualified Contract are subject to tax under
Section 72 of the Code. If payments are received in the form of an annuity,
then, in general, each payment is taxable as ordinary income to the extent that
such payment exceeds the portion of the cost basis of the annuity contract that
is allocable to that payment. Payment of the proceeds of an annuity contract in
a lump sum either before or at maturity is taxable as ordinary income to the
extent the lump sum exceeds the cost basis of the annuity contract. If the
Variable Annuitant's life span exceeds his or her life expectancy, the Variable
Annuitant's cost basis will eventually be recovered, and any payments made after
that point will be fully taxable. If, however, the Annuity Payments cease after
the initial Annuity Payment Date by reason of the death of the Variable
Annuitant, the amount of any unrecovered cost basis in the Contract will
generally be allowed as a deduction to the Variable Annuitant for his or her
last taxable year.

A payment received on account of a partial redemption of an annuity contract
generally is taxable as ordinary income in whole or in part. Also, if prior to
the initial Annuity Payment Date, (i) an annuity contract is assigned or
pledged, or (ii) a Contract issued after April 22, 1987 is transferred without
adequate consideration, then the amount assigned, pledged or transferred may
similarly be taxable. Special rules may apply with respect to investments in a
Contract made before August 14, 1982. Because the applicable tax treatment is
complex, a qualified tax advisor should be consulted prior to a partial
withdrawal, assignment, pledge, or contract transfer.

Further, in general, in the case of a payment received under a Non-Qualified
Contract, a penalty may be imposed equal to 10% of the taxable portion of the
payment. However, the 10% penalty does not apply in various circumstances. For
example, the penalty is generally inapplicable to payments that are: (i) made on
or after age 59-1/2; (ii) allocable to investments in the Contract before August
14, 1982, (iii) made on or after the death of the holder; (iv) made incident to
disability; (v) part of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or the life expectancy) of the
Variable Annuitant or the joint lives (or joint life expectancies) of the
Variable Annuitant and his or her beneficiary; or (vi) made under a Contract
purchased with a single premium and which has an annuity starting date
commencing no later than one year from the purchase date of the annuity and
which provides for a series of substantially equal periodic payments (to be made
not less frequently than annually) during the annuity period.

A Non-Qualified Contract will not be treated as an annuity contract for
purposes of certain Code sections, including Section 72, for any period (and any
subsequent period) for which the investments made by the Fund attributable to
such Non-Qualified Contract are not, in accordance with Code Section 817(h) and
the Treasury regulations thereunder, adequately diversified. Although certain
questions exist about the diversification standards, The Franklin believes that
the Fund presently satisfies those standards and intends that the Fund will
continue to be adequately diversified for those purposes.

34
<PAGE>

REQUIRED DISTRIBUTIONS

In order to be treated as an annuity contract for federal income tax
purposes, section 72(s) of the Code requires Non-Qualified Contracts to provide
that (a) if any Contract Owner dies on or after the annuity date but prior to
the time the entire interest in the Contract has been distributed, the remaining
portion of such interest will be distributed at least as rapidly as under the
method of distribution being used as of the date of such owner's death; and (b)
if any Contract Owner dies prior to the annuity date, the entire interest in the
Contract will be distributed within five years after the date of such owner's
death. These requirements will be considered satisfied as to any portion of an
owner's interest which is payable to or for the benefit of a "designated
beneficiary" and which is distributed over the life of such "designated
beneficiary" or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of the
Contract Owner's death. The "designated beneficiary" refers to a natural person
designated by the owner as a Beneficiary and to whom ownership of the Contract
passes by reason of death. However, if the "designated beneficiary" is the
surviving spouse of the deceased Contract Owner, the Contract may be continued
with the surviving spouse as the new Contract Owner.

The Non-Qualified Contracts contain provisions which are intended to comply
with the requirements of section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. The Franklin intends to
review such provisions and modify them if necessary to assure that they comply
with the requirements of Code section 72(s) when clarified by regulation or
otherwise. Other rules may apply to Qualified Contracts.

AGGREGATION OF CONTRACTS

Under a provision of the federal tax law effective for annuity contracts
entered into after October 21, 1988, all annuity contracts (other than contracts
held in connection with Qualified Plans) issued by the same company (or
affiliates) to the same contract owner during any calendar year will generally
be treated as one annuity contract for the purpose of determining the amount of
any distribution, not in the form of an annuity, that is includable in gross
income. This rule may have the effect of causing more rapid taxation of the
distributed amounts from such combination of contracts. It is not certain how
this rule will be applied or interpreted by the Internal Revenue Service. In
particular, it is not clear if or how this rule applies to Immediate Variable
Annuity Contracts or "split" annuity arrangements. Accordingly, a qualified
tax advisor should be consulted about the application and effect of this rule.

<PAGE>

FUTURE LEGISLATION

Although the likelihood of legislative change is uncertain, there is always
the possibility that the tax treatment of the Contracts could change by
legislation or other means. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the federal
taxation of the Contracts. It is also possible that any change could be
retroactive (that is, effective prior to the date of the change). A tax adviser
should be consulted with respect to legislative developments and their effect on
the Contract.

INCOME TAX WITHHOLDING

Withholding of federal income tax is generally required from distributions
from Qualified Plans and Non-Qualified Plans, or Contracts issued in connection
therewith, to the extent the distributions are taxable and are not otherwise
subject to withholding as wages ("Distributions"). See "The Contracts:
Qualified Plans," above, and "The Contracts: Non-Qualified Plans," above,
regarding the taxation of Distributions.

Federal income tax is generally required to be withheld from all or any
portion of a Distribution made on or after January 1, 1993 that constitutes an
"eligible rollover distribution." An "eligible rollover distribution"
generally includes any distribution from a qualified trust described in Section
401(a) of the Code, a qualified annuity plan described in Section 403(a) of the
Code or a qualified annuity contract described in Section 403(b) of the Code
except for (i) a distribution which is one of a series of substantially equal
periodic instalments payable at least annually for the life (or over the life
expectancy) of the Variable Annuitant or for the joint lives (or over the joint
life expectancies) of the Variable Annuitant and his or her Beneficiary, or for
a specified period of 10 years or more or (ii) a minimum distribution required
pursuant to Section 401(a)(9) of the Code and (iii) an amount which is not
includible in gross income (for example, the return of non-deductible
contributions). Any eligible rollover distribution which is not rolled over
directly from a Section 401(a) qualified trust, a Section 403(a) qualified
annuity plan or a Section 403(b) qualified annuity contract to an "eligible
retirement plan" is subject to mandatory federal income tax withholding in an
amount equal to 20% of the eligible rollover distribution. An "eligible
retirement plan" generally includes a qualified trust described in Section
401(a) of the Code, a qualified annuity plan described in Section 403(a) of the
Code, an individual retirement account described in Section 408(a) of the Code
or an Individual Retirement Annuity described in Section 408(b) of the Code.
Mandatory federal income tax withholding is required even if the Variable
Annuitant receives an eligible rollover distribution and rolls it over within 60
days to an eligible retirement plan. Federal income tax is not required to be
withheld from any eligible rollover distribution which is rolled over directly
from a qualified trust described in Section 401(a) of the Code, a qualified
annuity plan described in Section 403(a) of the Code or a qualified annuity
contract described in Section 403(b) of the Code to an eligible retirement plan.

36
<PAGE>

MANAGEMENT

The Fund is managed by a Board of Managers elected annually by the
Contract Owners. The Board of Managers currently has four members. The
members of the Board of Managers also serve as the Board of Managers of
Franklin Life Variable Annuity Fund A and Franklin Life Variable Annuity Fund
B, separate accounts of The Franklin having investment objectives of
long-term appreciation of capital through investment appreciation and
retention and reinvestment of income derived mainly from investments in
equity securities, particularly common stocks. The assets of Fund A are held
with respect to Variable Annuity contracts used in connection with certain
qualified plans and trusts or individual retirement annuities accorded
special tax treatment under the Code and those of Fund B are held with
respect to Variable Annuity contracts used for retirement planning for
individuals and not in connection with qualified plans and trusts, individual
retirement annuities or employer-related plans that are accorded such special
tax treatment.

The affairs of the Fund are conducted in accordance with Rules and
Regulations adopted by the Board of Managers. Under the Rules and
Regulations, the Board of Managers is authorized to take various actions on
behalf of the Fund, including the entry into contracts for the purpose of
services with respect to the Fund under circumstances where the approval of
such contracts is not required to be submitted to the Contract Owners.
Subject to the authority of the Board of Managers, officers and employees of
The Franklin are responsible for overall management of the Fund's business
affairs.

VOTING RIGHTS

All Contract Owners will have the right to vote upon:

(1) The initial approval of any investment management agreement and any
amendment thereto.

(2) Ratification of an independent auditor for the Fund.

(3) Any change in the primary investment objective or fundamental investment
restrictions of the Fund.

(4) Election of members of the Board of Managers of the Fund (cumulative
voting is not permitted).

(5) Termination of the investment management agreement (such termination may
also be effected by the Board of Managers).

(6) Any other matter submitted to them by the Board of Managers.

An employee covered by an H.R. 10 Plan, if not the Contract Owner, will have
the right to instruct the Contract Owner with respect to all votes attributable
to the Qualified Contract. An employee covered by a Qualified Contract issued in
connection with a qualified pension or profit-sharing plan described in Section
401 of the Code will have the right to instruct the Contract Owner with respect
to votes attributable to his or her payments to the plan, if any, and, to the
extent authorized by the terms of the plan, with respect to any additional votes
under the Qualified Contract. If Annuity Payments are being made under an
annuity to a person who is not a Contract Owner, that person will have the right
to instruct the Contract Owner with respect to votes attributable to the amount
of the assets in the Fund to meet the Annuity Payments related to the Contract.

37
<PAGE>

Qualified Contract Owners will cast votes with respect to which instructions
have been received in accordance with such instructions. Votes with respect to
which employees, Variable Annuitants or other persons to whom payments are being
made under a Qualified Contract are entitled to instruct the Contract Owner, but
for which the Contract Owner has received no instructions, shall be cast by the
Contract Owner for or against each proposal to be voted on in the same
proportion as votes for which instructions have been received by such Contract
Owner. If no one is entitled to instruct the Contract Owner, or if the Contract
Owner receives no instructions, all votes which the Contract Owner is entitled
to cast may be cast at his or her sole discretion. Neither the Fund nor The
Franklin has any duty to inquire as to the instructions received or the
authority of the Contract Owner to cast such votes; except to the extent that
the Fund or The Franklin has actual knowledge to the contrary, the votes cast by
Contract Owners will be considered valid and effective as among the Fund, The
Franklin and other persons having voting rights with respect to the Fund.

Should assets be maintained in the Fund with respect to contracts other than
those offered by this Prospectus, contract owners under such contracts would be
entitled to vote, and their votes would be computed in a similar manner. Assets
maintained by The Franklin in the Fund in excess of the amounts attributable to
the Contracts or other contracts of The Franklin will entitle The Franklin to
vote and its vote would be computed in a similar manner. The Franklin will cast
its votes in the same proportion as the votes cast by Contract Owners and the
owners of such other contracts.

The number of votes which each Contract Owner may cast at a meeting shall be
determined as of a record date to be chosen by the Board of Managers within 120
days of the date of the meeting. At least 20 days' written notice of the meeting
will be given to Contract Owners of record. To be entitled to vote or to receive
notice, a Contract Owner must have been such on the record date.

DISTRIBUTION OF THE CONTRACTS

The Fund no longer offers new Contracts. Commissions are paid to registered
representatives of Franklin Financial with respect to Stipulated Payments
received by The Franklin under the Contracts to a maximum of 2% of such
Stipulated Payments.

STATE REGULATION

As a life insurance company organized and operated under Illinois law, The
Franklin is subject to statutory provisions governing such companies and to
regulation by the Illinois Director of Insurance. An annual statement is filed
with the Director on or before March 1 of each year covering the operations of
The Franklin for the preceding year and its financial condition on December 31
of such year. The Franklin's books and accounts are subject to review and
examination by the Illinois Insurance Department at all times, and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners ("NAIC") periodically. The NAIC has divided the
country into six geographic zones. A representative of each such zone may
participate in the examination.

In addition, The Franklin is subject to the insurance laws and regulations of
the jurisdictions other than Illinois in which it is licensed to operate.
Generally, the insurance departments of such jurisdictions apply the laws of
Illinois in determining permissible investments for The Franklin.

For certain provisions of Illinois law applicable to the Fund's investments,
see "Investment Policies and Restrictions of the Fund," above.

REPORTS TO OWNERS

38
<PAGE>

FUNDAMENTAL CHANGES

The Board of Managers of the Fund, and the respective Board of Managers of
each of Franklin Life Variable Annuity Fund A ("Fund A") and Franklin Life
Variable Annuity Fund B ("Fund B"), have approved resolutions whereby Contract
Owners will be asked during 1998 to approve or to disapprove an Agreement and
Plan of Reorganization ("the Agreement") and related transactions (together, the
Agreement and related transactions are the "Reorganization") whereby: (i) the
Fund will be restructured into a single unit investment trust consisting of
three subaccounts; (ii) the assets of each of the Fund, Fund A and Fund B will
be liquidated and the proceeds transferred to one of the three subaccounts in
the restructured Fund (so that the interests of Contract Owners and of Fund A
and Fund B contract owners will continue as interests in the restructured Fund);
and (iii) each subaccount will invest exclusively in shares of a specified
mutual fund portfolio.

Contract Owners will be provided with a proxy statement describing the
Reorganization in detail. If the Reorganization is approved, then immediately
following the consummation of the Reorganization, each Contract Owner will have
an interest in a number of units in a subaccount of the restructured Fund having
a value equal to the value of the Contract Owner's interest in a Fund
immediately prior to the Reorganization.

YEAR 2000 TRANSITION

Like all financial services providers, The Franklin utilizes systems that may
be affected by Year 2000 transition issues and it relies on service providers,
including banks, custodians, and investment managers that also may be affected.
The Franklin and its affiliates have developed, and are in the process of
implementing, a Year 2000 transition plan, and are confirming that their service
providers are also so engaged. The resources that are being devoted to this
effort are substantial. It is difficult to predict with precision whether the
amount of resources ultimately devoted, or the outcome of these efforts, will
have any negative impact on The Franklin. However, as of the date of this
prospectus, it is not anticipated that Contract Owners will experience negative
effects on their investment, or on the services provided in connection
therewith, as a result of Year 2000 transition implementation. The Franklin
currently anticipates that its systems will be Year 2000 compliant on or about
December 31, 1998, but there can be no assurance that The Franklin will be
successful, or that interaction with other service providers will not impair The
Franklin's services at that time.

LEGAL PROCEEDINGS

In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and
sales practices, and a number of these lawsuits have resulted in substantial
settlements. The Franklin is a defendant in certain purported class action
lawsuits. These claims are being defended vigorously by The Franklin. Given
the uncertain nature of litigation and the early stages of this litigation,
the outcome of these actions cannot be predicted at this time. The Franklin
nevertheless believes that the ultimate outcome of all such pending
litigation should not have a material adverse effect on the Fund or on The
Franklin's financial position; however, it is possible that settlements or
adverse determinations in one or more of these actions or other future
proceedings could have a material adverse effect on The Franklin's results of
operations for a given period. No provision has been made in the
consolidated financial statements related to this pending litigation because
the amount of loss, if any, from these actions cannot be reasonably estimated
at this time.

39
<PAGE>

REGISTRATION STATEMENT

OTHER VARIABLE ANNUITY CONTRACTS; EFFECT OF NON-QUALIFICATION

The Franklin may offer, under other prospectuses, other variable annuity
contracts having interests in the Fund and containing different terms and
conditions from those offered hereby.

In the event that a plan intended to qualify as a Qualified Plan under the
Code fails to meet the applicable qualification requirements under the Code
(including Section 818(a)) or in the event a Qualified Plan ceases to qualify
thereunder, The Franklin shall have the right, upon receiving notice of such
non-qualification, to treat any such Contract issued in connection with such a
plan as a Non-Qualified Contract participating in the Fund.

YIELD INFORMATION

In accordance with regulations adopted by the Securities and Exchange
Commission, the Fund has computed an annualized yield and an effective yield for
a seven-day period ending on the date of the Fund's most recent balance sheet.
The annualized yield is computed by determining the net change, exclusive of
realized gains and losses from the sale of investments, unrealized appreciation
and depreciation on investments, and income other than investment income, in the
value of a hypothetical pre-existing account having a balance of one
Accumulation Unit at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the seven-day
period (the "base period return") and multiplying this result by 365/7 to
obtain an annualized yield. The annualized yield for the seven calendar day
period ended December 31, 1997 was 3.93%. The effective yield is computed by
compounding the base period return by adding one, raising the sum to a power
equal to 365 divided by 7, and substracting one from the result. The effective
yield for the seven calendar day period ended December 31, 1997 was 4.00%. The
effective yield is higher because it represents a compound yield, i.e., it
assumes that the increase in account value represented by the base period return
is reinvested.

Yield as determined with respect to a portfolio composed primarily of money
market securities normally will fluctuate on a daily basis and is affected by
changes in interest rates on money market securities, average portfolio
maturities, the type and quality of portfolio securities held and the expenses
of the Fund. Therefore, the yield for any given past period should not be
considered as a representation of the yield for any future period.

In addition, although yield information may be useful in reviewing the Fund's
performance and in providing a basis for comparison with other investment
alternatives, it should be kept in mind that the Fund's yield cannot be compared
to the yield on bank deposits and other investments which pay fixed yields for a
stated period of time and that other investment companies may calculate yield on
additional bases. When comparing the yields of investment companies,

40
<PAGE>

consideration should be given to the quality and maturity of the portfolio of
securities of each company as well as to the type of expenses incurred. In this
connection, it should be noted that the accrued expenses of the Fund differ from
those incurred under conventional money market funds that do not offer variable
annuity contracts in that additional charges are made against the Fund relating
to The Franklin's assumption of mortality and expense risks under the Contract.
See "Mortality and Expense Risk Charge," above. In addition, the yield
information contained herein does not reflect administration deductions from
Stipulated Payments or deductions for premium taxes, which would reduce the
yield and effective yield contained herein. Furthermore, unlike investments in
conventional money market funds which may be held on a non-qualified basis by
the investor, investment income earned by the Fund during the accumulation
period is not currently taxable to holders of Contracts. See "Federal Income Tax
Status," above.

TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<CAPTION>
PAGE IN STATEMENT OF
ADDITIONAL INFORMATION
----------------------
<S> <C>
General Information . . . . . . . . . . . . . . . . . . 3
Investment Objectives . . . . . . . . . . . . . . . . . 3
Limitations on Settlement Options . . . . . . . . . . . 3
Management. . . . . . . . . . . . . . . . . . . . . . . 5
Investment Advisory and Other Services. . . . . . . . . 7
Distribution of The Contracts . . . . . . . . . . . . . 8
Portfolio Turnover and Brokerage. . . . . . . . . . . . 9
Safekeeper of Securities. . . . . . . . . . . . . . . . 10
Legal Matters . . . . . . . . . . . . . . . . . . . . . 10
Experts . . . . . . . . . . . . . . . . . . . . . . . . 10
Index to Financial Statements . . . . . . . . . . . . . F-1
</TABLE>

41
<PAGE>

APPENDIX-DEBT SECURITY RATINGS

STANDARD & POOR'S CORPORATION-BOND RATINGS

AAA-Highest grade. Capacity to pay principal and interest is extremely
strong. AA-High grade. Capacity to pay principal and interest is very strong,
and in the majority of instances these bonds differ from AAA issues only in a
small degree. A-Strong capacity to pay principal and interest, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions.

MOODY'S INVESTORS SERVICE, INC.-BOND RATINGS

Aaa-Best quality. These securities carry the smallest degree of investment
risk and are generally referred to as "gilt-edge." Interest payments are
protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues. Aa-High quality by all standards. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger. A-Upper medium grade. Factors giving security to principal and
interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.

COMMERCIAL PAPER RATINGS

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. An A-1 rating (highest quality) by Standard & Poor's indicates that the
degree of safety regarding timely repayment is strong. An A-2 rating indicates
that capacity for timely payment is satisfactory, although the relative degree
of safety is not as high as for issues designated A-1. An A-3 rating indicates
adequate capacity for repayment but with more vulnerability to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Issuers (or institutions supplying credit support) rated
Prime-1 (Moody's highest rating) have a superior ability for repayment of senior
short-term debt obligations. Prime-1 repayment ability will often be evidenced
by many of the following characteristics: (1) leading market positions in
well-established industries; (2) high rates of return on funds employed; (3)
conservative capitalization structure with moderate reliance on debt and ample
asset protection; (4) broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and (5) well established access to a
range of financial markets and assured sources of alternate liquidity. Issuers
(or institutions supplying credit support) rated Prime-2 have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers (or institutions supplying credit support) rated Prime-3 have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.

42
<PAGE>

PROSPECTUS

FRANKLIN LIFE MONEY
MARKET VARIABLE
ANNUITY FUND C

INDIVIDUAL VARIABLE
ANNUITY CONTRACTS

ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713

- --------------------------------------------------------------------------------
Complete and return this form to:

The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Attention: Box 1018
(800) 528-2011, extension 2591

Please send me the Statement of Additional Information dated April 30, 1998 for
Franklin Life Money Market Variable Annuity Fund C.

- --------------------------------------------------------------------------------
(Name)

- --------------------------------------------------------------------------------
(Street)

- --------------------------------------------------------------------------------
(City) (State) (Zip Code)

- --------------------------------------------------------------------------------
<PAGE>

APPENDIX E

VIP MONEY MARKET PORTFOLIO
PROSPECTUS

Please read this prospectus before investing, and keep it on file for
future reference. It contains important information to help you decide
if the fund's goal matches your own.
To learn more about the fund and its investments, you can obtain a
copy of the fund's most recent financial report and portfolio listing,
or a copy of the Statement of Additional Information (SAI) dated April
30, 1998. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is available along with other related materials
on the SEC's Internet Web site (http://www.sec.gov). The SAI is
incorporated herein by reference (legally forms a part of the
prospectus). For a free copy of either document, call Fidelity at
1-800-544-1916, or your insurance company.
Shares of the fund may be purchased only by the separate accounts of
insurance companies, for the purpose of funding variable annuity and
variable life insurance contracts. The fund may not be available in
your state due to various insurance regulations. Please check with
your insurance company for availability. If the fund in this
prospectus is not available in your state, this prospectus is not to
be considered a solicitation. Please read this prospectus in
conjunction with the prospectus of the separate account of the
specific insurance product that accompanies this prospectus and keep
them on file for future reference.
INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL MAINTAIN
A STABLE $1.00 SHARE PRICE.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC,
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
like all mutual funds, THESE
SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE
COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL
OFFENSE.
VIP-MM-pro-0498
700550

VARIABLE
INSURANCE
PRODUCTS
FUND
INITIAL CLASS
Variable Insurance Products Fund (the Trust) is designed to provide
investment vehicles for variable annuity and variable life insurance
contracts of various insurance companies. Money Market Portfolio is a
fund of the Trust.
MONEY MARKET PORTFOLIO seeks high current income while maintaining a
stable $1.00 share price by investing in a broad range of money market
securities.
PROSPECTUS
APRIL 30, 1998(FIDELITY_LOGO_GRAPHIC) 82 DEVONSHIRE STREET, BOSTON, MA
02109
CONTENTS

<TABLE>
<CAPTION>
<S> <C> <C>
KEY FACTS THE FUND AT A GLANCE

WHO MAY WANT TO INVEST

FINANCIAL HIGHLIGHTS A summary of the fund's
financial data.

THE FUND IN DETAIL CHARTER How the fund is organized.

INVESTMENT PRINCIPLES AND RISKS The fund's overall
approach to investing.

BREAKDOWN OF EXPENSES How operating costs are
calculated and what they include.

PERFORMANCE

ACCOUNT POLICIES DISTRIBUTIONS AND TAXES

TRANSACTION DETAILS Share price calculations and the
timing of purchases and redemptions.

</TABLE>

KEY FACTS

THE FUND AT A GLANCE
Money Market Portfolio is designed to provide an investment vehicle
for variable annuity and variable life insurance contracts of various
insurance companies.
MANAGEMENT: Fidelity Management & Research Company (FMR) is the
management arm of Fidelity Investments, which was established in 1946
and is now America's largest mutual fund manager. Fidelity Investments
Money Management, Inc. (FIMM), a subsidiary of FMR, chooses
investments for the fund.
GOAL: Income while maintaining a stable $1.00 share price. As with any
mutual fund, there is no assurance that the fund will achieve its
goal.
STRATEGY: Invests in high-quality, short-term money market securities
of all types.
SIZE: As of December 31, 1997, the fund had over $1.0 billion in
assets.
WHO MAY WANT TO INVEST
The fund may be appropriate for investors who would like to earn
income at current money market rates while preserving the value of
their investment. The fund is managed to keep its share price stable
at $1.00. The rate of income will vary from day to day, generally
reflecting short-term interest rates. The fund does not constitute a
balanced investment plan. However, because it emphasizes stability, it
could be well-suited for a portion of your investments.

THE SPECTRUM OF FIDELITY FUNDS
BROAD CATEGORIES OF FIDELITY FUNDS ARE PRESENTED
HERE IN ORDER OF ASCENDING RISK. GENERALLY,
INVESTORS SEEKING TO MAXIMIZE RETURN MUST
ASSUME GREATER RISK. MONEY MARKET PORTFOLIO IS IN
THE MONEY MARKET CATEGORY.
MONEY MARKET SEEKS INCOME AND STABILITY BY
INVESTING IN HIGH-QUALITY, SHORT-TERM INVESTMENTS.
(SOLID BULLET) INCOME SEEKS INCOME BY INVESTING IN BONDS.
(SOLID BULLET) ASSET ALLOCATION SEEKS HIGH TOTAL RETURN WITH
REDUCED RISK THROUGH A MIX OF STOCKS, BONDS, AND
SHORT-TERM AND MONEY MARKET INSTRUMENTS.
(SOLID BULLET) GROWTH AND INCOME SEEKS LONG-TERM GROWTH
AND INCOME BY INVESTING IN STOCKS AND BONDS.
(SOLID BULLET) GROWTH SEEKS LONG-TERM GROWTH BY INVESTING
MAINLY IN STOCKS.
3
FINANCIAL HIGHLIGHTS
The financial highlights table that follows has been audited by
Coopers & Lybrand L.L.P., independent accountants. The fund's
financial highlights, financial statements, and report of the auditor
are included in the fund's Annual Report and are incorporated by
reference into (are legally a part of) the fund's SAI.
SELECTED PER-SHARE DATA

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
38.Years ended December
31 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988

39.Net asset value, beginning of
period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000

40.Income from Investment
Operations .053 .052 .057 .042 .032 .038 .059 .078 .087 .071
Net interest income

41.Less Distributions (.053) (.052) (.057) (.042) (.032) (.038) (.059) (.078) (.087) (.071)
From net interest income

42.Net asset value, end of
period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000

43.Total returnA,B 5.51% 5.41% 5.87% 4.25% 3.23% 3.90% 6.09% 8.04% 9.12% 7.39%

44.RATIOS AND SUPPLEMENTAL DATA

45.Net assets, end of period (In
millions) $ 1,021 $ 1,126 $ 809 $ 749 $ 353 $ 301 $ 271 $ 255 $ 143 $ 106

46.Ratio of expenses to average net
assets .31% .30% .33% .27% .22%C .24% .38% .56% .67% .60%

47.Ratio of net interest income to average
net 5.32% 5.28% 5.72% 4.32% 3.16% 3.85% 5.93% 7.76% 8.70% 7.16%
assets

</TABLE>

F TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN.
G THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
H FMR AGREED TO REIMBURSE A PORTION OF THE CLASS'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS'S EXPENSE RATIO WOULD
HAVE BEEN HIGHER.
THE FUND IN DETAIL

CHARTER
MONEY MARKET PORTFOLIO IS A MUTUAL FUND: an investment that pools
shareholders' money and invests it toward a specified goal. The fund
is a diversified fund of Variable Insurance Products Fund (VIP), an
open-end management investment company organized as a Massachusetts
business trust on November 13, 1981.
THE FUND IS GOVERNED BY A BOARD OF TRUSTEES which is responsible for
protecting the interests of shareholders. The trustees are experienced
executives who meet periodically throughout the year to oversee the
fund's activities, review contractual arrangements with companies that
provide services to the fund, and review the fund's performance. The
trustees serve as trustees for other Fidelity funds. The majority of
trustees are not otherwise affiliated with Fidelity.
THE FUND MAY HOLD SPECIAL SHAREHOLDER MEETINGS AND MAIL PROXY
MATERIALS. These meetings may be called to elect or remove trustees,
change fundamental policies, approve a management contract, or for
other purposes. Shareholders not attending these meetings are
encouraged to vote by proxy. An insurance company issuing a variable
contract that participates in the fund will vote shares held in its
separate account as required by law and interpretations thereof, as
may be amended or changed from time to time. In accordance with
current law and interpretations thereof, a participating insurance
company is required to request voting instructions from policyowners
and must vote shares in the separate account in proportion to the
voting instructions received. Your insurance company is entitled to
one vote for each share it owns. For a further discussion, please
refer to your insurance company's separate account prospectus.
FMR AND ITS AFFILIATES
Fidelity Investments is one of the largest investment management
organizations in the United States and has its principal business
address at 82 Devonshire Street, Boston, Massachusetts 02109. It
includes a number of different subsidiaries and divisions which
provide a variety of financial services and products. The fund employs
various Fidelity companies to perform activities required for its
operation.
The fund is managed by FMR, which handles the fund's business affairs.
FIMM, located in Merrimack, New Hampshire, has primary responsibility
for providing investment management services.
The fund has an investment objective similar to that of an existing
Fidelity fund. The fund's objective is most similar to that of
Fidelity Cash Reserves. The performance of a separate account
investing in the fund is not expected to be the same as the
performance of the fund due in part to dissimilarities in their
investments. Various insurance-related costs at the insurance
company's separate account will also affect performance.
The fund sells its shares to separate accounts of insurance companies
that are both affiliated and unaffiliated with FMR. The fund currently
does not foresee any disadvantages to policyowners arising out of the
fact that the fund offers its shares to separate accounts of various
insurance companies to serve as the investment medium for their
variable products. Nevertheless, the Board of Trustees intends to
monitor events in order to identify any material irreconcilable
conflicts which may possibly arise, and to determine what action, if
any, should be taken in response to such conflicts. If such a conflict
were to arise, one or more insurance companies' separate accounts
might be required to withdraw its investments in the fund and shares
of another fund may be substituted. This might force the fund to sell
securities at disadvantageous prices. In addition, the Board of
Trustees may refuse to sell shares of the fund to any separate account
or may suspend or terminate the offering of shares of the fund if such
action is required by law or regulatory authority or is in the best
interests of the shareholders of the fund.
Fidelity investment personnel may invest in securities for their own
accounts pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
Fidelity Distributors Corporation (FDC) distributes and markets
Fidelity's funds and services.

3
FIDELITY FACTS
Fidelity offers the broadest selection of mutual
funds in the world.
(solid bullet) Number of Fidelity mutual funds: over 226
(solid bullet) Assets in Fidelity mutual funds: over
$529 billion
(solid bullet) Number of shareholder accounts: over
34 million
(solid bullet) Number of investment analysts and portfolio
managers: over 265
Fidelity Investments Institutional Operations Company, Inc. (FIIOC)
performs transfer agent servicing functions for Initial Class of the
fund.
FMR Corp. is the ultimate parent company of FMR and FIMM. Members of
the Edward C. Johnson 3d family are the predominant owners of a class
of shares of common stock representing approximately 49% of the voting
power of FMR Corp. Under the Investment Company Act of 1940 (the 1940
Act), control of a company is presumed where one individual or group
of individuals owns more than 25% of the voting stock of that company;
therefore, the Johnson family may be deemed under the 1940 Act to form
a controlling group with respect to FMR Corp.
FMR may use its broker-dealer affiliates and other firms that sell
fund shares to carry out the fund's transactions, provided that the
fund receives brokerage services and commission rates comparable to
those of other broker-dealers.
INVESTMENT PRINCIPLES AND RISKS
The fund seeks to earn a high level of current income while
maintaining a stable $1.00 share price by investing in high-quality,
short-term securities. The fund invests only in high-quality U.S.
dollar-denominated money market securities of domestic and foreign
issuers, including U.S. Government securities and repurchase
agreements. The fund also may enter into reverse repurchase
agreements.
The fund complies with industry-standard requirements on the quality,
maturity, and diversification of its investments, which are designed
to help maintain a stable $1.00 share price. Of course, there is no
guarantee that the fund will maintain a stable $1.00 share price. The
fund will purchase only high-quality securities that FMR believes
present minimal credit risks and will observe maturity restrictions on
securities it buys. In general, securities with longer maturities are
more vulnerable to price changes, although they may provide higher
yields. It is possible that a major change in interest rates or a
default on the fund's investments could cause its share price (and the
value of an investment) to change.
The fund earns income at current money market rates. It stresses
income, preservation of capital, and liquidity, and does not seek the
higher yields or capital appreciation that more aggressive investments
may provide. The fund's yield will vary from day to day and generally
reflects current short-term interest rates and other market
conditions.
It is important to note that neither the fund nor its yield is insured
or guaranteed by the U.S. Government.
SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of
instruments in which the fund may invest, strategies FMR may employ in
pursuit of the fund's investment objective, and a summary of related
risks. Any restrictions listed supplement those discussed earlier in
this section. A complete listing of the fund's limitations and more
detailed information about the fund's investments are contained in the
fund's SAI. Policies and limitations are considered at the time of
purchase; the sale of instruments is not required in the event of a
subsequent change in circumstances.
FMR may not buy all of these instruments or use all of these
techniques unless it believes that they are consistent with the fund's
investment objective and policies and that doing so will help the fund
achieve its goal. Fund holdings and recent investment strategies are
detailed in the fund's financial reports, which are sent to
shareholders twice a year. For a free SAI or financial report, contact
your insurance company.
MONEY MARKET SECURITIES are high-quality, short-term instruments
issued by the U.S. Government, corporations, financial institutions,
and other entities. These securities may carry fixed, variable, or
floating interest rates. Money market securities may be structured or
may employ a trust or similar structure so that they are eligible
investments for money market funds. If the structure does not perform
as intended, adverse tax or investment consequences may result.
U.S. GOVERNMENT MONEY MARKET SECURITIES are short-term debt
instruments issued or guaranteed by the U.S. Treasury or by an agency
or instrumentality of the U.S. Government. Not all U.S. Government
securities are backed by the full faith and credit of the United
States. For example, U.S. Government securities such as those issued
by Fannie Mae are supported by the instrumentality's right to borrow
money from the U.S. Treasury under certain circumstances. Other U.S.
Government securities such as those issued by the Federal Farm Credit
Banks Funding Corporation are supported only by the credit of the
entity that issued them.
CREDIT AND LIQUIDITY SUPPORT. Issuers may employ various forms of
credit and liquidity enhancement, including letters of credit,
guarantees, puts and demand features, and insurance, provided by
foreign or domestic entities such as banks and other financial
institutions. These arrangements expose a fund to the credit risk of
the entity providing the credit or liquidity support. Changes in the
credit quality of the provider could affect the value of the security
and the fund's share price.
FOREIGN EXPOSURE. Securities issued by foreign entities, including
foreign governments, corporations, and banks, and securities issued by
U.S. entities with substantial foreign operations may involve
additional risks and considerations. Likewise, securities for which
foreign entities provide credit or liquidity support may involve
different risks than those supported by domestic entities. Extensive
public information about the foreign entity may not be available, and
unfavorable political, economic, or governmental developments in the
foreign country involved could affect the repayment of principal or
payment of interest.
ASSET-BACKED SECURITIES include interests in pools of mortgages,
loans, receivables, or other assets. Payment of principal and interest
may be largely dependent upon the cash flows generated by the assets
backing the securities.
VARIABLE AND FLOATING RATE SECURITIES have interest rates that are
periodically adjusted either at specific intervals or whenever a
benchmark rate changes. These interest rate adjustments are designed
to help stabilize the security's price.
STRIPPED SECURITIES are the separate income or principal components of
a debt security. The risks associated with stripped securities are
similar to those of other money market securities, although stripped
securities may be more volatile. U.S. Treasury securities that have
been stripped by a Federal Reserve Bank are obligations issued by the
U.S. Treasury.
REPURCHASE AGREEMENTS. In a repurchase agreement, the fund buys a
security at one price and simultaneously agrees to sell it back at a
higher price. Delays or losses could result if the other party to the
agreement defaults or becomes insolvent.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the
fund temporarily transfers possession of a portfolio instrument to
another party in return for cash. This could increase the risk of
fluctuation in the fund's yield or in the market value of its assets.
OTHER MONEY MARKET SECURITIES may include commercial paper,
certificates of deposit, bankers' acceptances, and time deposits.
PUT FEATURES entitle the holder to put (sell back) a security to the
issuer or another party. In exchange for this benefit, the fund may
accept a lower interest rate. The credit quality of the investment may
be affected by the creditworthiness of the put provider. Demand
features, standby commitments, and tender options are types of put
features.
ILLIQUID AND RESTRICTED SECURITIES. Some investments may be determined
by FMR, under the supervision of the Board of Trustees, to be
illiquid, which means that they may be difficult to sell promptly at
an acceptable price. The sale of some illiquid securities, and some
other securities, may be subject to legal restrictions. Difficulty in
selling securities may result in a loss or may be costly to the fund.
RESTRICTIONS: The fund may not purchase a security if, as a result,
more than 10% of its assets would be invested in illiquid securities.
WHEN-ISSUED AND FORWARD PURCHASE OR SALE TRANSACTIONS are trading
practices in which payment and delivery for the security take place at
a later date than is customary for that type of security. The market
value of the security could change during this period.
FINANCIAL SERVICES INDUSTRY. Companies in the financial services
industry are subject to various risks related to that industry, such
as government regulation, changes in interest rates, and exposure on
loans, including loans to foreign borrowers. If a fund invests
substantially in this industry, its performance may be affected by
conditions affecting the industry.
RESTRICTIONS: The fund will invest more than 25% of its total assets
in the financial services industry.
CASH MANAGEMENT. The fund may invest in money market securities, in
repurchase agreements, and in a money market fund available only to
funds and accounts managed by FMR or its affiliates, whose goal is to
seek a high level of current income while maintaining a stable $1.00
share price. A major change in interest rates on a default on the
money market fund's investments could cause its share price to change.
RESTRICTIONS: The fund does not currently intend to invest in a money
market fund.
DIVERSIFICATION. Diversifying the fund's investment portfolio can
reduce the risks of investing. This may include limiting the amount of
money invested in any one issuer or, on a broader scale, in any one
industry.
RESTRICTIONS: The fund may not invest more than 5% of its total assets
in any one issuer, except that the fund may invest up to 10% of its
total assets in certain other money market funds and in the highest
quality securities of a single issuer for up to three business days.
These limitations do not apply to U.S. Government securities.
BORROWING. The fund may borrow from banks or from other funds advised
by FMR, or through reverse repurchase agreements, and may make
additional investments while borrowings are outstanding.
RESTRICTIONS: The fund may borrow only for temporary or emergency
purposes, or engage in reverse repurchase agreements, but not in an
amount exceeding 331/3% of its total assets.
LENDING. The fund may lend money to other funds advised by FMR.
RESTRICTIONS: Loans, in the aggregate, may not exceed 331/3% of the
fund's total assets.
INTERNAL REVENUE SERVICE (IRS) LIMITATIONS. In addition to the above,
the fund also follows certain limitations imposed by the IRS on
separate accounts of insurance companies relating to the tax-deferred
status of variable contracts. More specific information may be
contained in your insurance company's separate account prospectus.
FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS
Some of the policies and restrictions discussed on the preceding pages
are fundamental, that is, subject to change only by shareholder
approval. The following paragraphs restate all those that are
fundamental. All policies stated throughout this prospectus, other
than those identified in the following paragraphs, can be changed
without shareholder approval.
The fund seeks as high a level of current income as is consistent with
preservation of capital and liquidity by investing in money market
instruments.
The fund will invest more than 25% of its total assets in the
financial services industry.
The fund may borrow only for temporary or emergency purposes, or
engage in reverse repurchase agreements, but not in an amount
exceeding 33% of its total assets.
Loans, in the aggregate, may not exceed 33% of the fund's total
assets.
BREAKDOWN OF EXPENSES
Like all mutual funds, the fund pays fees related to its daily
operations. Expenses paid out of Initial Class's assets are reflected
in its share price.
The fund pays a MANAGEMENT FEE to FMR for managing its investments and
business affairs. FMR in turn pays fees to an affiliate who provides
assistance with these services. The fund also pays OTHER EXPENSES,
which are explained at right.
FMR may, from time to time, agree to reimburse the fund for management
fees and other expenses above a specified limit. FMR retains the
ability to be repaid by the fund if expenses fall below the specified
limit prior to the end of the fiscal year. Reimbursement arrangements,
which may be terminated at any time without notice, can decrease the
fund's expenses and boost its performance.
MANAGEMENT FEE
The management fee is calculated and paid to FMR every month. The fee
is calculated by multiplying the sum of two components by the fund's
average net assets and adding an income-based fee.
One component, the group fee rate, is based on the average net assets
of all the mutual funds advised by FMR. This rate cannot rise above
0.37%, and it drops as total assets under management increase.
The other component, the individual fund fee rate, is 0.03%. The
income-based fee is 6% of the fund's gross income in excess of a 5%
yield and cannot rise above 0.24% of the fund's average net assets.
For December 1997, the group fee rate was 0.14%. The total management
fee for the fiscal year ended December 31, 1997 was 0.21% of the
fund's average net assets.
FIMM IS THE FUND'S SUB-ADVISER and has primary responsibility for
managing its investments. FMR is responsible for providing other
management services. FMR pays FIMM 50% of its management fee (before
expense reimbursements) for FIMM's services. FMR paid FMR Texas Inc.,
the predecessor company to FIMM, a fee equal to 0.10% of the fund's
average net assets for the fiscal year ended December 31, 1997.
OTHER EXPENSES
While the management fee is a significant component of the fund's
annual operating costs, the fund has other expenses as well.
FIIOC performs transfer agency, dividend disbursing, and shareholder
servicing functions for Initial Class of the fund. Fidelity Service
Company, Inc. (FSC) calculates the net asset value per share (NAV) and
dividends for Initial Class of the fund and maintains the fund's
general accounting records.
For the fiscal year ended December 31, 1997, Initial Class of the fund
paid fees equal to 0.07% of Initial Class's average net assets for
transfer agency and related services, and the fund paid fees equal to
0.01% of the fund's average net assets for pricing and bookkeeping
services. These amounts are before expense reductions, if any.
For the fiscal year ended December 31, 1997, Initial Class's total
expenses amounted to 0.31% of Initial Class's average net assets.
The fund also pays other expenses, such as legal, audit, and custodian
fees; in some instances, proxy solicitation costs; and the
compensation of trustees who are not affiliated with Fidelity.
Initial Class shares of the fund have adopted a DISTRIBUTION AND
SERVICE PLAN. This Plan recognizes that FMR may use its management fee
revenues, as well as its past profits or its resources from any other
source, to pay FDC for expenses incurred in connection with the
distribution of Initial Class shares. FMR, directly or through FDC,
may make payments to third parties, such as banks or broker-dealers,
that engage in the sale of, or provide shareholder support services
for, Initial Class shares. Currently, the Board of Trustees has
authorized such payments.
PERFORMANCE
The fund's total return and yield may be quoted in advertising in
accordance with current law and interpretations thereof.
EXPLANATION OF TERMS
TOTAL RETURN is the change in value of an investment over a given
period, assuming reinvestment of any dividends and capital gains. A
CUMULATIVE TOTAL RETURN reflects actual performance over a stated
period of time. An AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate
of return that, if achieved annually, would have produced the same
cumulative total return if performance had been constant over the
entire period. Average annual total returns smooth out variations in
performance; they are not the same as actual year-by-year results.
YIELD refers to the income generated by an investment in the fund over
a given period of time, expressed as an annual percentage rate. When a
yield assumes that income earned is reinvested, it is called an
EFFECTIVE YIELD.
SEVEN-DAY YIELD illustrates the income earned by an investment in a
money market fund over a recent seven-day period. Since money market
funds maintain a stable $1.00 share price, current seven-day yields
are the most common illustration of money market fund performance.
The fund's recent strategies, performance, and holdings are detailed
twice a year in financial reports, which are sent to all shareholders.
For additional performance information, contact your insurance company
for a free annual report.
TOTAL RETURNS AND YIELDS QUOTED FOR A CLASS INCLUDE THE CLASS'S
EXPENSES, BUT MAY NOT INCLUDE CHARGES AND EXPENSES ATTRIBUTABLE TO ANY
PARTICULAR INSURANCE PRODUCT. BECAUSE SHARES OF THE FUND MAY BE
PURCHASED ONLY THROUGH VARIABLE ANNUITY AND VARIABLE LIFE INSURANCE
CONTRACTS, YOU SHOULD CAREFULLY REVIEW THE PROSPECTUS OF THE INSURANCE
PRODUCT YOU HAVE CHOSEN FOR INFORMATION ON RELEVANT CHARGES AND
EXPENSES. Excluding these charges from quotations of a class's
performance has the effect of increasing the performance quoted. You
should bear in mind the effect of these charges when comparing the
fund's performance to that of other mutual funds.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN
INDICATION OF FUTURE PERFORMANCE.
ACCOUNT POLICIES

<PAGE>

APPENDIX F

VIP II INDEX 500 PORTFOLIO
PROSPECTUS

Please read this prospectus before investing, and keep it on file for
future reference. It contains important information to help you decide
if the fund's goal matches your own.
To learn more about the fund and its investments, you can obtain a
copy of the fund's most recent financial report and portfolio listing,
or a copy of the Statement of Additional Information (SAI) dated April
30, 1998. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is available along with other related materials
on the SEC's Internet Web site (http://www.sec.gov). The SAI is
incorporated herein by reference (legally forms a part of the
prospectus). For a free copy of either document, call Fidelity at
1-800-544-1916, or your insurance company.
Shares of the fund may be purchased only by the separate accounts of
insurance companies, for the purpose of funding variable annuity and
variable life insurance contracts. The fund may not be available in
your state due to various insurance regulations. Please check with
your insurance company for availability. If the fund in this
prospectus is not available in your state, this prospectus is not to
be considered a solicitation. Please read this prospectus in
conjunction with the prospectus of the separate account of the
specific insurance product that accompanies this prospectus and keep
them on file for future reference.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC,
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
like all mutual funds, THESE SECURITIES HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
VIPII-i500-pro-0498
700585

VARIABLE
INSURANCE
PRODUCTS
FUND II
INITIAL CLASS
Variable Insurance Products Fund II (the Trust) is designed to provide
investment vehicles for variable annuity and variable life insurance
contracts of various insurance companies. Asset Manager Portfolio is a
fund of the Trust.
INDEX 500 PORTFOLIO seeks a total return which corresponds to that of
the Standard & Poor's 500 Index.
PROSPECTUS
APRIL 30, 1998 (FIDELITY_LOGO_GRAPHIC) 82 DEVONSHIRE STREET, BOSTON,
MA 02109
CONTENTS

<TABLE>
<CAPTION>
<S> <C> <C>
KEY FACTS 18 THE FUND AT A GLANCE

18 WHO MAY WANT TO INVEST

20 FINANCIAL HIGHLIGHTS A summary of the fund's financial
data.

THE FUND IN DETAIL 20 CHARTER How the fund is organized.

21 INVESTMENT PRINCIPLES AND RISKS The fund's overall
approach to investing.

23 BREAKDOWN OF EXPENSES How operating costs are
calculated and what they include.

23 PERFORMANCE

ACCOUNT POLICIES 24 DISTRIBUTIONS AND TAXES

24 TRANSACTION DETAILS Share price calculations and the
timing of purchases and redemptions.

24 APPENDIX

</TABLE>

KEY FACTS

THE FUND AT A GLANCE
Index 500 Portfolio is designed to provide an investment vehicle for
variable annuity and variable life insurance contracts of various
insurance companies.
MANAGEMENT: Fidelity Management & Research Company (FMR) is the
management arm of Fidelity Investments, which was established in 1946
and is now America's largest mutual fund manager.
Bankers Trust Company (BT) is a wholly-owned subsidiary of Bankers
Trust New York Corporation, the seventh largest bank holding company
in the United States. BT currently serves as sub-adviser to the fund
and manages the fund's portfolio.
GOAL: Total return that corresponds to that of the Standard & Poor's
500 Index (S&P 500(registered trademark)). As with any mutual fund,
there is no assurance that the fund will achieve its goal.
STRATEGY: Invests in equity securities of companies that compose the
S&P 500 and in other instruments that are based on the value of the
index.
SIZE: As of December 31, 1997, the fund had over $2.0 billion in
assets.
WHO MAY WANT TO INVEST
The fund may be appropriate for investors who are willing to ride out
stock market fluctuations in pursuit of potentially high long-term
returns. The fund is designed for those who want to keep expenses low
while pursuing growth of capital and income through a portfolio of
securities that includes common stocks of companies representing a
significant portion of the market value of all common stocks publicly
traded in the United States, as measured by the S&P 500.
Because the fund seeks to track, rather than beat, the performance of
the S&P 500, the fund is not managed in the same manner as other
mutual funds. BT generally does not judge the merits of any particular
stock as an investment. Therefore, you should not expect to achieve
the potentially greater results that could be obtained by a fund that
aggressively seeks growth.
The value of the fund's investments will vary from day to day, and
generally reflect market conditions, interest rates, and other
company, political, or economic news. In the short-term, stock prices
can fluctuate dramatically in response to these factors. Over time,
however, stocks have shown greater growth potential than other types
of securities. When fund shares are redeemed, they may be worth more
or less than their original cost. By itself, the fund does not
constitute a balanced investment plan.
THE SPECTRUM OF FIDELITY
FUNDS
Broad categories of Fidelity funds are presented
here in order of ascending risk. Generally,
investors seeking to maximize return must
assume greater risk. Index 500 Portfolio is in
the GROWTH category.
(solid bullet) MONEY MARKET Seeks income and stability by
investing in high-quality, short-term investments.
(solid bullet) INCOME Seeks income by investing in bonds.
(solid bullet) ASSET ALLOCATION Seeks high total return with
reduced risk through a mix of stocks, bonds, and
short-term and money market instruments.
(solid bullet) GROWTH AND INCOME Seeks long-term growth
and income by investing in stocks and bonds.
(right arrow) GROWTH Seeks long-term growth by investing
mainly in stocks.
(checkmark)

FINANCIAL HIGHLIGHTS
The financial highlights table that follows has been audited by Price
Waterhouse LLP, independent accountants. The fund's financial
highlights, financial statements, and report of the auditor are
included in the fund's Annual Report and are incorporated by reference
into (are legally a part of) the fund's SAI.
SELECTED PER-SHARE DATA

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
40.Years ended December 31 1997 1996 1995 1994 1993 1992D

41.Net asset value, beginning of period $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60 $ 50.00

42.Income from Investment Operations

43. Net investment income 1.80E 1.04 .85 1.14 1.31 .44

44. Net realized and unrealized gain (loss) 26.67 15.55 19.72 (.56) 3.80 2.71

45. Total from investment operations 28.47 16.59 20.57 .58 5.11 3.15

46.Less Distributions

47. From net investment income (1.03) (.91) (.95) -- (1.28) (.47)

48. From net realized gain (2.09) (2.34) (.11) (.10) (.60) (.08)

49. In excess of net realized gain -- -- (.02) -- (.09) --

50. Total distributions (3.12) (3.25) (1.08) (.10) (1.97) (.55)

51.Net asset value, end of period $ 114.40 $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60

52.Total returnB,C 32.83% 22.71% 37.19% 1.04% 9.74% 6.31%

</TABLE>

53.RATIOS AND SUPPLEMENTAL DATA

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
54.Net assets, end of period (In millions) $ 2,098 $ 823 $ 246 $ 51 $ 25 $ 18

55.Ratio of expenses to average net assets .28%F .28%F .28%F .28%F .28%F .28%A,F

56.Ratio of net investment income to average net assets 1.74% 2.26% 2.70% 2.81% 2.65% 2.89%A

57.Portfolio turnover rate 9% 14% 16% 2% 9% 0%

58.Average commission rateG $ .0268 $ .0315

</TABLE>

A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
D FOR THE PERIOD AUGUST 27, 1992 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1992.
E NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING FOR THE PERIOD.
F FMR AGREED TO REIMBURSE A PORTION OF THE CLASS'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS'S EXPENSE RATIO WOULD
HAVE BEEN HIGHER.
G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY
FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES
EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION
RATE STRUCTURES MAY DIFFER.
THE FUND IN DETAIL

CHARTER
INDEX 500 PORTFOLIO IS A MUTUAL FUND: an investment that pools
shareholders' money and invests it toward a specified goal. Index 500
Portfolio is a diversified fund of Variable Insurance Products Fund II
(VIP II), an open-end management investment company organized as a
Massachusetts business trust on March 21, 1988.
THE FUND IS GOVERNED BY A BOARD OF TRUSTEES which is responsible for
protecting the interests of shareholders. The trustees are experienced
executives who meet periodically throughout the year to oversee the
fund's activities, review contractual arrangements with companies that
provide services to the fund, and review the fund's performance. The
trustees serve as trustees for other Fidelity funds. The majority of
trustees are not otherwise affiliated with Fidelity or BT.
THE FUND MAY HOLD SPECIAL SHAREHOLDER MEETINGS AND MAIL PROXY
MATERIALS. These meetings may be called to elect or remove trustees,
change fundamental policies, approve a management contract, or for
other purposes. Shareholders not attending these meetings are
encouraged to vote by proxy. An insurance company issuing a variable
contract that participates in the fund will vote shares held in its
separate account as required by law and interpretations thereof, as
may be amended or changed from time to time. In accordance with
current law and interpretations thereof, a participating insurance
company is required to request voting instructions from policyowners
and must vote shares in the separate account in proportion to the
voting instructions received. Your insurance company is entitled to
one vote for each share it owns. For a further discussion, please
refer to your insurance company's separate account prospectus.
FMR AND ITS AFFILIATES
Fidelity Investments is one of the largest investment management
organizations in the United States and has its principal business
address at 82 Devonshire Street, Boston, Massachusetts 02109. It
includes a number of different subsidiaries and divisions which
provide a variety of financial services and products. The fund employs
various Fidelity companies to perform activities required for its
operation.
The fund is managed by FMR, which handles its business affairs. BT,
the fund's sub-adviser, chooses the fund's investments. FMR supervises
the sub-adviser and, in conjunction with the Board of Trustees,
reviews the sub-adviser's performance of its duties.
The fund has an investment objective similar to that of an existing
Fidelity fund. The fund's objective is most similar to that of Spartan
Market Index Fund. The performance of a separate account investing in
the fund is not expected to be the same as the performance of the fund
due in part to dissimilarities in their investments. Various
insurance-related costs at the insurance company's separate account
will also affect performance.
The fund sells its shares to separate accounts of insurance companies
that are both affiliated and unaffiliated with FMR. The fund currently
does not foresee any disadvantages to policyowners arising out of the
fact that the fund offers its shares to separate accounts of various
insurance companies to serve as the investment medium for their
variable products. Nevertheless, the Board of Trustees intends to
monitor events in order to identify any material irreconcilable
conflicts which may possibly arise, and to determine what action, if
any, should be taken in response to such conflicts. If such a conflict
were to arise, one or more insurance companies' separate accounts
might be required to withdraw its investments in the fund and shares
of another fund may be substituted. This might force the fund to sell
securities at disadvantageous prices. In addition, the Board of
Trustees may refuse to sell shares of the fund to any separate account
or may suspend or terminate the offering of shares of the fund if such
action is required by law or regulatory authority or is in the best
interests of the shareholders of the fund.
Fidelity investment personnel may invest in securities for their own
accounts pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.

FIDELITY FACTS
Fidelity offers the broadest selection of mutual
funds in the world.
(solid bullet) Number of Fidelity mutual funds: over 226
(solid bullet) Assets in Fidelity mutual funds: over
$529 billion
(solid bullet) Number of shareholder accounts: over
34 million
(solid bullet) Number of investment analysts and portfolio
managers: over 265

(checkmark)
Fidelity Distributors Corporation (FDC) distributes and markets
Fidelity's funds and services.
Fidelity Investments Institutional Operations Company, Inc. (FIIOC)
performs transfer agent servicing functions for Initial Class of the
fund.
FMR Corp. is the ultimate parent company of FMR. Members of the Edward
C. Johnson 3d family are the predominant owners of a class of shares
of common stock representing approximately 49% of the voting power of
FMR Corp. Under the Investment Company Act of 1940 (the 1940 Act),
control of a company is presumed where one individual or group of
individuals owns more than 25% of the voting stock of that company;
therefore, the Johnson family may be deemed under the 1940 Act to form
a controlling group with respect to FMR Corp.
BT AND ITS AFFILIATES
BT is the sub-adviser of the fund and acts as the fund's custodian.
BT, a New York banking corporation with principal offices at 130
Liberty Street, New York, New York 10006, is a wholly-owned subsidiary
of Bankers Trust New York Corporation.
BT, subject to the supervision and direction of the Board of Trustees
and FMR, makes investment decisions for the fund, places orders to
buy, sell and lend the fund's investments, and manages the fund in
accordance with its investment objective and policies. BT may utilize
the expertise of any of its worldwide subsidiaries and affiliates to
assist in its role as sub-adviser. BT places orders for portfolio
transactions with broker-dealers and other firms of its choosing,
which may include affiliates of BT or FMR.
BT investment personnel may invest in securities for their own
accounts pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
BT may use FMR and BT broker-dealer affiliates and other firms that
sell fund shares to carry out the fund's transactions, provided that
the fund receives brokerage services and commission rates comparable
to those of other broker-dealers.
INVESTMENT PRINCIPLES AND RISKS
The fund seeks to provide investment results that correspond to the
total return of a broad range of common stocks publicly traded in the
United States.
To achieve this objective, the fund attempts to duplicate the
composition and total return of the S&P 500. The S&P 500 is made up of
500 common stocks, most of which trade on the New York Stock Exchange
(NYSE). Standard & Poor's (S&P) is neither an affiliate nor a sponsor
of the fund, and inclusion of a stock in the index does not imply that
it is a good investment. The S&P 500 is a widely recognized, unmanaged
index of common stock prices. It is generally acknowledged that the
S&P 500 broadly represents the performance of publicly traded common
stocks in the United States. Total returns for the S&P 500 assume
reinvestment of dividends but do not include the effect of brokerage
commissions or other fees. At some time in the future FMR may, subject
to shareholders' approval and 30 days' notice, select another index if
such a standard of comparison is deemed to be more representative of
the performance of U.S. common stocks.
Under normal conditions the fund seeks to invest at least 80% of its
assets (65% if fund assets are below $20 million) in equity securities
of companies that compose the S&P 500.
The fund may not always hold all of the same securities as the S&P
500. BT may choose, if extraordinary circumstances warrant, to exclude
an index stock from the fund and substitute a similar stock if doing
so will help the fund achieve its objective.
The fund may not track the S&P 500 perfectly. Differences between the
S&P 500 and the fund's portfolio may cause differences in performance.
Even if the fund's investments match the S&P 500 exactly, its returns
could differ on a day-to-day basis because of differences in how the
fund and the S&P 500 are valued. The fund normally values all of its
investments at 4:00 p.m. Eastern time. The S&P 500 is valued by its
sponsor, who may use different closing prices than the fund does. In
addition, the fund's ability to replicate the S&P 500's returns will
depend to some extent on transaction costs and the size and frequency
of cash flows into and out of the fund.
The fund seeks to achieve a 98% or better correlation between its
total return and the total return of the S&P 500. BT uses an indexing
technique to structure the fund's portfolio similarly to that of the
S&P 500. FMR monitors correlation between the performance of the fund
and that of the S&P 500 on a monthly basis. Correlation is measured by
comparing the fund's monthly total returns to those of the S&P 500
over the most recent 36-month period. In the unlikely event that the
fund cannot achieve a correlation of 98% or better, the trustees will
consider alternative arrangements.
The fund may purchase short-term debt securities for cash management
purposes and may use various techniques, such as stock index futures,
to adjust its exposure to the S&P 500.
The value of the fund's domestic and foreign investments varies in
response to many factors. Stock values fluctuate in response to the
activities of individual companies, and general market and economic
conditions. Investments in foreign securities may involve risks in
addition to those of U.S. investments, including increased political
and economic risk, as well as exposure to currency fluctuations.
BT may use various investment techniques to hedge a portion of the
fund's risks, but there is no guarantee that these strategies will
work as BT intends. Also, as a mutual fund, the fund seeks to spread
investment risk by diversifying its holdings among many companies and
industries. Of course, when fund shares are redeemed, they may be
worth more or less than their original cost.
BT normally invests the fund's assets according to its investment
strategy. The fund also reserves the right to invest without
limitation in preferred stocks and investment-grade debt instruments
for temporary, defensive purposes.
SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of
instruments in which the fund may invest, strategies BT may employ in
pursuit of the fund's investment objective, and a summary of related
risks. Any restrictions listed supplement those discussed earlier in
this section. A complete listing of the fund's limitations and more
detailed information about the fund's investments are contained in the
fund's SAI. Policies and limitations are considered at the time of
purchase; the sale of instruments is not required in the event of a
subsequent change in circumstances.
BT may not buy all of these instruments or use all of these techniques
unless it believes that they are consistent with the fund's investment
objective and policies and that doing so will help the fund achieve
its goal. Fund holdings and recent investment strategies are detailed
in the fund's financial reports, which are sent to shareholders twice
a year. For a free SAI or financial report, contact your insurance
company.
EQUITY SECURITIES may include common stocks, preferred stocks,
convertible securities, and warrants. Common stocks, the most familiar
type, represent an equity (ownership) interest in a corporation.
Although equity securities have a history of long-term growth in
value, their prices fluctuate based on changes in a company's
financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.
RESTRICTIONS: With respect to 75% of its total assets, the fund may
not purchase more than 10% of the outstanding voting securities of a
single issuer. This limitation does not apply to securities of other
investment companies.
EXPOSURE TO FOREIGN MARKETS. Foreign securities, foreign currencies,
and securities issued by U.S. entities with substantial foreign
operations may involve additional risks and considerations. These
include risks relating to political, economic, or regulatory
conditions in foreign countries; fluctuations in foreign currencies;
withholding or other taxes; trading, settlement, custodial, and other
operational risks; and the potentially less stringent investor
protection and disclosure standards of foreign markets. Additionally,
governmental issuers of foreign debt securities may be unwilling to
pay interest and repay principal when due, and may require that the
conditions for payment be renegotiated. All of these factors can make
foreign investments, especially those in emerging markets, more
volatile and potentially less liquid than U.S. investments.
RESTRICTIONS: FMR limits the amount of the fund's assets that may be
invested in foreign securities to 50%.
REPURCHASE AGREEMENTS. In a repurchase agreement, the fund buys a
security at one price and simultaneously agrees to sell it back at a
higher price. Delays or losses could result if the other party to the
agreement defaults or becomes insolvent.
ADJUSTING INVESTMENT EXPOSURE. The fund can use various techniques to
increase or decrease its exposure to changing security prices or other
factors that affect security values. These techniques may involve
derivative transactions such as buying and selling options and futures
contracts, entering into swap agreements, and purchasing indexed
securities.
BT can use these practices in its effort to track the return of the
S&P 500. If BT judges market conditions incorrectly or employs a
strategy that does not correlate well with the fund's investments,
these techniques could result in a loss, regardless of whether the
intent was to reduce risk or increase return. These techniques may
increase the volatility of the fund and may involve a small investment
of cash relative to the magnitude of the risk assumed. In addition,
these techniques could result in a loss if the counterparty to the
transaction does not perform as promised.
ILLIQUID SECURITIES. Some investments may be determined by BT, under
the supervision of the Board of Trustees and FMR, to be illiquid,
which means that they may be difficult to sell promptly at an
acceptable price. Difficulty in selling securities may result in a
loss or may be costly to the fund.
RESTRICTIONS: The fund may not purchase a security if, as a result,
more than 10% of its assets would be invested in illiquid securities.
OTHER INSTRUMENTS may include securities of closed-end investment
companies and real estate-related instruments.
CASH MANAGEMENT. The fund may invest in money market securities, in
repurchase agreements, and in a money market fund available only to
funds and accounts managed by FMR or its affiliates, whose goal is to
seek a high level of current income while maintaining a stable $1.00
share price. The fund may also invest in similar money market funds
managed by BT or other investment managers. A major change in interest
rates or a default on a money market fund's investments could cause
its share price to change.
DIVERSIFICATION. Diversifying a fund's investment portfolio can reduce
the risks of investing. This may include limiting the amount of money
invested in any one issuer or, on a broader scale, in any one
industry.
RESTRICTIONS: With respect to 75% of its total assets, the fund may
not purchase a security if, as a result, more than 5% would be
invested in the securities of any one issuer. This limitation does not
apply to U.S. Government securities or to securities of other
investment companies.
The fund may not invest more than 25% of its total assets in any one
industry. This limitation does not apply to U.S. Government
securities.
BORROWING. The fund may borrow from banks or from other funds advised
by FMR, or through reverse repurchase agreements. If the fund borrows
money, its share price may be subject to greater fluctuation until the
borrowing is paid off. If the fund makes additional investments while
borrowings are outstanding, this may be considered a form of leverage.
RESTRICTIONS: The fund may borrow only for temporary or emergency
purposes, but not in an amount exceeding 331/3% of its total assets.
LENDING securities to broker-dealers and institutions, including
Fidelity Brokerage Services, Inc. (FBSI), an affiliate of FMR, is a
means of earning income. BT receives a portion of securities lending
income as a sub-advisory fee. Securities lending could result in a
loss or a delay in recovering the fund's securities. The fund may also
lend money to other funds advised by FMR.
RESTRICTIONS: Loans, in the aggregate, may not exceed 331/3% of the
fund's total assets.
INTERNAL REVENUE SERVICE (IRS) LIMITATIONS. In addition to the above,
the fund also follows certain limitations imposed by the IRS on
separate accounts of insurance companies relating to the tax-deferred
status of variable contracts. More specific information may be
contained in your insurance company's separate account prospectus.
FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS
Some of the policies and restrictions discussed on the preceding pages
are fundamental, that is, subject to change only by shareholder
approval. The following paragraphs restate all those that are
fundamental. All policies stated throughout this prospectus, other
than those identified in the following paragraphs, can be changed
without shareholder approval.
The fund seeks investment results that correspond to the total return
of common stocks publicly traded in the United States, as represented
by the S&P 500.
With respect to 75% of its total assets, the fund may not purchase a
security if, as a result, more than 5% would be invested in the
securities of any one issuer and may not purchase more than 10% of the
outstanding voting securities of a single issuer. These limitations do
not apply to U.S. Government securities or to securities of other
investment companies.
The fund may not invest more than 25% of its total assets in any one
industry. This limitation does not apply to U.S. Government
securities.
The fund may borrow only for temporary or emergency purposes, but not
in an amount exceeding 331/3% of its total assets.
Loans, in the aggregate, may not exceed 33% of the fund's total
assets.
BREAKDOWN OF EXPENSES
Like all mutual funds, the fund pays fees related to its daily
operations. Expenses paid out of Initial Class's assets are reflected
in its share price.
The fund pays a MANAGEMENT FEE to FMR for managing its investments and
business affairs. FMR and the fund pay sub-advisory fees to BT for
managing the fund's investments, administering its securities lending
program, and for custodial services. The fund also pays OTHER
EXPENSES, which are explained below.
FMR may, from time to time, agree to reimburse the fund for management
fees and other expenses above a specified limit. FMR retains the
ability to be repaid by the fund if expenses fall below the specified
limit prior to the end of the fiscal year. Reimbursement arrangements,
which may be terminated at any time without notice, can decrease the
fund's expenses and boost its performance.
MANAGEMENT AND SUB-ADVISORY FEES
Management and sub-advisory fees are calculated and paid every month
to FMR and BT, respectively. The fund pays the fees at the annual rate
of 0.24% of its average net assets. These fees include a management
fee of 0.24% payable to FMR and an estimated sub-advisory fee of less
than 0.01% payable to BT (representing 40% of net income from
securities lending).
The total management fee for the fiscal year ended December 31, 1997
was 0.27% of the fund's average net assets. Effective December 1,
1997, the fund's management fee rate was reduced from 0.28% to 0.24%.
BT IS THE FUND'S SUB-ADVISER under an agreement with FMR and the fund.
For providing investment management, securities lending, and custodial
services to the fund, FMR pays BT fees at an annual rate of 0.006% of
the fund's average net assets. In addition, the fund pays BT fees
equal to 40% of net income from the fund's securities lending program.
The remaining 60% of net income from the fund's securities lending
program goes to the fund.
OTHER EXPENSES
While management and sub-advisory fees are significant components of
the fund's annual operating costs, the fund has other expenses as
well.
FIIOC performs transfer agency, dividend disbursing, and shareholder
servicing functions for Initial Class of the fund. Fidelity Service
Company, Inc. (FSC) calculates the net asset value per share (NAV) and
dividends for Initial Class of the fund, and maintains the general
accounting records for the fund.
For the fiscal year ended December 31, 1997, Initial Class of the fund
paid fees equal to 0.07% of Initial Class's average net assets for
transfer agency and related services, and the fund paid fees equal to
0.04% of the fund's average net assets for pricing and bookkeeping
services. These amounts are before expense reductions, if any.
For the fiscal year ended December 31, 1997, Initial Class's total
expenses amounted to 0.28% of Initial Class's average net assets.
Effective August 27, 1992, FMR has voluntarily agreed to reimburse
Initial Class of the fund to the extent that total operating expenses
(with the exceptions noted below) exceed 0.28% of its average net
assets. If this agreement were not in effect, total operating
expenses, as a percentage of average net assets of Initial Class of
the fund, would have been 0.40%. Expenses eligible for reimbursement
do not include interest, taxes, brokerage commissions, or
extraordinary expenses. In addition, sub-advisory fees paid by the
fund associated with securities lending are not eligible for
reimbursement.
The fund also pays other expenses, such as legal and audit fees; in
some instances, proxy solicitation costs; and the compensation of
trustees who are not affiliated with Fidelity.
Initial Class shares of the fund have adopted a DISTRIBUTION AND
SERVICE PLAN. This Plan recognizes that FMR may use its management fee
revenues, as well as its past profits or its resources from any other
source, to pay FDC for expenses incurred in connection with the
distribution of Initial Class shares. FMR, directly or through FDC,
may make payments to third parties, such as banks or broker-dealers,
that engage in the sale of, or provide shareholder support services
for, Initial Class shares. Currently, the Board of Trustees has
authorized such payments.
The fund's portfolio turnover rate for the fiscal year ended December
31, 1997 was 9%. This rate varies from year to year.
PERFORMANCE
The fund's total return may be quoted in advertising in accordance
with current law and interpretations thereof.
EXPLANATION OF TERMS
TOTAL RETURN is the change in value of an investment over a given
period, assuming reinvestment of any dividends and capital gains. A
CUMULATIVE TOTAL RETURN reflects actual performance over a stated
period of time. An AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate
of return that, if achieved annually, would have produced the same
cumulative total return if performance had been constant over the
entire period. Average annual total returns smooth out variations in
performance; they are not the same as actual year-by-year results.
Other illustrations of fund performance may show moving averages over
specified periods.
The fund's recent strategies, performance, and holdings are detailed
twice a year in financial reports, which are sent to all shareholders.
For additional performance information, contact your insurance company
for a free annual report.
TOTAL RETURNS QUOTED FOR A CLASS INCLUDE THE CLASS'S EXPENSES, BUT MAY
NOT INCLUDE CHARGES AND EXPENSES ATTRIBUTABLE TO ANY PARTICULAR
INSURANCE PRODUCT. BECAUSE SHARES OF THE FUND MAY BE PURCHASED ONLY
THROUGH VARIABLE ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS, YOU
SHOULD CAREFULLY REVIEW THE PROSPECTUS OF THE INSURANCE PRODUCT YOU
HAVE CHOSEN FOR INFORMATION ON RELEVANT CHARGES AND EXPENSES.
Excluding these charges from quotations of a class's performance has
the effect of increasing the performance quoted. You should bear in
mind the effect of these charges when comparing the fund's performance
to that of other mutual funds.
TOTAL RETURNS ARE BASED ON PAST RESULTS AND ARE NOT AN INDICATION OF
FUTURE PERFORMANCE.
ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES
For a discussion of the tax status of your variable insurance
contract, refer to the prospectus of your insurance company's separate
account. It is suggested you keep all statements you receive to assist
in your personal recordkeeping.
It is expected that shares of the fund will be held under the terms of
variable annuity and variable life insurance contracts. Under current
tax law, dividend or capital gain distributions from the fund are not
currently taxable when left to accumulate within a variable annuity or
variable life insurance contract. Depending on the variable contract,
withdrawals from the contract may be subject to ordinary income tax
and, in addition, to a 10% penalty tax on withdrawals before age 59.
The fund is treated as a separate entity for federal income tax
purposes. The fund intends to pay out all of its net investment income
and net realized capital gains, if any, for each year. Dividends from
the fund will be distributed at least annually. Normally, net realized
capital gains, if any, are distributed each year for the fund. Such
income and capital gain distributions are automatically reinvested in
additional shares of the same class of the fund. The fund makes
dividend and capital gain distributions on a per-share basis for each
class. After each distribution from the fund, the fund's share price
drops by the amount of the distribution. Because dividend and capital
gain distributions are reinvested, the total value of an account will
not be affected because, although the shares will have a lower price,
there will be correspondingly more of them.
TRANSACTION DETAILS
THE FUND IS OPEN FOR BUSINESS each day the New York Stock Exchange
(NYSE) is open. FSC normally calculates Initial Class's NAV as of the
close of business of the NYSE, normally 4:00 p.m. Eastern time.
A CLASS'S NAV is the value of a single share. The NAV of Initial Class
is computed by adding Initial Class's pro rata share of the value of
the fund's investments, cash, and other assets, subtracting Initial
Class's pro rata share of the value of the fund's liabilities,
subtracting the liabilities allocated to Initial Class, and dividing
the result by the number of Initial Class shares of the fund that are
outstanding.
The fund's assets are valued primarily on the basis of market
quotations. Short-term securities with remaining maturities of sixty
days or less for which quotations are not readily available are valued
on the basis of amortized cost. This method minimizes the effect of
changes in a security's market value. Foreign securities are valued on
the basis of quotations from the primary market in which they are
traded, and are translated from the local currency into U.S. dollars
using current exchange rates. In addition, if quotations are not
readily available, or if the values have been materially affected by
events occurring after the closing of a foreign market, assets may be
valued by another method that the Board of Trustees believes
accurately reflects fair value.
A CLASS'S OFFERING PRICE (price to buy one share) is its NAV. A
class's REDEMPTION PRICE (price to sell one share) is its NAV.
THE FUND RESERVES THE RIGHT to suspend the offering of shares for a
period of time. The fund also reserves the right to reject any
specific purchase order. Purchase orders may be refused if, in FMR's
opinion, they would disrupt management of the fund.
INVESTMENTS AND REDEMPTIONS. Investments may be made only by separate
accounts established and maintained by insurance companies for the
purpose of funding variable annuity and variable life insurance
contracts. Please refer to the prospectus of your insurance company's
separate account for information on how to invest in and redeem from
the fund.
Each participating insurance company receives orders from its variable
contract owners to purchase or redeem shares of the fund each business
day. That night, all orders received by that insurance company on that
business day are aggregated, and the insurance company places a net
purchase or redemption order for shares of the fund the morning of the
next business day. These orders are generally executed at the NAV that
was computed at the close of the previous business day in order to
provide a match between the variable contract owners' orders to the
insurance companies and the insurance companies' orders to the fund.
In some cases, an insurance company's order for fund shares may be
executed at the NAV next computed after the order is actually
transmitted to the fund.
Redemption proceeds will normally be wired to the insurance company on
the next business day after receipt of the redemption instructions by
the fund, but in no event later than 7 days following receipt of
instructions. The fund may suspend redemptions or postpone payment
dates on days when the NYSE is closed (other than weekends or
holidays), when trading on the NYSE is restricted, or as permitted by
the SEC.
APPENDIX
Index 500 Portfolio is not sponsored, endorsed, sold or promoted by
S&P. S&P makes no representation or warranty, express or implied, to
participants in the fund or any member of the public regarding the
advisability of investing in securities generally or in the fund
particularly or the ability of the S&P 500 to track general stock
market performance. S&P's only relationship to the Licensee is the
licensing of certain trademarks and trade names of S&P and of the S&P
500, which is determined, composed, and calculated by S&P without
regard to the Licensee or the fund. S&P has no obligation to take the
needs of the Licensee or the participants in the fund into
consideration in determining, composing, or calculating the S&P 500.
S&P is not responsible for and has not participated in the
determination of the timing of, prices at, or quantities of the fund
to be issued or in the determination or calculation of the equation by
which the fund is to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing, or trading
of the fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P
500 or any data included therein and S&P shall have no liability for
any errors, omissions, or interruptions therein. S&P makes no
warranty, express or implied, as to results to be obtained by the
Licensee, participants in the fund, or any other person or entity from
the use of the S&P 500 or any data included therein. S&P makes no
express or implied warranties, and expressly disclaims all warranties
or merchantability or fitness for a particular purpose or use with
respect to the S&P 500 or any data included therein. Without limiting
any of the foregoing, in no event shall S&P have any liability for any
special, punitive, indirect, or consequential damages (including lost
profits), even if notified of the possibility of such damages.
"Standard & Poor's(registered trademark)," "S&P(registered
trademark)," "S&P 500(registered trademark)," "Standard & Poor's 500,"
and "500" are trademarks of McGraw-Hill, Inc. and have been licensed
for use by FDC.

This prospectus is printed on recycled paper using soy-based inks.

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

FRANKLIN LIFE VARIABLE ANNUITY FUND A

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement/Prospectus of Franklin Life
Variable Annuity Fund A dated the same date as this Statement of Additional
Information.

A copy of that Proxy Statement/Prospectus may be obtained by calling (800)
528-2011, Extension 2591, or by writing The Franklin Life Insurance Company, #1
Franklin Square, Springfield, IL 62713, Attention: Box 1018.

August 31, 1998

1
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

TABLE OF CONTENTS

Appendix A - Franklin Life Variable Annuity Fund A - Statement of Additional
Information

Appendix B - Franklin Life Variable Annuity Fund A - Annual Report dated
December 31, 1997

Appendix C - Variable Insurance Products Fund - Statement of Additional
Information
Variable Insurance Products Fund II - Statement of Additional
Information

Appendix D - VIP II Index 500 Portfolio - Annual Report dated December 31, 1997

Appendix E - VIP Money Market Portfolio - Annual Report dated December 31, 1997

2
<PAGE>

ADDITIONAL INFORMATION ABOUT FRANKLIN LIFE VARIABLE ANNUITY FUND A

Additional information regarding Franklin Life Variable Annuity Fund A
("Fund A") is found in the Statement of Additional Information to Fund A's
registration statement on Form N-3 filed with the Securities and Exchange
Commission as Post-Effective Amendment No. 45 on April 30, 1998 (File Nos. 2-
36394 and 811-1990). This Statement of Additional Information is attached
hereto as Appendix A.

ADDITIONAL INFORMATION ABOUT VARIABLE INSURANCE PRODUCTS FUND - MONEY MARKET
PORTFOLIO AND VARIABLE INSURANCE PRODUCTS FUND II - INDEX 500 PORTFOLIO

Additional information regarding Variable Insurance Products Fund -
Money Market Portfolio ("VIP Money Market Portfolio") and Variable Insurance
Products Fund II - Index 500 Portfolio ("VIP Index 500 Portfolio") is found
in the Statement of Additional Information to the registration statement on
Form N-1A filed with the Securities and Exchange Commission as Post-Effective
Amendment No. 38 on April 24, 1998 (File Nos. 2-75010 and 811-3329). This
Statement of Additional Information is attached hereto as Appendix C.

FINANCIAL STATEMENTS

Financial statements regarding Fund A are included in the Statement of
Additional Information attached hereto as Appendix A and in the Annual Report
dated December 31, 1997 provided in Appendix B.

Financial statements regarding VIP Money Market Portfolio are included in
the Annual Report dated December 31, 1997 provided in Appendix E.

Financial statements regarding VIP II Index 500 Portfolio are included in
the Annual Report dated December 31, 1997 provided in Appendix D.

<PAGE>

APPENDIX A

FRANKLIN LIFE VARIABLE ANNUITY FUND A

STATEMENT OF ADDITIONAL INFORMATION

<PAGE>

INDIVIDUAL VARIABLE ANNUITY
CONTRACTS FOR USE WITH CERTAIN
QUALIFIED PLANS AND TRUSTS
ACCORDED SPECIAL TAX
TREATMENT AND AS
INDIVIDUALRETIREMENT ANNUITIES

FRANKLIN LIFE VARIABLE ANNUITY
FUND A

ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
TELEPHONE (800) 528-2011

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus dated April 30, 1998 relating to the
offering of individual variable annuities for use in connection with certain
qualified plans and trusts accorded special tax treatment or as individual
retirement annuities. A copy of the Prospectus may be obtained by writing to The
Franklin Life Insurance Company at the address set forth above (Attention: Box
1018) or by calling (800) 528-2011, extension 2591.

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

THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.

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

THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1998.

<PAGE>

TABLE OF CONTENTS

PAGE

<S> <C>
General Information . . . . . . . . . . . . . . . . . . . . . . . . 2

Investment Objectives . . . . . . . . . . . . . . . . . . . . . . . 2

Limitations on Settlement Options . . . . . . . . . . . . . . . . . 2

Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Investment Advisory and Other Services. . . . . . . . . . . . . . . 6

Distribution of The Contracts . . . . . . . . . . . . . . . . . . . 7

Portfolio Turnover and Brokerage. . . . . . . . . . . . . . . . . . 8

Safekeeper of Securities. . . . . . . . . . . . . . . . . . . . . . 9

Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Index to Financial Statements . . . . . . . . . . . . . . . . . . . F-1
</TABLE>

<PAGE>

GENERAL INFORMATION

The individual variable annuity contracts offered by the Prospectus dated
April 30, 1998 (the "Prospectus") are designed primarily to provide annuity
payments which will vary with the investment performance of Franklin Life
Variable Annuity Fund A (the "Fund"), a separate account which has been
established by The Franklin Life Insurance Company ("The Franklin") under
Illinois insurance law. Reference is made to the Prospectus, which should be
read in conjunction with this Statement of Additional Information. Capitalized
terms not otherwise defined in this Statement of Additional Information shall
have the meanings designated in the Prospectus.

American General has advised the Fund that there was no person who was
known to it to be the beneficial owner of 10% or more of the voting power of
American General as of March 5, 1998.

INVESTMENT OBJECTIVES

The investment objectives and policies of the Fund are described under
"Investment Policies and Restrictions of the Fund" in the Prospectus.

LIMITATIONS ON SETTLEMENT OPTIONS

A. LIMITATIONS ON CHOICE OF SETTLEMENT OPTION

Described below are certain limitations on Settlement Options based on The
Franklin's current understanding of the distribution rules generally applicable
to Contracts purchased for use as Individual Retirement Annuities or issued in
connection with Section 403(b) annuity purchase plans. Various questions exist,
however, about the application of the distribution rules to distributions from
the Contracts and their effect on Settlement Option availability thereunder.

The Internal Revenue Service has proposed regulations relating to required
distributions from qualified plans, individual retirement plans, and annuity
contracts under Section 403(b) of the Code. These proposed regulations may limit
the availability of the Settlement Options in Contracts purchased for use as
Individual Retirement Annuities or issued in connection with Section 403(b)
annuity purchase plans. The proposed regulations are generally effective for
calendar years after 1984; persons contemplating the purchase of a Contract
should consult a qualified tax advisor concerning the effect of the proposed
regulations on the Settlement Option or Options he or she is contemplating.

FIRST OPTION-LIFE ANNUITY. Under Contracts issued for use as Individual
Retirement Annuities or in connection with Section 403(b) annuity purchase
plans, if the Variable Annuitant dies before Annuity Payments have commenced,
this Option is not available to a Beneficiary unless distributions to the
Beneficiary begin not later than one year after the date of the Variable
Annuitant's death (except that distributions to a Beneficiary who is the
surviving spouse of the Variable Annuitant need not commence earlier than the
date on which the Variable Annuitant would have attained age 70-1/2). If the
surviving

<PAGE>

spouse of the Variable Annuitant is the Beneficiary and such surviving spouse
dies before Annuity Payments to such spouse have commenced, the surviving spouse
will be treated as the Variable Annuitant for purposes of the preceding rule.

SECOND OPTION-LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN.
Under Contracts issued for use as Individual Retirement Annuities or in
connection with Section 403(b) annuity purchase plans, this Option is not
available unless the selected period does not extend beyond the life expectancy
of the Variable Annuitant (or the life expectancy of the Variable Annuitant and
his or her Beneficiary). Further, if the Variable Annuitant dies before Annuity
Payments have commenced, this Option is not available to a Beneficiary unless
(i) the selected period does not extend beyond the life expectancy of the
Beneficiary and (ii) the distribution to the Beneficiary commences not later
than one year after the date of the Variable Annuitant's death (except that
distributions to a Beneficiary who is the surviving spouse of the Variable
Annuitant need not commence earlier than the date on which the Variable
Annuitant would have attained age 70-1/2). If the surviving spouse of the
Variable Annuitant is the Beneficiary and the surviving spouse dies before
Annuity Payments to such spouse have commenced, the surviving spouse will be
treated as the Variable Annuitant for purposes of the preceding sentence. This
Option is also not available under Individual Retirement Annuities or in
connection with Section 403(b) annuity purchase plans unless certain minimum
distribution incidental benefit requirements of the proposed regulations are
met.

THIRD OPTION-UNIT REFUND LIFE ANNUITY. This Option is not available under
Contracts issued for use as Individual Retirement Annuities. Also, under
Qualified Contracts issued in connection with Section 403(b) annuity purchase
plans, if the Variable Annuitant dies before Annuity Payments have commenced,
this Option is not available to a Beneficiary unless distributions to the
Beneficiary begin not later than one year after the date of the Variable
Annuitant's death (except that distributions to a Beneficiary who is the
surviving spouse of the Variable Annuitant need not commence earlier than the
date on which the Variable Annuitant would have attained age 70-1/2). If the
surviving spouse of the Variable Annuitant is the Beneficiary and such surviving
spouse dies before Annuity Payments to such spouse have commenced, the surviving
spouse will be treated as the Variable Annuitant for purposes of the preceding
rule. This Option is also not available in connection with Section 403(b)
annuity purchase plans unless certain minimum distribution incidental benefit
requirements of the proposed regulations are met.

FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. Under Contracts issued
for use as Individual Retirement Annuities or in connection with Section 403(b)
annuity purchase plans, this Option is not available unless the secondary
variable annuitant is the spouse of the Variable Annuitant or unless certain
minimum distribution incidental benefit requirements of the proposed regulations
are met. Further, if the Variable Annuitant dies before Annuity Payments have
commenced, this Option is not available to a Beneficiary under a Contract issued
for use as Individual Retirement Annuities or in connection with Section 403(b)
annuity purchase plans.

FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. Under Contracts issued for
use as Individual Retirement Annuities or in connection with Section 403(b)
annuity purchase plans, this Option is not available unless the limitations
described in the Second Option, above, applicable to such Qualified Contracts,
are satisfied, except that this Option is otherwise available to a Beneficiary
where the Variable Annuitant dies before Annuity Payments have commenced if the
designated period does not exceed a period that terminates five years after the
death of the Variable Annuitant or the substituted surviving spouse, as the case
may be. In addition, this Option is not available if the number of years in the
selected period over which Annuity Payments would otherwise be paid plus the
attained age of the Variable Annuitant at the initial Annuity Payment Date would
exceed 95.

SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. This Option is not
available under Contracts issued for use as Individual Retirement Annuities or
in connection with Section 403(b) annuity purchase plans.

<PAGE>

SEVENTH OPTION-INVESTMENT OPTION. This Option is not available under
Qualified Contracts issued in connection with any Qualified Plan.

B. LIMITATIONS ON COMMENCEMENT OF ANNUITY PAYMENTS

The Contract Owner may defer the initial Annuity Payment Date and continue
the Contract to a date not later than age 75 unless the provisions of the Code
or any governing Qualified Plan require Annuity Payments to commence at an
earlier date. For example, under Qualified Contracts, other than those issued
for use as Individual Retirement Annuities, the Contract Owner may not defer the
initial Annuity Payment Date beyond April 1 of the calendar year following the
later of the calendar year in which the Variable Annuitant (i) attains age
70-1/2, or (ii) retires, and must be made in a specified form or manner. In
addition, if the plan participant is a "5 percent owner" (as defined in the
Code), or if the Contract is issued for use as an Individual Retirement Annuity,
distributions generally must begin no later than the date described in (i). The
Franklin will require satisfactory proof of age of the Variable Annuitant prior
to the initial Annuity Payment Date.

MANAGEMENT

The following persons hold the positions designated with respect to the
Board of Managers. The table also shows any positions held with The Franklin and
Franklin Financial Services Corporation, a wholly-owned subsidiary of The
Franklin which serves as distributor for the Contracts. (See "Distribution of
the Contracts," below.)

PRINCIPAL OCCUPATIONS
NAME AND ADDRESS DURING PAST 5 YEARS POSITIONS HELD WITH THE FUND

<S> <C> <C>
ROBERT G. SPENCER* Officer of The Franklin; Chairman and Member, Board of Managers
#1 Franklin Square currently, Vice President
Springfield, Illinois 62713 of The Franklin; prior to
1996, also Treasurer of The
Franklin and Treasurer and
Assistant Secretary of
Franklin Financial Services
Corporation.

ELIZABETH E. ARTHUR* Officer of The Franklin; Secretary, Board of Managers
#1 Franklin Square currently, Director,
Springfield, Illinois 62713 Assistant Secretary and
Associate General Counsel
of The Franklin. Ms. Arthur
also serves as Assistant
Secretary of Franklin
Financial Services Corporation.

DR. ROBERT C. SPENCER Visiting Professor of Member, Board of Managers
2303 South 3rd Avenue Government, Montana State
Bozeman, Montana 59715 University, since 1992;
Professor of Government and
Public Affairs, Sangamon
State University, prior
thereto.

JAMES W. VOTH Chairman, Resource International Member, Board of Managers
50738 Meadow Green Court Corp., South Bend, Indiana
Granger, Indiana 46530 (marketing, manufacturing and
engineering service to industry);
prior to 1993, also President of
Resource International Corp.

<PAGE>

<CAPTION>
PRINCIPAL OCCUPATIONS DURING
NAME AND ADDRESS PAST 5 YEARS POSITIONS HELD WITH THE FUND

CLIFFORD L. GREENWALT Director, President and Chief Executive Member, Board of Managers
607 East Adams Street Officer, CIPSCO Incorporated, since
Springfield, Illinois 62739 October, 1990 (utility holding company);
Director, President and Chief Executive
Officer, Central Illinois Public Service
Company, Springfield, Illinois (a subsidiary
of CIPSCO Incorporated); Director, Electric
Energy, Inc., Joppa, Illinois; Director,
First of America Bank, Kalamazoo, Michigan;
Director, First of America Bank - Illinois,
N.A. (a subsidiary of First of America Bank).
</TABLE>

*DENOTES INDIVIDUALS WHO ARE "INTERESTED PERSONS" (AS DEFINED IN THE INVESTMENT
COMPANY ACT OF 1940) OF THE FUND, THE FRANKLIN OR FRANKLIN FINANCIAL SERVICES
CORPORATION BY REASON OF THE CURRENT POSITIONS HELD BY THEM AS SET FORTH IN THE
ABOVE TABLE.

The following table sets forth a summary of compensation paid for services
to the Fund and certain other entities that are deemed to be part of the same
"Fund Complex" in accordance with the rules of the Securities and Exchange
Commission to all members of the Board of Managers for the year ended December
31, 1997. Pursuant to the terms of its agreement to assume certain of the
Fund's administrative expenses, The Franklin pays all compensation received by
the members of the Board of Managers and the officers of the Fund. Members of
the Board of Managers or officers of the Fund who are also officers, directors
or employees of The Franklin do not receive any remuneration for their services
as members of the Board of Managers or officers of the Fund. Other members of
the Board of Managers received a fee of $1,400 for the year and, thus, the
aggregate direct remuneration of all such members of the Board of Managers was
$4,200 during 1997. It is currently anticipated that the annual aggregate
remuneration of such members of the Board of Managers to be paid during 1998
will not exceed $4,200.

NAME OF PERSON, POSITION AGGREGATE TOTAL COMPENSATION
COMPENSATION RELATING TO FUND AND
RELATING TO FUND FUND COMPLEX PAID TO
EACH MEMBER

<S> <C> <C>
Each member of the Board
of Managers (except $1,400 (1) $4,200 (1)(2)
Robert G. Spencer)
</TABLE>
- --------------------------

(1) Paid by The Franklin pursuant to an agreement to assume certain Fund
administrative expenses.
(2) Includes amounts paid to members of the Board of Managers who are not
officers, directors or employees of The Franklin for service on the Boards
of Managers of Franklin Life Variable Annuity Fund B and Franklin Life
Money Market Variable Annuity Fund C.

Neither any member of the Board of Managers nor the Secretary of the Fund
was, as of April 20, 1998, the owner of any contract participating in the
investment experience of the Fund.

<PAGE>

INVESTMENT ADVISORY AND OTHER SERVICES

The Franklin acts as investment manager of the Fund pursuant to an
Investment Management Agreement executed and dated January 31, 1995, which was
approved by Contract Owners at their annual meeting held on April 17, 1995 and
was renewed to January 31, 1999 by the Board of Managers of the Fund at its
meeting on January 19, 1998. The method of determining the advisory charge is
described in the Prospectus under "Investment Management Service Charge."

The Investment Management Agreement:

(1) May not be terminated by The Franklin without the prior approval of a
new investment management agreement by a "majority" (as that term is defined in
the Investment Company Act of 1940) of the votes available to the Contract
Owners, and may be terminated without the payment of any penalty on 60 days'
written notice by a vote of the Board of Managers of the Fund or by a vote of a
majority of the votes available to the Contract Owners.

(2) Shall continue in effect from the date of its execution until the
second anniversary of such execution date and thereafter shall continue in
effect from year to year but only if such continuance is specifically approved
at least annually by the Board of Managers or by a vote of a majority of the
votes available to Contract Owners, provided that in either case the
continuation is also approved by the vote of a majority of the Board of
Managers who are not "interested persons" (as that term is defined in the
Investment Company Act of 1940) of the Fund or of The Franklin, cast in person
at a meeting called for the purpose of voting on such approval.

(3) Shall not be amended without prior approval by a majority of the
votes available to the Contract Owners.

(4) Shall terminate automatically on "assignment" (as that term is defined
in the Investment Company Act of 1940).

A "majority" of the votes available to the Contract Owners is defined in
the Investment Company Act of 1940 as meaning the lesser of (i) Contract Owners
holding 67% or more of the voting power of the Contract Owners present at a
meeting if Contract Owners holding more than 50% of the total voting power of
all Contract Owners in the Fund are present or represented by proxy, or (ii)
Contract Owners holding more than 50% of the total voting power of all Contract
Owners in the Fund. For the voting rights of Contract Owners, see "Voting
Rights," in the Prospectus.

Under the Investment Management Agreement, The Franklin, subject to the
control of the Board of Managers of the Fund, is authorized and has the duty to
manage the investment of the assets of the Fund, subject to the Fund's
investment policies and the restrictions on investment activities set forth in
the Prospectus, and to order the purchase and sale of securities on behalf of
the Fund. In carrying out its obligations to manage the investment of the assets
of the Fund, The Franklin is committed by the Agreement, so long as it remains
in force, to pay all investment expenses of the Fund other than the following,
which the Fund will bear: (i) taxes, if any, based on the income of, capital
gains of assets in, or existence of, the Fund; (ii) taxes, if any, in connection
with the acquisition, disposition or transfer of assets of the Fund; (iii)
commissions or other capital items payable in connection with the purchase or
sale of the Fund's investments; and (iv) interest on account of any borrowings
by the Fund.

Robert G. Spencer and Elizabeth E. Arthur are "affiliated persons," as
defined in the Investment Company Act of 1940, of both The Franklin and the Fund
by reason of the positions held by them with The Franklin and the Fund as set
forth in the table under "Management," above.

<PAGE>

The Administration Agreement discussed under "Deductions and Charges Under
the Contracts-Sales and Administration Deduction" in the Prospectus provides
that The Franklin will provide all services and will assume all expenses
required for the administration of the Contracts, including expenses for legal
and accounting services to the Fund and the cost of such indemnification of
members of the Board of Managers and officers, agents, or employees of the Fund
as is provided by the Fund in its Rules and Regulations. The Franklin is not,
however, obligated under the Administration Agreement to pay the investment
management service charge discussed under "Investment Management Service
Charge," in the Prospectus. The Administration Agreement also provides that The
Franklin will from time to time adjust the assets of the Fund by withdrawing
sums in cash or by transferring cash to the Fund so that the assets of the Fund
will be equal to the actuarial value of the amounts payable under all
outstanding Contracts having an interest in the Fund. The Administration
Agreement may be amended or terminated at any time by mutual consent of the Fund
and The Franklin.

DISTRIBUTION OF THE CONTRACTS

Franklin Financial Services Corporation ("Franklin Financial"), #1 Franklin
Square, Springfield, Illinois 62713, is organized under the laws of the State of
Delaware and is a wholly-owned subsidiary of The Franklin. Franklin Financial
serves as "principal underwriter" (as that term is defined in the Investment
Company Act of 1940) for the Contracts, pursuant to a Sales Agreement with the
Fund. The present Sales Agreement was approved by the Board of Managers of the
Fund, and came into effect, on January 31, 1995. It was last renewed by the
Board of Managers on January 19, 1998. Franklin Financial's employment will
continue thereunder if specifically approved at least annually by the Board of
Managers of the Fund, or by a majority of votes available to Contract Owners,
provided that in either case the continuance of the Sales Agreement is also
approved by a majority of the members of the Board of Managers of the Fund who
are not "interested persons" (as that term is defined in the Investment Company
Act of 1940) of the Fund or Franklin Financial. The employment of Franklin
Financial as principal underwriter automatically terminates upon "assignment"
(as that term is defined in the Investment Company Act of 1940) of the Sales
Agreement and is terminable by either party on not more than 60 days' and not
less than 30 days' notice.

The Fund no longer issues new Contracts. To the extent that Stipulated
Payments continue to be made on Contracts, the Fund may nevertheless be deemed
to be offering interests in Contracts on a continuous basis. Contracts are sold
primarily by persons who are insurance agents or brokers for The Franklin
authorized by applicable law to sell life and other forms of personal insurance
and who are similarly authorized to sell Variable Annuities. Pursuant to an
Agreement, dated June 30, 1971 and amended on May 15, 1975, between The Franklin
and Franklin Financial, Franklin Financial agreed to employ and supervise agents
chosen by The Franklin to sell the Contracts and to use its best efforts to
qualify such persons as registered representatives of Franklin Financial, which
is a broker-dealer registered with the Securities and Exchange Commission under
the Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. Franklin Financial also may enter into agreements with
The Franklin and each such agent with respect to the supervision of such agent.

Franklin Financial incurs certain sales expenses, such as sales literature
preparation and related costs, in connection with the sale of the Contracts
pursuant to a Sales Agreement with the Fund. Sales deductions from Stipulated
Payments are paid to Franklin Financial as a means to recover sales expenses.
Sales deductions are not necessarily related to Franklin Financial's actual
sales expenses in any particular year. To the extent sales expenses are not
covered by sales deductions, Franklin Financial will cover them from other
assets.

Pursuant to an Agreement between The Franklin and Franklin Financial, The
Franklin has agreed to pay commissions earned by registered representatives of
Franklin Financial on the sale of the Contracts and to bear the cost of
preparation of prospectuses and other disclosure materials. Commissions and
other remuneration and the cost of disclosure materials will be paid by The
Franklin from its General Account.

<PAGE>

Registration as a broker-dealer does not mean that the Securities and
Exchange Commission has in any way passed upon the financial standing, fitness
or conduct of any broker or dealer, upon the merits of any securities offering
or upon any other matter relating to the business of any broker or dealer.
Salesmen and employees selling Contracts, where required, are also licensed as
securities salesmen under state law.

Elizabeth E. Arthur is an "affiliated person" (as that term is defined in
the Investment Company Act of 1940) of both Franklin Financial and the Fund by
reason of the positions held by her with Franklin Financial and the Fund as set
forth in the table under "Management," above.

PORTFOLIO TURNOVER AND BROKERAGE

A. PORTFOLIO TURNOVER

The Fund will purchase securities, in general, for long-term appreciation
of capital and income and does not place emphasis on obtaining short-term
trading profits. See "Investment Policies and Restrictions of the Fund" in the
Prospectus. Accordingly, the Fund expects to have an annual rate of portfolio
turnover which is at, or below, the industry average. (The "portfolio turnover"
rate means (a) the lesser of the dollar amount of the purchases or of the sales
of portfolio securities (other than short-term securities, that is, those with a
maturity of one year or less at the time of purchase) by the Fund for the period
in question, divided by (b) the monthly average of the value of the Fund's
portfolio securities (excluding short-term securities).) However, the rate of
portfolio turnover is not a limiting factor when changes in the portfolio are
deemed appropriate, and in any given year conditions could result in a higher
rate, which would not in and of itself indicate a variation from stated
investment objectives. The degree of portfolio activity affects the brokerage
costs of the Fund. See "Brokerage," this page, below.

For 1996, the portfolio turnover rate was 4.77%; for 1997 the rate was
.70%.

B. BROKERAGE

Decisions to buy and sell securities for the Fund will be made by The
Franklin, as the Fund's investment manager, subject to the control of the Fund's
Board of Managers. The Franklin, as investment manager, also is responsible for
placing the brokerage business of the Fund and, where applicable, negotiating
the amount of the commission rate paid, subject to the control of the Fund's
Board of Managers. The Fund has no formula for the distribution of brokerage
business in connection with the placing of orders for the purchase and sale of
investments for the Fund. It is The Franklin's intention to place such orders,
consistent with the best execution, to secure the highest possible price on
sales and the lowest possible price on purchases of securities. Portfolio
transactions executed in the over-the-counter market will be placed directly
with the primary market makers unless better executions are available elsewhere.
Subject to the foregoing, The Franklin may give consideration in the allocation
of brokerage business to services performed by a broker or dealer in furnishing
statistical data and research to it. The Franklin may thus be able to supplement
its own information and to consider the views and information of other research
organizations in arriving at its investment decisions. Any such services would
also be available to The Franklin in the management of its own assets and those
of any other separate account. To the extent that such services are used by The
Franklin in performing its investment management functions with respect to the
Fund, they may tend to reduce The Franklin's expenses. However, the dollar value
of any information which might be received is indeterminable and may, in fact,
be negligible. The Franklin does not consider the value of any research services
provided by brokers in negotiating commissions. During 1995, 1996 and 1997, a
total of $4,260, $1,865, and $1,695, respectively, in brokerage commissions was
paid; none of such brokerage business of the Fund was allocated to Franklin
Financial Services Corporation or to brokers who furnished statistical data and
research to The Franklin. No officer or director of The Franklin or Franklin
Financial Services Corporation (the principal underwriter for the Contracts),
and no member of the Board of Managers, is

<PAGE>

affiliated with any brokerage firm (except with Franklin Financial Services
Corporation, as described under "Investment Management Service Charge," in the
Prospectus, and "Distribution of the Contracts," above) and no beneficial owner
of 5% or more of the total voting power of The Franklin or any of its parents is
known to be affiliated with any brokerage firm utilized by the Fund (except with
Franklin Financial Services Corporation).

SAFEKEEPER OF SECURITIES

Securities of the Fund are held by State Street Bank and Trust Company
("State Street"), which is located at 1776 Heritage Drive, North Quincy,
Massachusetts, under a Custodian Agreement dated April 17, 1995 to which The
Franklin and State Street are parties. Representatives of the Securities and
Exchange Commission, the Illinois Insurance Department and the NAIC zonal
examination committee have access to such securities in the performance of their
official duties.

LEGAL MATTERS

Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain matters relating to the federal securities laws.

EXPERTS

The statement of assets and liabilities, including the portfolio of
investments, as of December 31, 1997 and the related statement of operations for
the year then ended and the statements of changes in contract owners' equity for
each of the two years in the period then ended and the table of per-unit income
and changes in accumulation unit value for each of the three years in the period
then ended of the Fund, appearing herein, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein. The consolidated financial statements of The Franklin at
December 31, 1997 and 1996 and for each of the two years in the period ended
December 31, 1997, the eleven months ended December 31, 1995 and the one month
ended January 31, 1995, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein. The
table of per-unit income and changes in accumulation unit value for each of the
two years in the period ended December 31, 1994 of the Fund, appearing herein,
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their report thereon appearing elsewhere herein. Such financial
statements and tables of per-unit income and changes in accumulation unit value
referred to above are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.

<PAGE>
INDEX TO FINANCIAL STATEMENTS

PAGE
----
<S> <C>
Franklin Life Variable Annuity Fund A:

Reports of Independent Auditors and Accountants F-2 - F-3

Financial Statements:

Statement of Assets and Liabilities, December 31, 1997 F-4

Statement of Operations for the year ended
December 31, 1997 F-4

Statements of Changes in Contract Owners' Equity
for the years ended December 31, 1997 and 1996 F-4

Portfolio of Investments, December 31, 1997 F-5

Notes to Financial Statements F-6

Supplementary Information - Per-Unit Income and Changes
in Accumulation Unit Value for the five years ended
December 31, 1997 F-7

The Franklin Life Insurance Company and Subsidiaries:*

Report of Independent Auditors F-8

Financial Statements:

Consolidated Statement of Income for the years ended
December 31, 1997 and 1996, the eleven months ended
December 31, 1995, and the one month ended January
31, 1995 F-9

Consolidated Balance Sheet, December 31, 1997 and 1996 F-10- F-11

Consolidated Statement of Shareholder's Equity for the
years ended December 31, 1997 and 1996, the eleven
months ended December 31, 1995, and the one month
ended January 31, 1995 F-12

Consolidated Statement of Cash Flows for the years
ended December 31, 1997 and 1996, the eleven months
ended December 31, 1995, and the one month ended,
January 31, 1995 F-13

Notes to Consolidated Financial Statements F-14 - F-38

</TABLE>

*The consolidated financial statements of The Franklin contained herein should
be considered only as bearing upon the ability of The Franklin to meet its
obligations under the Contracts.

F-1

<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Managers and Contract Owners
Franklin Life Variable Annuity Fund A

We have audited the accompanying statement of assets and liabilities of Franklin
Life Variable Annuity Fund A, including the portfolio of investments, as of
December 31, 1997, the related statement of operations for the year then ended
and the statements of changes in contract owners' equity for each of the two
years then ended, and the table of per-unit income and changes in accumulation
unit value for each of the three years then ended. These financial statements
and the table of per-unit income and changes in accumulation unit value are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the table of per-unit income and
changes in accumulation unit value based on our audits. The table of per-unit
income and changes in accumulation unit value for each of the two years in the
period ended December 31, 1994 was audited by other auditors whose report dated
February 1, 1995, expressed an unqualified opinion on that table.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the table of
per-unit income and changes in accumulation unit value are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of investments held by the custodian as of December 31,
1997. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and the 1997, 1996, and 1995 table of
per-unit income and changes in accumulation unit value referred to above present
fairly, in all material respects, the financial position of Franklin Life
Variable Annuity Fund A at December 31, 1997, and the results of its operations
for the year then ended, and the changes in its contract owners' equity for each
of the two years then ended, and per-unit income and changes in accumulation
unit value for each of the three years then ended in conformity with generally
accepted accounting principles.

ERNST & YOUNG LLP

Chicago, Illinois
January 30, 1998

F-2

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Managers and Contract Owners
Franklin Life Variable Annuity Fund A
Springfield, Illinois

We have audited the accompanying table of per-unit income and changes in
accumulation unit value of Franklin Life Variable Annuity Fund A for each of the
two years in the period ended December 31, 1994. This table of per-unit income
and changes in accumulation unit value is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this table of
per-unit income and changes in accumulation unit value based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the table of per-unit income and changes in
accumulation unit value is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the table of per-unit income and changes in accumulation unit value. An audit
also includes assessing the accounting principles used by management as well as
evaluating the overall presentation of the table of per-unit income and changes
in accumulation unit value. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the table of per-unit income and changes in accumulation unit
value referred to above presents fairly, in all material respects, the per-unit
income and changes in accumulation unit value for each of the two years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.

COOPERS & LYBRAND L.L.P.

Chicago, Illinois
February 1, 1995

F-3

<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997

<S> <C> <C>
Assets
Investments-at fair value (cost-$6,923,517):
Common stocks $ 10,325,291
Short-term notes 1,896,668
-------------
12,221,959
Cash on deposit 54,548
Dividends and interest receivable 19,871
-------------
Total Assets 12,296,378

Liability -due to The Franklin Life Insurance Company 1,489
-------------

Contract owners' equity
Annuity reserves $ 19,380
Value of 124,714.114 accumulation units outstanding,
equivalent to $98.42918992 per unit 12,275,509 $ 12,294,889
---------- -------------
-------------
</TABLE>

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997

<S> <C> <C>
Investment income
Dividends $ 167,447
Interest 83,552
----------
Total Income $ 250,999

Expenses
Mortality and expense charges $ 119,981
Investment management services 52,451
----------
Total expenses 172,432
------------
Net investment income 78,567

Realized and unrealized gain on investments:
Net realized gain from investment transactions
(excluding short-term investments):
Proceeds from sales $1,508,962
Cost of investments sold (identified cost method) 1,056,000
----------
Net realized gain 452,962
Net unrealized appreciation of investments
Beginning of year $3,584,070
End of year 5,298,442
----------
Net unrealized appreciation 1,714,372
------------
Net gain on investments 2,167,334
------------
Net increase in contract owners'
equity resulting from operations $2,245,901
------------
------------
</TABLE>

STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY

YEAR ENDED DECEMBER 31
1997 1996
--------------------------

<S> <C> <C>
Net investment income $ 78,567 $ 85,278
Net realized gain from investment transactions 452,962 269,793
Net unrealized appreciation of investments 1,714,372 1,406,762
--------------------------
Net increase In contract owners'
equity resulting from operations 2,245,901 1,761,833
Net contract purchase payments 268,272 226,321
Reimbursement for contract guarantees 172 3,178
Annuity payments (4,568) (3,878)
Withdrawals (1,636,104) (995,151)
--------------------------
Net increase in contract owners' equity 873,673 992,303
Contract owners' equity at beginning
of year 11,421,216 10,428,913
--------------------------
Contract owners' equity at end of year $12,294,889 $11,421,216
--------------------------
--------------------------
</TABLE>

See Notes to Financial Statements

F-4

<PAGE>

FRANKLIN LIFE VARIABLE ANNUITY FUND A
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>

NUMBER
OF FAIR
SHARES VALUE
- ------------- -----------

<C> <S> <C>
COMMON STOCKS (83.98%)
BANKING (4.16%)
3,675 SLM Holding Corporation $ 511,284
BEVERAGES (1.30%)
4,400 PepsiCo, Incorporated 159,500
BUSINESS SERVICES (1.61%)
5,600 Equifax Inc. 198,450
CHEMICALS (2.23%)
2,700 Dow Chemical 274,050
COMPUTER SERVICES (3.00%)
8,100 Ceridian Corporation* 371,081
COSMETICS & HOUSEHOLD PRODUCTS
(3.27%)
4,000 Gillette Company 401,750

DRUGS & HEALTH CARE (21.62%)
8,000 Eli Lilly and Company 557,000
4,300 Merck & Company, Inc. 455,800
4,200 Pfizer, Incorporated 313,163
6,450 St. Jude Medical, Inc.* 196,725
6,600 Schering-Plough Corporation 410,025
6,000 Stryker Corporation 223,500
16,000 Walgreen Company 502,000
-----------
2,658,213
ELECTRONICS & INSTRUMENTATIONS
(2.94%)
5,800 Hewlett-Packard Company 361,775
FOOD PROCESSING (2.86%)
10,600 ConAgra, Inc. 351,125
FOOD - RETAIL (2.19%)
5,700 Albertson's, Inc. 269,325
FOOD - WHOLESALE (2.48%)
6,700 Sysco Corporation 305,269
HOUSEHOLD PRODUCTS (1.28%)
3,700 Newell Co. 157,250
MACHINERY - INDUSTRIAL &
CONSTRUCTION (.46%)
1,500 Fluor Corporation 56,062

OFFICE EQUIPMENT & SERVICES (8.00%)
5,000 Compaq Computers Corporation* 282,500
5,350 Digital Equipment Corporation* 198,619

International Business
4,800 Machines Corporation 502,200
-----------
983,319
OIL SERVICES & DRILLING (2.62%)
6,200 Halliburton Company 321,625

OILS & OIL RELATED PRODUCTS (4.9%)
2,700 Amoco Corporation 229,838
2,600 Atlantic Richfield Company 208,325
2,600 Kerr-McGee Corporation 164,612
-----------
602,775
PACKAGING - CONTAINERS (3.06%)
8,400 Avery-Dennison Corporation 375,900
PHOTOGRAPHY (2.02%)
4,100 Eastman Kodak Company 248,306
RESTAURANTS/LODGING (1.92%)
3,400 Marriott International, Inc. 235,450
RETAIL-SPECIALTY (2.29%)
7,200 NIKE, Inc. 281,250
TECHNOLOGY (7.48%)
5,000 AMP, Incorporated 210,000
4,950 Diebold, Incorporated 250,594
4,800 Intel Corporation 337,200
3,600 Millipore Corporation 122,175
-----------
919,969

UTILITIES - TELEPHONE (2.29%)
5,000 BellSouth Corporation 281,562
-----------

TOTAL COMMON STOCKS
(COST-$5,026,849) 10,325,290

PRINCIPAL
AMOUNT
------

SHORT-TERM NOTES (15.43%)
$ 450,000 United States Treasury Bill
4.93%, due 2/5/98 (cost-$446,549) 446,549
$ 1,460,000 United States Treasury Bill
5.05%, due 2/5/98 (cost-$1,450,119) 1,450,119
-----------
TOTAL SHORT-TERM NOTES
1,896,669
-----------
TOTAL INVESTMENTS (99.41%)
(COST-$6,923,517) 12,221,959

CASH AND RECEIVABLES, LESS
LIABILITY (.59%) 72,930
-----------
TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $12,294,889
-----------
-----------
</TABLE>

*NON-INCOME PRODUCING INVESTMENT IN 1997.

See Notes to Financial Statements
- --------------------------------------------------------------------------------
THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE VARIABLE
ANNUITY FUND A CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.

F-5

<PAGE>

FRANKLIN LIFE VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS

NOTE A-SIGNIFICANT ACCOUNTING POLICIES

Franklin Life Variable Annuity Fund A (the Fund) is a segregated investment
account of The Franklin Life Insurance Company (The Franklin) and is registered
as an open-end diversified management investment company under the Investment
Company Act of 1940, as amended. The Fund no longer issues new contracts.
Significant accounting policies of the Fund are as follows:

VALUATION OF INVESTMENTS: Investments in common stocks listed on national stock
exchanges are valued at closing sales prices. Unlisted common stocks are valued
at the most recent bid prices, as supplied by broker-dealers. Short-term notes
are valued at cost, which approximates fair value.

INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment transactions
are accounted for on the trade date. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.

FEDERAL INCOME TAXES: Operations of the Fund will form a part of, and be taxed
with those of, The Franklin which is taxed as a "life insurance company" under
the Internal Revenue Code. Under current law, no federal income taxes are
payable with respect to the Fund.

ANNUITY RESERVES: Reserves on contracts, all involving life contingencies, are
calculated using the Progressive Annuity Table with an assumed investment rate
of 3-1/2%.

NOTE B-INVESTMENTS

Exclusive of short-term investments, the cost of investments purchased and the
proceeds from investments sold during 1997 aggregated $70,929 and $1,508,962,
respectively.

NOTE C-EXPENSES

Amounts are paid to The Franklin for investment management services at the rate
of .0012% of the current value of the Fund per day (.438% on an annual basis)
and for mortality and expense risk assurances at the rate of .002745% of the
current value of the Fund per day (1.002% on an annual basis).

NOTE D-SALES AND ADMINISTRATIVE CHARGES

Sales and administrative charges aggregating $16,926 and $21,860 were deducted
from the proceeds of the sales of accumulation units and retained by Franklin
Financial Services Corporation and The Franklin during 1997 and 1996,
respectively. Franklin Financial Services Corporation is a wholly-owned
subsidiary of The Franklin and principal underwriter for the Fund.

NOTE E-SUMMARY OF CHANGES IN ACCUMULATION UNITS

YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------------------------------------------

UNITS AMOUNT UNITS AMOUNT
----- ------ ----- ----------
<S> <C> <C> <C> <C>
Balance at
beginning of year 139,945 $11,403,341 150,474 $10,412,808
Purchases 2,945 268,272 3,007 226,321

Net investment
income* - 78,354 - 85,005

Net realized gain
from investment
transactions* - 451,738 - 268,930

Net unrealized
appreciation
of investments* - 1,709,736 - 1,402,260

Withdrawals (18,176) (1,636,104) (13,536) (995,151)

Reimbursement
for contract
guarantees* - 172 - 3,168
-----------------------------------------------------------------------
Balance at end
of year 124,714 $12,275,509 139,945 $11,403,341
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>

*Excludes portion allocated to annuity reserves on a pro rata basis.

NOTE F-REMUNERATION OF MANAGEMENT

No person receives any remuneration from the Fund because The Franklin pays the
fees of members of the Board of Managers and officers and employees of the Fund
pursuant to expense assurances. Certain members of the Board of Managers and
officers of the Fund are also directors, officers or employees of The Franklin
or Franklin Financial Services Corporation. Amounts paid by the Fund to The
Franklin and to Franklin Financial Services Corporation are disclosed in this
report.

NOTE G-NET UNREALIZED APPRECIATION OF
INVESTMENTS

Net unrealized appreciation of investments at December 31, 1997 and 1996 was as
follows:

DECEMBER 31, DECEMBER 31,
1997 1996
--------------------------------
<S> <C> <C>
Gross unrealized appreciation $5,387,633 $3,670,260

Gross unrealized depreciation 89,191 86,190
--------------------------------
Net unrealized appreciation
of investments $5,298,442 $3,584,070
--------------------------------
--------------------------------
</TABLE>

F-6

<PAGE>

YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $1.910 $1.685 $1.948 $1.408 $1.231
Expenses 1.312 1.090 .875 .773 .773
----------------------------------------------------------------------------
Net investment income .598 .595 1.073 .635 .458
Net realized and unrealized gain (loss) on
investments 16.346 11.690 14.139 (.240) .112
----------------------------------------------------------------------------
Net increase in accumulation unit value 16.944 12.285 15.212 .395 .570
Accumulation unit value:
Beginning of year 81.485 69.200 53.988 53.593 53.023
----------------------------------------------------------------------------
End of year $98.429 $81.485 $69.200 $53.988 $53.593
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Ratio of expenses to average net assets 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net investment income to average
net assets .66% .79% 1.76% 1.18% .85%
Portfolio turnover rate .70% 4.77% 14.66% 88.99% 68.62%
Number of accumulation units outstanding at
end of year 124,714 139,945 150,474 172,507 198,763
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

F-7

<PAGE>

REPORT OF INDEPENDENT AUDITORS

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

Board of Directors
and Shareholder
The Franklin Life Insurance Company

We have audited the accompanying consolidated balance sheet of The Franklin
Life Insurance Company (an indirect wholly-owned subsidiary of American
General Corporation) (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholder's equity and cash
flows for the years ended December 31, 1997 and 1996, the eleven months ended
December 31, 1995 and the one month ended January 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Franklin
Life Insurance Company at December 31, 1997 and 1996 and the consolidated
results of its operations and its cash flows for the years ended
December 31, 1997 and 1996, the eleven months ended December 31, 1995 and the
one month ended January 31, 1995, in conformity with generally accepted
accounting principles.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
February 23, 1998

F-8
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME
(In millions)

Predecessor Basis
------------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-----------------------------------------------------------------------------
1997 1996 1995 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations $370.2 $ 418.6 $449.6 $34.5
Net investment income 518.6 521.5 468.8 41.3
Realized investment gains (losses) 12.8 2.5 7.2 (7.6)
Other 75.8 68.3 55.9 4.1
-----------------------------------------------------------------------------
Total revenues 977.4 1,010.9 981.5 72.3

Benefits and expenses
Benefits paid or provided
Death claims and other policy
benefits 250.6 240.6 236.3 21.5
Investment-type contracts 169.4 173.3 168.3 14.0
Dividends to policyholders 86.3 81.9 85.6 7.5
Change in policy reserves 54.6 95.9 148.5 11.0
Increase in participating policy-
holders' interests 4.7 12.0 11.0 1.0
Commissions 106.5 110.2 108.0 7.6
Operating costs and expenses 33.5 35.7 17.3 2.8
Amortization of deferred policy
acquisition costs 11.5 10.7 8.3 5.8
Amortization of cost of insurance
purchased, net of deferrals 45.3 51.1 29.0 0.8
-----------------------------------------------------------------------------
Total benefits and expenses 762.4 811.4 812.3 72.0
-----------------------------------------------------------------------------

Income before income tax expense 215.0 199.5 169.2 0.3

Income tax expense

Current 74.8 94.7 39.7 4.9

Deferred (benefit) (0.4) (25.3) 21.1 (4.7)
-----------------------------------------------------------------------------
Total income tax expense 74.4 69.4 60.8 0.2
-----------------------------------------------------------------------------

Net income $140.6 $ 130.1 $108.4 $ 0.1
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

F-9
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------

ASSETS 1997 1996
------------ -----------
<S> <C> <C>
Investments
Fixed maturity securities(amortized cost:
$5,157.7; $5,152.3) $5,615.2 $5,476.5
Mortgage loans on real estate 621.6 607.0
Equity securities (cost: $1.1; $2.0) 4.4 5.0
Policy loans 332.7 327.4
Other long-term investments 46.3 47.6
-----------------------
Total investments 6,620.2 6,463.5

Cash and cash equivalents 39.5 24.6
Accrued investment income 100.3 99.7
Note receivable from parent 116.4 116.4
Preferred stock of affiliates, at cost 8.5 8.5
Receivable from brokers 26.5 17.7
Receivable from agents, less allowance ($4.3; 14.4 18.3
$0.4)
Amounts recoverable from reinsurers 41.5 84.0
Deferred policy acquisition costs 111.7 82.0
Cost of insurance purchased 303.9 407.8
Property and equipment, at cost, less accumulated
depreciation ($10.2; $7.2) 23.4 20.6
Other assets 27.4 29.6
Assets held in Separate Accounts 239.6 134.9
-----------------------

Total assets $7,673.3 $7,507.6
-----------------------
-----------------------

</TABLE>
See Notes to Consolidated Financial Statements.

F-10
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (CONTINUED)
(In millions, except share data)

DECEMBER 31
-------------------------
LIABILITIES 1997 1996
-------------------------
<S> <C> <C>
Insurance liabilities
Life, annuity and accident and health reserves $2,882.8 $2,864.7
Policy and contract claims 34.4 38.1
Investment-type contract deposits
and dividend accumulations 2,907.6 2,992.7
Participating policyholders' interests 211.4 209.7
Other 50.7 49.5
Income taxes
Current 2.2 6.4
Deferred 4.5 (19.0)
Intercompany payables 0.5 0.8
Accrued expenses and other liabilities 109.6 116.6
Liabilities related to Separate Accounts 239.6 134.9
-------------------------
Total liabilities 6,443.3 6,394.4

SHAREHOLDER'S EQUITY
Common stock ($2 par value;
30,000,000 shares authorized,
21,002,000 shares issued and outstanding) 42.0 42.0
Paid-in capital 886.1 886.1
Net unrealized gains on securities 150.8 106.6
Retained earnings 151.1 78.5
-------------------------
Total shareholder's equity 1,230.0 1,113.2
-------------------------
Total liabilities and shareholder's equity $7,673.3 $7,507.6
-------------------------
-------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

F-11
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(In millions)
<TABLE>
<CAPTION>

Predecessor Basis
-----------------
Eleven
Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------
1997 1996 1995 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 42.0 $ 42.0 $ 42.0 $ 42.0
-------------------------------------------------
-------------------------------------------------
Paid-in capital

Balance at beginning of period 886.1 884.3 884.3 803.0
Paid in during the period - 1.8 - -
Adjustment for the acquisition - - - 81.3
-------------------------------------------------

Balance at end of period 886.1 886.1 884.3 884.3
-------------------------------------------------

Net unrealized gains (losses)
on securities

Balance at beginning of period 106.6 187.5 - (8.1)
Change during the period 44.2 (80.9) 187.5 1.4
Adjustment for the acquisition - - - 6.7
-------------------------------------------------

Balance at end of period 150.8 106.6 187.5 -
-------------------------------------------------
Retained earnings

Balance at beginning of period 78.5 48.4 - 522.7
Net income 140.6 130.1 108.4 0.1
Dividends paid to parent (68.0) (100.0) (60.0) (250.0)
Adjustment for the acquisition - - - (272.8)
-------------------------------------------------

Balance at end of period 151.1 78.5 48.4 -
-------------------------------------------------

Total shareholder's equity
at end of period $1,230.0 $1,113.2 $1,162.2 $ 926.3
-------------------------------------------------
-------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

F-12
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)

Predecessor Basis
-----------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------------------------
1997 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income $ 140.6 $ 130.1 $108.4 $ 0.1

Reconciling adjustments
Insurance liabilities 33.4 121.5 155.4 19.9
Deferred policy acquisition costs (40.4) (45.5) (59.4) (2.7)
Investment (gains) losses (6.1) (4.7) (11.4) (0.9)
Investment write-downs and reserves (6.7) 2.2 4.2 8.5
Cost of insurance purchased and intangibles 45.3 51.1 29.0 1.0
Interest credited, net of charges on investment
contract deposits 92.5 103.2 153.7 12.0
Purchase of trading securities - - - (1.5)
Proceeds from sale of trading securities - - - 85.5
Other, net (5.4) (107.9) 14.3 (7.1)
-------------------------------------------------------------------
Net cash provided by operating activities 253.2 250.0 394.2 114.8
-------------------------------------------------------------------

INVESTING ACTIVITIES
Investment purchases
Available-for-sale (891.8) (5,479.1) (1,055.8) -
Held-to-maturity - - - (0.8)
Other investments (125.2) (122.6) (95.7) (27.2)
Affiliated - - (124.5) -
Investment calls, maturities and sales
Available-for-sale 978.0 5,526.3 832.0 0.2
Held-to-maturity - - - 24.9
Other investments 70.7 65.1 127.1 6.3
Additions to property and equipment (6.7) (4.6) (3.5) (0.5)
-------------------------------------------------------------------

Net cash provided by (used for) investing activities 25.0 (14.9) (320.4) 2.9
-------------------------------------------------------------------

FINANCING ACTIVITIES
Policyholder account deposits 194.5 165.3 357.8 29.2
Policyholder account withdrawals (389.8) (297.1) (366.2) (32.6)
Additional capital contribution - 1.8 - -
Proceeds from intercompany borrowings 230.4 62.0 105.2 -
Repayments of intercompany borrowings (230.4) (62.1) (105.1) -
Dividend payments (68.0) (100.0) (60.0) (250.0)
-------------------------------------------------------------------
Net cash used for financing activities (263.3) (230.1) (68.3) (253.4)
-------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents 14.9 5.0 5.5 (135.7)
Cash and cash equivalents at beginning of period 24.6 19.6 14.1 149.8
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 39.5 $ 24.6 $ 19.6 $ 14.1
-------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

F-13
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting Policies

1.1 NATURE OF OPERATIONS

The Franklin Life Insurance Company (Franklin) and its subsidiaries,
headquartered in Springfield, Illinois, provide life insurance and
annuity products to middle-income customers throughout the United
States. Franklin serves this customer base through 3,200 agents.

1.2 PREPARATION OF FINANCIAL STATEMENTS

The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP) and include the
accounts of Franklin, and its subsidiaries, The American Franklin Life
Insurance Company (AMFLIC), Franklin Financial Services Corporation
(FFSC) and prior to December 31, 1995, The Franklin United Life
Insurance Company (FULIC). Franklin was formerly a wholly-owned
subsidiary of American Franklin Company (AFC), and is now an indirect,
wholly-owned subsidiary of American General Corporation (AGC) following
the dissolution of AFC in June of 1996. All material intercompany
transactions have been eliminated in consolidation.

On December 31, 1995, Franklin completed the sale of FULIC to American
General Life Insurance Company of New York (AGNY), an affiliated entity.
Franklin received $8.5 million of preferred stock of American General
Life Insurance Company, the parent of AGNY, as consideration. No gain
or loss was recognized on the transaction.

The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and disclosures of contingent assets and liabilities.
Ultimate results could differ from these estimates.

1.3 ACQUISITION

On January 31, 1995, AGC Life Insurance Company (AGCL), a subsidiary of
AGC, acquired AFC for $1.17 billion. The purchase price consisted of
$920 million in cash and a $250 million extraordinary cash dividend paid
by AFC to its former parent prior to closing. In addition, $6.3 million
of acquisition costs were capitalized as part of the acquisition.

F-14
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.3 ACQUISITION (CONTINUED)

The acquisition was accounted for using the purchase method of
accounting in accordance with the provisions of Accounting Principles
Board Opinion 16, "Business Combinations", and other existing accounting
literature pertaining to purchase accounting. Under purchase
accounting, the total purchase cost was allocated to the assets and
liabilities acquired based on a determination of their fair value.
Franklin's consolidated statements of income, shareholder's equity and
cash flows for the years ended December 31, 1997 and 1996, and the
eleven months ended December 31, 1995, are reported under the purchase
method of accounting and, accordingly, are not consistent with the basis
of presentation of the "Predecessor Basis" consolidated statements of
income, shareholder's equity and cash flows for the one month ended
January 31, 1995.

1.4 INVESTMENTS

FIXED MATURITY AND EQUITY SECURITIES. All fixed maturity securities and
equity securities are classified as available-for-sale and recorded at
fair value. After adjusting related balance sheet accounts as if
unrealized gains (losses) had been realized, the net adjustment is
recorded in net unrealized gains (losses) on securities within
shareholder's equity. If the fair value of a security classified as
available-for-sale declines below its cost and this decline is
considered to be other than temporary, the security is reduced to its
fair value, and the reduction is recorded as a realized loss.

MORTGAGE LOANS. Mortgage loans are reported at amortized cost, net of
an allowance for losses. The allowance for losses covers all
non-performing loans and loans for which management has a concern based
on management's assessment of risk factors, such as potential
non-payment or non-monetary default. The allowance is based on a
loan-specific review and a formula that reflects past results and
current trends.

Loans for which Franklin determines that collection of all amounts due
under the contractual terms is not probable are considered to be
impaired. Franklin generally looks to the underlying collateral for
repayment of impaired loans. Therefore, impaired loans are considered
to be collateral dependent and are reported at the lower of amortized
cost or fair value of the underlying collateral, less estimated cost to
sell.

POLICY LOANS. Policy loans are reported at unpaid principal balance.

INVESTMENT INCOME. Interest on fixed maturity securities, policy loans
and performing and restructured mortgage loans is recorded as income
when earned and is adjusted for any amortization of premium or discount.
Interest on delinquent mortgage loans is recorded as income when
received. Dividends are recorded as income on ex-dividend dates.

F-15
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.4 INVESTMENTS (CONTINUED)

OTHER LONG TERM INVESTMENTS. Other long term investments represent
investments in joint ventures and limited partnerships and are reported
on the equity method.

REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses)
are recognized using the specific identification method.

1.5 CASH AND CASH EQUIVALENTS

Highly liquid investments with an original maturity of three months or
less are included in cash and cash equivalents. The carrying amount
approximates fair value.

1.6 DEFERRED POLICY ACQUISITION COSTS (DPAC)

Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC.

DPAC associated with interest-sensitive life contracts, insurance
investment contracts, and participating life insurance contracts is
charged to expense in relation to the estimated gross profits of those
contracts. The interest assumptions used to compute estimated gross
profits with respect to participating life insurance contracts were
7.75% at December 31, 1997 and 1996, and 8.5% at December 31, 1995.
DPAC associated with all other insurance contracts is charged to expense
over the premium-paying period or as the premiums are earned over the
life of the contract.

DPAC is adjusted for the impact on estimated future gross profits as if
net unrealized gains (losses) on securities had been realized at the
balance sheet date. The impact of this adjustment is included in net
unrealized gains (losses) on securities within shareholder's equity.

Franklin reviews the carrying amount of DPAC on at least an annual
basis. Management considers estimated future gross profits or future
premiums, expected mortality, interest earned and credited rates,
persistency, and expenses in determining whether the carrying amount is
recoverable.

1.7 COST OF INSURANCE PURCHASED (CIP)

The cost assigned to certain insurance contracts in force at January 31,
1995 is reported as CIP. Interest is accreted on the unamortized
balance of CIP at rates of 7.0% to 8.5%. CIP is charged to expense and
adjusted for the impact of net unrealized gains (losses) on securities
in the same manner as DPAC. Franklin reviews the carrying amount of CIP
on at least an annual basis using the same methods used to evaluate
DPAC.

F-16
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.8 SEPARATE ACCOUNTS

Separate Accounts are assets and liabilities associated with certain
contracts for which the investment risk lies solely with the contract
holder. Therefore, Franklin's liability for these accounts equals the
value of the account assets. Investment income, realized investment
gains (losses), and policyholder account deposits and withdrawals
related to Separate Accounts are excluded from the consolidated
statements of income. Assets held in Separate Accounts are carried at
fair value.

1.9 INSURANCE LIABILITIES

Substantially all of Franklin's insurance liabilities relate to
long-duration contracts, which generally require performance over a
period of more than one year. The contract provisions normally cannot be
changed or canceled by Franklin during the contract period.

For interest-sensitive life insurance and insurance investment
contracts, reserves equal the sum of the policy account balances and
deferred revenue charges. Reserves for non-participating long-duration
contracts are based on estimates of the cost of future policy benefits
to be paid as a result of present and future claims due to death,
disability, surrender of a policy, or payment of an endowment. Reserves
are determined using the net level premium method. Interest assumptions
used to compute reserves ranged from 2.0% to 8.5% at December 31, 1997.
The liability for future policy benefits on participating life insurance
contracts is a net level reserve using the nonforfeiture interest rate
and mortality table of the plan of insurance.

1.10 PREMIUM RECOGNITION

Most receipts for annuities and interest-sensitive life insurance
contracts are classified as deposits instead of revenues. Revenues for
these contracts consist of mortality, expense, and surrender charges.
Policy charges that are designed to compensate Franklin for future
services are deferred and recognized in income over the period earned,
using the same assumptions used to amortize DPAC.

For limited-payment contracts, net premiums are recorded as revenue, and
the difference between the gross premium received and the net premium is
deferred and recognized in income in a constant relationship to
insurance in force. For all other long-duration contracts, premiums are
recognized when due.

F-17
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.11 PARTICIPATING LIFE INSURANCE

Participating life insurance contracts contain dividend payment
provisions that entitle the policyholders to participate in the earnings
of the contracts. Participating life insurance accounted for 46% and
47% of life insurance in force at December 31, 1997 and 1996
respectively, and 70%, 62%, 58%, and 69% of premiums and other
considerations for the years ended December 31, 1997 and 1996, the
eleven months ended December 31, 1995, and the one month ended January
31, 1995, respectively.

The portion of earnings allocated to participating policyholders that
cannot be expected to inure to Franklin's shareholder is excluded from
net income and shareholder's equity. Dividends to be paid on
participating life insurance contracts are determined annually based on
estimates of the contracts' earnings.

1.12 INCOME TAXES

Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in
effect when the temporary differences reverse. The effect of a tax rate
change is recognized in income in the period of enactment. State income
taxes are included in income tax expense.

A change in deferred taxes related to fluctuations in fair value of
available-for-sale securities is included in net unrealized gains
(losses) on securities in shareholder's equity.

1.13 RECLASSIFICATION

Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation.

1.14 NEW ACCOUNTING STANDARDS NOT YET ADOPTED

In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. Beginning in 1998, Franklin must adopt this statement for
all periods presented. Application of this statement will not change
recognition or measurement of net income and, therefore, will not impact
Franklin's consolidated results of operations or financial position.

F-18
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Investments

2.1 INVESTMENT INCOME

Income by type of investment was as follows:

Eleven
Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
---------------------------------------------------
In millions 1997 1996 1995 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $435.5 $434.6 $394.3 $33.9
Mortgage loans on real 58.3 58.8 54.3 4.6
estate
Policy loans 19.3 18.9 18.6 1.7
Other investments 9.5 13.5 9.1 1.2
---------------------------------------------------
Gross investment income 522.6 525.8 476.3 41.4
Investment expense 4.0 4.3 7.5 0.1
---------------------------------------------------
Net investment income $518.6 $521.5 $468.8 $41.3
---------------------------------------------------
---------------------------------------------------
</TABLE>

The carrying value of investments that produced no investment income
during 1997 totaled $12.4 million, or less than .19% of total invested
assets at December 31, 1997. The ultimate disposition of these assets
is not expected to have a material effect on Franklin's consolidated
results of operations or financial position.

F-19
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.2 REALIZED INVESTMENT GAINS (LOSSES)

Realized investment gains (losses) for fixed maturity and equity
securities, net of DPAC and CIP amortization were as follows:
<TABLE>
<CAPTION>

Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------------------------------
In millions 1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Gross gains $ 15.4 $ 25.0 $ 13.8 $ -
Gross losses (6.2) (17.6) (1.9) -
------------------------------------------------------------------------
Total fixed maturity securities 9.2 7.4 11.9 -
------------------------------------------------------------------------

Equity securities
Gross gains 1.0 1.8 1.9 4.1
Gross losses - - (0.5) (5.4)
------------------------------------------------------------------------
Total equity securities 1.0 1.8 1.4 (1.3)
------------------------------------------------------------------------

Other 2.6 (6.7) (6.1) (6.3)
------------------------------------------------------------------------
Realized investment gains (losses) $ 12.8 $ 2.5 $ 7.2 $(7.6)
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>

Voluntary sales of investments resulted in the following realized gains
(losses):

Realized
------------------
In millions Category Proceeds Gains Losses
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1997 AVAILABLE-FOR-SALE $577.6 $10.5 $ 3.1
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Year Ended
December 31, 1996 Available-for-sale $807.0 $21.8 $15.4
- -------------------------------------------------------------------------------------
Eleven Months Ended
December 31, 1995 Available-for-sale $268.7 $ 8.5 $ 0.4
- -------------------------------------------------------------------------------------
One Month Ended
January 31, 1995 Trading $ 84.7 $ 4.1 $ 5.4
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>

F-20
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.3 FIXED MATURITY AND EQUITY SECURITIES

VALUATION. Amortized cost and fair value of fixed maturity and equity
securities were as follows:

DECEMBER 31, 1997
----------------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In millions COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $2,845.2 $228.9 $0.3 $3,073.8

Below investment grade 307.8 13.7 1.1 320.4

Public utilities 972.3 116.1 - 1,088.4

Mortgage-backed 750.7 67.4 0.1 818.0

Foreign governments 90.0 15.4 0.4 105.0

U.S. government 186.7 17.7 - 204.4

States/political subdivisions 4.8 0.2 - 5.0

Redeemable preferred stocks 0.2 - - 0.2
----------------------------------------------------------------------
Total fixed maturity securities $5,157.7 $459.4 $1.9 $5,615.2
----------------------------------------------------------------------
----------------------------------------------------------------------
Equity securities $ 1.1 $ 3.3 $ - $ 4.4
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>

F-21
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)

DECEMBER 31, 1996
-------------------------------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
In millions Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $2,747.7 $170.2
$6.3 $2,911.6
Below investment grade 239.7 9.0 1.4 247.3

Public utilities 1,064.7 86.9 - 1,151.6

Mortgage-backed 802.1 41.9 1.4 842.6

Foreign governments 96.2 11.0 - 107.2

U.S. government 190.1 13.9 0.1 203.9

States/political subdivisions 11.5 0.5 - 12.0

Redeemable preferred stocks 0.3 - - 0.3
-------------------------------------------------------------------

Total fixed maturity securities $5,152.3 $333.4 $9.2 $5,476.5
-------------------------------------------------------------------
-------------------------------------------------------------------

Equity securities $ 2.0 $ 3.0 $ - $ 5.0
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>

F-22
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)

MATURITIES. The contractual maturities of fixed maturity securities at
December 31, 1997 were as follows:

AMORTIZED FAIR
In millions COST VALUE
- --------------------------------------------------------------------------------
FIXED MATURITY SECURITIES, EXCLUDING
MORTGAGE-BACKED SECURITIES, DUE
<S> <C> <C>
In one year or less $ 55.0 $ 55.4

In years two through five 785.0 825.8

In years six through ten 1,993.5 2,140.3

After ten years 1,573.5 1,775.7

Mortgage-backed securities 750.7 818.0
----------------------------

Total fixed maturity securities $5,157.7 $5,615.2
----------------------------
----------------------------
</TABLE>

Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. Corporate
requirements and investment strategies may result in the sale of
investments before maturity.

2.4 NET UNREALIZED GAINS ON SECURITIES

Net unrealized gains on available-for-sale securities included in
shareholder's equity at December 31 were as follows:

In millions 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 462.7 $ 336.4
Gross unrealized losses (1.9) (9.2)
DPAC fair value adjustment (10.4) (0.4)
CIP fair value adjustment (215.7) (160.9)
Participating policyholders'
interest (2.5) (1.8)
Deferred federal income taxes (81.4) (57.5)
-----------------------
Net unrealized gains
on securities $ 150.8 $ 106.6
-----------------------
-----------------------
</TABLE>

F-23
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.5 MORTGAGE LOANS ON REAL ESTATE
DIVERSIFICATION. Diversification of the geographic location and type of
property collateralizing mortgage loans reduces the concentration of credit
risk. For new loans, Franklin requires loan-to-value ratios of 75% or
less, based on management's credit assessment of the borrower. At December
31, the mortgage loan portfolio was distributed as follows:

DECEMBER 31
----------------------------------
In millions 1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Geographic distribution
East North Central $119.6 $120.0
East South Central 36.2 37.8
Mid Atlantic 35.5 21.5
Mountain 53.5 58.1
New England 22.5 19.2
Pacific 99.5 104.3
South Atlantic 175.2 167.7
West North Central 34.3 35.4
West South Central 53.5 57.9
Allowance for losses (8.2) (14.9)
-----------------------------------------------------------------------
Total $621.6 $607.0
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Property type
Retail $333.5 $312.3
Office 131.9 147.5
Industrial 96.7 89.4
Residential and other 67.7 72.7
Allowance for losses (8.2) (14.9)
-----------------------------------------------------------------------
Total $621.6 $607.0
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>

F-24
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.5 MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
IMPAIRED LOANS. The carrying value of impaired mortgage loans on real
estate and related interest income were as follows as of and for the year
ended December 31:

<TABLE>
<CAPTION>
In millions 1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans
With allowance * $ 8.0 $21.4 5.3
Without allowance 8.1 - 17.8
----------------------------------------------

Total impaired loans $16.1 $21.4 23.1
----------------------------------------------
----------------------------------------------

Average investment $18.8 $22.3 27.4
----------------------------------------------
----------------------------------------------

Interest income earned $ 0.8 $ 1.5 1.3
----------------------------------------------
----------------------------------------------
</TABLE>

* Represents gross amounts before allowance for mortgage loan losses of
$3.0 million, $4.9 million, and $1.6 million at December 31, 1997,
1996, and 1995, respectively. There were no impaired loans as of
January 31, 1995.

ALLOWANCE. Activity in the allowance for mortgage loan losses was as
follows:

Eleven One Month
YEAR ENDED Year Ended Months Ended Ended
DECEMBER 31 December 31 December 31 January 31
---------------------------------------------------
In millions 1997 1996 1995 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of
period $14.9 $12.7 8.5 -
Net change in allowance * (6.7) 2.2 4.2 8.5
---------------------------------------------------
Balance at end of period $ 8.2 $14.9 12.7 8.5
---------------------------------------------------
</TABLE>

* Charged to realized investment gains (losses).

F-25
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.6 INVESTMENTS ON DEPOSIT

At December 31, 1997 and 1996, bonds and other investments carried at $19.3
million and $22.6 million, respectively, were on deposit with regulatory
authorities to comply with state insurance laws.

2.7 INVESTMENT RESTRICTIONS

Franklin is restricted by the insurance laws of its domiciliary state as to
the amount which it can invest in any entity. At December 31, 1997 and
1996, Franklin's largest investment in any one entity other than U.S.
government obligations and related party amounts was $62.8 million and
$64.6 million, respectively.

3. Fair Value of Financial Instruments

Carrying amounts and fair values for certain of Franklin's financial
instruments at December 31 are presented below. Care should be exercised
in drawing conclusions based on fair value, since (1) the fair values
presented do not include the value associated with all of Franklin's assets
and liabilities, and (2) the reporting of investments at fair value without
a corresponding revaluation of related policyholder liabilities can be
misinterpreted.

DECEMBER 31
------------------------------------------------
1997 1996
------------------------------------------------
CARRYING FAIR Carrying Fair
In millions AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity securities $5,615.2 $5,615.2 $5,476.5 $5,476.5
Mortgage loans on real
estate 621.6 659.4 607.0 637.7
Equity securities 4.4 4.4 5.0 5.0

Liabilities
Insurance investment
contracts $1,881.4 $ 1,813.3 $1,967.9 $1,892.9
Dividend accumulations $ 780.1 $ 780.1 $ 755.9 $ 755.9
</TABLE>

F-26
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. Fair Value of Financial Instruments (continued)

The following methods and assumptions were used to estimate the fair value
of financial instruments.

FIXED MATURITY AND EQUITY SECURITIES. Fair values of fixed maturity and
equity securities were based on quoted market prices, where available. For
investments not actively traded, fair values were estimated using values
obtained from independent pricing services or, in the case of some private
placements, by discounting expected future cash flows using a current
market rate applicable to yield, credit quality, and average life of the
investments.

MORTGAGE LOANS ON REAL ESTATE. Fair value of mortgage loans was estimated
primarily using discounted cash flows, based on contractual maturities and
risk-adjusted discount rates.

POLICY LOANS. Policy loans have no stated maturity dates and are an
integral part of the related insurance contract. Accordingly, it is not
practicable to estimate a fair value. The weighted average interest rate
on policy loans was 6% in 1997 and 1996.

INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment
contracts was estimated using cash flows discounted at market interest
rates.

DIVIDEND ACCUMULATIONS. Fair value disclosed for dividend accumulations
equals the amount of dividends payable on demand at the reporting date.

F-27
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. Deferred Policy Acquisition Costs (DPAC)
An analysis of the changes in the DPAC asset is as follows:

Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
--------------------------------------------------------
In millions 1997 1996 1995 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period
balance $ 82.0 $ 47.5 $ - $ 510.6

Capitalization 51.9 56.2 67.7 8.5

Amortization (11.5) (10.7) (8.3) (5.8)

Effect of unrealized
gains on securities (10.0) 11.3 (11.7) -

Effect of realized
investment gains (0.7) (0.4) (0.2) -

Adjustment for the
acquisition(a) - - - (513.3)

Other - (21.9) - -
--------------------------------------------------------

End of period balance $111.7 $ 82.0 $47.5 $ -
--------------------------------------------------------
--------------------------------------------------------
</TABLE>

(a) Represents the necessary elimination of the historical DPAC asset
required by purchase accounting.

F-28
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. Cost of Insurance Purchased (CIP)
An analysis of the changes in the CIP asset is as follows:

Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
---------------------------------------------------
In millions 1997 1996 1995 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period $ 407.8 $ 353.0 $ 656.6 $174.7
balance
Interest accretion 47.3 51.8 49.0 2.0
Additions 15.1 13.6 41.3 -
Amortization (107.7) (116.5) (118.0) (2.8)
Effect of unrealized
gains on securities (54.8) 109.1 (270.0) -
Effect of realized
investment gains (3.8) (3.2) (5.9) -
Incremental adjustment
for the acquisition(a) - - - 482.7
---------------------------------------------------

End of period balance $ 303.9 $ 407.8 $ 353.0 $656.6
---------------------------------------------------
</TABLE>

(a) Represents the incremental amount necessary to recognize the new CIP
asset attributable to the January 31, 1995 acquisition.

CIP amortization, net of interest accretion and additions, expected to
be recorded in each of the next five years is $41.7 million, $38.4
million, $35.3 million, $32.4 million, and $29.8 million.

6. Separate Accounts

Franklin administers three Separate Accounts for variable annuity
contracts. AMFLIC administers three Separate Accounts in connection
with the issuance of its Variable Universal Life and Variable Annuity
products.

F-29
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. Income Taxes

Franklin files a life/life consolidated return which includes Franklin and
AMFLIC. FFSC, a broker-dealer and wholly-owned subsidiary of Franklin,
files a separate return.

The method of allocation of tax expense is subject to a written agreement.
Allocation is based upon separate return calculations with current credit
for net losses and tax credits. Consolidated alternative minimum tax,
excise tax or surtax, if any, is allocated separately. The tax liability
of each subsidiary under this agreement shall not exceed the amount such
subsidiary would have paid if it had filed on a separate return basis.
Intercompany tax balances are to be settled no later than thirty (30) days
after the date of filing the consolidated return.

7.1 DEFERRED TAXES

Components of deferred tax liabilities and assets at December 31, were as
follows:

In millions 1997 1996
---------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities, applicable to:
Basis differential of investments $ 122.8 $ 63.1
DPAC and CIP 98.6 124.6
Other 10.2 15.7
-----------------------------
Total deferred tax liabilities 231.6 203.4
-----------------------------

Deferred tax assets, applicable to:
Policy reserves (124.5) (128.3)
Participating policyholders' (74.0) (73.6)
interests
Postretirement benefits (3.4) (4.0)
Basis differential of investments (7.5) (7.7)
Other (17.7) (8.8)
-----------------------------
Total deferred tax assets (227.1) (222.4)
-----------------------------
Net deferred tax liability (asset) $ 4.5 $ (19.0)
-----------------------------
-----------------------------
</TABLE>

Franklin expects adequate future taxable income to realize the deferred tax
assets. Accordingly, no valuation allowance is considered necessary.

A portion of life insurance income earned prior to 1984 is not taxable
unless it exceeds certain statutory limitations or is distributed as
dividends. Such income, accumulated in policyholders' surplus accounts,
totaled $200 million at December 31, 1997. At current corporate income tax
rates, the maximum amount of tax on such income is approximately $70
million. Deferred income taxes on these accumulations are not required
because no distributions are expected.

F-30
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.2 TAX EXPENSE
A reconciliation between the federal income tax rate and the effective tax
rate follows:

Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
--------------------------------------------------
1997 1996 1995 1995
--------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0% 35.0%
State taxes, net 0.9 0.3 0.9 36.3
Tax-exempt investment income (0.5) (0.7) (0.6) (39.3)

Amortization of goodwill - - - 34.3
Other (0.8) 0.2 0.6 0.4
--------------------------------------------------
Effective tax rate 34.6% 34.8% 35.9% 66.7%
--------------------------------------------------
--------------------------------------------------
</TABLE>

7.3 TAXES PAID

Federal income taxes paid for the years ended December 31, 1997 and 1996,
and the eleven months ended December 31, 1995, were $77 million, $74
million, and $53 million, respectively. State income taxes paid for the
years ended December 31, 1997 and 1996, and the eleven months ended
December 31, 1995, were $2 million, $2 million, and $1 million,
respectively. There were no federal or state income taxes paid during
January 1995.

8. Benefit Plans

8.1 PENSION PLANS

On January 1, 1996, Franklin's existing defined benefit pension plan (The
Franklin Plan) was merged with the plan sponsored by AGC (the AGC Plan).
The AGC Plan is a non-contributory defined benefit plan covering most
Franklin employees. Under the AGC Plan, pension benefits are based on the
participant's compensation and length of credited service. AGC's funding
policy is to contribute annually no more than the maximum deductible for
federal income tax purposes.

Equity and fixed maturity securities were 63% and 28%, respectively, of the
AGC Plan's assets at the Plan's most recent balance sheet date.
Additionally, 5% of the Plan's assets were invested in general investment
accounts of AGC's subsidiaries through deposit administration insurance
contracts.

F-31
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.1 PENSION PLANS (continued)

The net pension (income)/expense and the computation of the projected
benefit obligation for years prior to January 1, 1996 were based on the
provisions of the Franklin Plan. The Franklin Plan provided for the
payment of retirement benefits; normally commencing at age 65, and also for
the payment of certain disability benefits. After meeting certain
qualifications, an employee acquired a vested right to future benefits.
Pension benefits were based on the participant's average monthly
compensation and length of credited service. Annual contributions made to
the plan were sufficient to satisfy legal funding requirements.

At December 31, 1995, fixed maturity securities constituted the majority of
The Franklin Plan's assets.

Prior to January 1, 1996, The Franklin Plan purchased annuity contracts
from Franklin to provide benefits for its retirees. For the eleven months
ended December 31, 1995, and the one month ended January 31, 1995, these
contracts provided approximately $3.9 million and $0.3 million annually for
retiree benefits, respectively.

During the fourth quarter of 1995, Franklin sponsored a program of special
incentives to those employees age 55 and over who elected early retirement.
The program concluded December 31, 1995. A withdrawal of $26.5 million was
made from the Franklin Plan in 1995 to provide full retirement benefits for
these employees who elected to retire under the program.

Net pension (income)/expense included the following components:

Eleven One Month
YEAR ENDED Year Ended Months Ended Ended
DECEMBER 31 December 31 December 31 January 31
-----------------------------------------------------
In millions 1997 1996 1995 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits
earned) $ 0.7 $ 0.8 $ 0.9 $ 0.2
Interest cost 1.9 2.0 3.7 0.4
Actual return on plan
assets (8.4) (7.8) (11.5) (0.4)
Net amortization and
deferral 5.0 4.6 6.3 -
-----------------------------------------------------
Pension (income) expense $(0.8) $ (0.4) $ (0.6) $ 0.2
-----------------------------------------------------
</TABLE>

F-32
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.1 PENSION PLANS (continued)
The funded status and the prepaid pension expense (included in other
assets) at December 31 were as follows:

In millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation, primarily vested $ 27.7 $ 27.0
Effect of increase in compensation levels 0.5 0.2
---------------------------
Projected benefit obligation 28.2 27.2
Plan assets at fair value 43.8 35.5
---------------------------
Plan assets at fair value in excess of projected
benefit obligation 15.6 8.3
Other unrecognized items, net (3.5) 3.0
---------------------------
Prepaid pension expense $ 12.1 $ 11.3
---------------------------
---------------------------

Weighted-average discount rate on benefit 7.25% 7.50%
obligation
Rate of increase in compensation levels 4.00 4.00
Expected long-term rate of return on plan assets 10.00 10.00
</TABLE>

8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

On January 1, 1996, the assets in Franklin's voluntary employees'
beneficiary association (Franklin VEBA) for the retiree health and welfare
plan were transferred to the AGC VEBA Plan. No changes in assumptions or
plan provisions were made as a result of the transfer.

Under the AGC VEBA Plan, Franklin has life, medical, supplemental major
medical and dental plans for certain retired employees and agents. Most
plans are contributory, with retiree contributions adjusted annually to
limit employer contributions to predetermined amounts. Franklin has
reserved the right to change or eliminate these benefits at any time.

The life plans are fully insured for a two-year period. A portion of the
retiree medical and dental plans is funded through the AGC VEBA Plan; the
remainder is unfunded and self-insured. All of the retiree medical and
dental plans' assets held in the AGC VEBA Plan were invested in readily
marketable securities.

F-33
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued)
The funded status and the accrued postretirement benefit cost (included in
other liabilities) at December 31 were as follows:

In millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligation
Retirees $7.2 $ 7.3
Active plan participants
Fully eligible 0.3 0.2
Other 2.0 1.8
------------------------------------
Accumulated postretirement
benefit obligation (APBO) 9.5 9.3
Plan assets at fair value 0.2 -
------------------------------------
APBO in excess of plan assets
at fair value 9.3 9.3
Unrecognized net gain 0.5 2.2
------------------------------------
Accrued benefit cost $9.8 $11.5
------------------------------------
------------------------------------
Weighted-average discount
rate on benefit obligation 7.25% 7.50%
</TABLE>

Postretirement benefit expense (income) was as follows:

Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
In millions 1997 1996 1995 1995
Service cost (benefits $0.1 $0.1 $0.1 $ -
earned)
Interest cost 0.7 0.7 0.9 (0.2)
Postretirement benefit
expense (income) $0.8 $0.8 $1.0 $(0.2)
</TABLE>

For measurement purposes, an 8.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998; the rate was
assumed to decrease gradually to 5% by the year 2005 and remain at that
level. A 1% increase in the assumed rate results in a $0.1 million
increase in the accumulated postretirement benefit obligation and no
increase in postretirement benefit expense.

F-34
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. Statutory Accounting

State insurance laws and regulations prescribe accounting practices for
calculating statutory net income and equity. In addition, state regulators
may permit statutory accounting practices that differ from prescribed
practices.

During 1995, Franklin received approval to loan $116.0 million to AGCL.
Franklin also received approval to pay an extraordinary dividend of $250
million to its former parent as part of the 1995 acquisition, and also
received approval to pay an extraordinary dividend of $60 million to AGCL.

At December 31, 1997 and 1996, Franklin had statutory shareholder's equity
of $521.0 million and $431.0 million, respectively. Statutory net income
was $129.7 million, $123.2 million, and $100.2 million for the years ended
December 31, 1997, 1996, and 1995, respectively.

As determined on a statutory basis, the statutory shareholder's equity and
net income of subsidiaries, were reported as follows:

STATUTORY
-------------------------------------
In millions 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder's Equity $17.7 $18.1 $ 9.9
-------------------------------------
-------------------------------------

Net Income $(0.6) $(1.9) $(4.7)
-------------------------------------
-------------------------------------
</TABLE>

Generally, Franklin is restricted by the insurance laws of its domiciliary
state as to amounts that can be transferred in the form of dividends,
loans, or advances without the approval of the Illinois Insurance
Department. Under these restrictions, during 1998, loans or advances in
excess of $130.3 million and dividends in any twelve-month period
aggregating in excess of $129.7 million will require the approval of the
Illinois Insurance Department.

10. Consolidated Statement of Cash Flows

In addition to the cash activities shown in the consolidated statement of
cash flows, the following transactions, occurred:

Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest added to annuity and
other financial products $169.4 $173.3 $168.3 $14.0
</TABLE>

F-35
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. Reinsurance

Franklin limits its exposure to loss on any single insured to $2.1 million
by ceding additional risks through reinsurance contracts with other
insurers. Franklin diversifies its risk of reinsurance loss by using a
number of reinsurers that have strong claims-paying ability ratings. If
the reinsurer could not meet its obligations, Franklin would reassume the
liability. The likelihood of a material reinsurance liability being
reassumed by Franklin is considered to be remote.

A receivable is recorded for the portion of benefits paid and insurance
liabilities that have been reinsured. Reinsurance recoveries on ceded
reinsurance contracts were $41.5 million, $67.3 million, $63.3 million and
$1.4 million for the years ended December 31, 1997 and 1996, the eleven
months ended December 31, 1995, and the one month ended January 31, 1995,
respectively. The amount of reinsurance recoverable (payable) on paid and
unpaid losses was $(0.5) million and $1.8 million at December 31, 1997 and
1996, respectively. The cost of reinsurance is recognized over the life of
the reinsured policies using assumptions consistent with those used to
account for the underlying policies.

Reinsurance premiums included in premiums and other considerations were as
follows:

Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------------
<S> <C> <C> <C> <C>
In millions 1997 1996 1995 1995
- -------------------------------------------------------------------------------
Direct premiums
and other
considerations $415.3 $491.5 $500.1 $36.8
Reinsurance assumed 8.3 15.9 44.2 (0.8)
Reinsurance ceded (53.4) (88.8) (94.7) (1.5)
- -------------------------------------------------------------------------------

Premiums and other
considerations $370.2 $418.6 $449.6 $34.5
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>

12. Related Party Transactions

Franklin participates in a program of short-term borrowing with AGC to
maintain its long-term commitments. Franklin borrowed $230.4 million and
$62.0 million, and repaid $230.4 million and $62.1 million in 1997 and
1996, respectively. Interest was paid on the outstanding balances based on
the rate as stipulated in the program.

During 1995, Franklin purchased a 6.75% promissory note from AGCL for
$116.0 million to mature in 2005 (see Note 9).

During 1995, Franklin received $8.5 million of 8% non-voting preferred
stock of American General Life Insurance Company as consideration for the
sale of FULIC.

F-36
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. Related Party Transactions (continued)

Franklin has entered into indefinite contracts for the performance of all
investment management services as well as cost allocation agreements with
its ultimate parent. Total expenses under these agreements were $2.5
million and $2.3 million for the years ended December 31, 1997 and 1996,
respectively, and $1.1 million for the eleven months ended December 31,
1995.

13. Legal Proceedings

In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and
sales practices, and a number of these lawsuits have resulted in
substantial settlements. Franklin is a defendant in such purported class
action lawsuits filed in 1997, asserting claims related to pricing and
sales practices. These claims are being defended vigorously by Franklin.
Given the uncertain nature of litigation and the early stages of this
litigation, the outcome of these actions cannot be predicted at this time.
Franklin management nevertheless believes the ultimate outcome of all such
pending litigation should not have a material adverse effect on Franklin's
financial position. It is possible that settlements or adverse
determinations in one or more of these actions or other future proceedings
could have a material adverse effect on results of operations for a given
period. No provision for any adverse determinations in this pending
litigation has been made in the consolidated financial statements because
the amount of loss, if any, from these actions cannot be reasonably
estimated at this time.

Franklin is a party to various other lawsuits and proceedings arising in
the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon
information presently available, Franklin management believes the total
amounts that will ultimately be paid, if any, arising from these lawsuits
and proceedings will not have a material adverse effect on Franklin's
results of operations and financial position. However, it should be noted
that the frequency of large damage awards, including large punitive damage
awards, that bear little or no relation to actual economic damages incurred
by plaintiffs in jurisdictions like Alabama continues to increase and
creates the potential for an unpredictable judgment in any given suit.

F-37
<PAGE>

THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. Guaranty Fund Assessments

Information about state guaranty fund assessments was as follows as of and
for the:

Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------------
In millions 1997 1996 1995 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expense, included
in operating costs
and expenses $1.2 $ 0.7 $ 0.2 $0.6
Liability for
anticipated
assessments 3.6 7.5 8.5 -
Receivable for
expected recoveries
against future
premium taxes 7.4 11.2 11.2 -
- -------------------------------------------------------------------------------
</TABLE>

Changes in state laws could decrease the amount recoverable against future
premium taxes.

F-38

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

FRANKLIN LIFE VARIABLE ANNUITY FUND A

INDIVIDUAL VARIABLE ANNUITY CONTRACTS FOR USE WITH CERTAIN QUALIFIED PLANS AND
TRUSTS ACCORDED SPECIAL TAX TREATMENT AND AS INDIVIDUAL RETIREMENT ANNUITIES

ISSUED BY

THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713

<PAGE>

APPENDIX B

FRANKLIN LIFE VARIABLE ANNUITY FUND A

ANNUAL REPORT DATED DECEMBER 31, 1997

<PAGE>

[LOGO]

THE FRANKLIN
LIFE INSURANCE COMPANY
-----------------------------------------------------
*AN AMERICAN GENERAL COMPANY
#1 FRANKLIN SQUARE , SPRINGFIELD, ILLINOIS 62713-0001

Dear Contract Owner:

We are pleased to provide this 1997 annual report which shows the status of and
balances in your Franklin Life Variable Annuity Fund A contract.

<TABLE>
<CAPTION>
INVESTMENT POSITION
-------------------

DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1997 1996
------------ -------- ------------
VARIABLE PORTION:
- -----------------
<S> <C> <C> <C>
Accumulation Unit Value $98.43 $91.56 $81.48
-------- ------ ------
-------- ------ ------
Percentage Change From:

December 31, 1996 +20.80%
--------
--------

June 30, 1997 + 7.50%
--------
--------
</TABLE>

The accumulation unit value is based on the market price of the investments held
by the Fund. A listing of the investments held at December 31, 1997 appears on
page 3.

FIXED PORTION:
Additional units in the fixed rate portion of your annuity arising from
contributions credited during the contract year ending in 1997 were based
on a 6.25% interest rate, less a contract expense charge. If your contract
anniversary is in the first half of 1998, the interest rate for the fixed
portion of your annuity applicable to contributions made during the
contract year ending in 1998 is anticipated to be 6.25%, less a contract
expense charge. Amounts selected for investment in the fixed rather than
the variable portion of your annuity do not participate in the investment
experience of the Fund. Contract units resulting from interest added or
contributions made prior to the contract year ending in 1997 continue to be
credited with additional interest based on investment yields which reflect
the years during which such units were purchased. Crediting rates are not
guaranteed for future years.

The U.S. economy continued to expand at a very rapid rate in 1997. It is
estimated that the Gross Domestic Product will increase some 3.5% to 4.0% for
the year, well ahead of the expectations expressed at the beginning of 1997.
Employment continues to grow, with the unemployment rate dropping to 4.7% in
December 1997, down from 5.3% in December 1996, but up from 4.6% in November
1997. The Federal Reserve Board has kept the Federal Funds rate steady the last
half of 1997 after raising the rate from 5.25% to 5.50% on March 25, 1997. The
stock market had another good year, the third year in a row, with the Standard &
Poor's 500 Index up 31.01% in 1997. This increase came with a great deal of
difficulty in the second half of the year, as the Asian markets ran into
financial uncertainty. The U.S. companies are showing very high price/earnings
ratios and the U.S. economic growth is expected to slow in the near future.

Inflation, as measured by the Gross Domestic Product deflator, was a very
acceptable 1.9% in 1996, then declining to 1.4% by the third quarter of 1997.
The Consumer Price Index increased 3.3% in 1996 and in 1997, 1.7%, the smallest
increase since 1986. The Producers Price Index declined 0.2% in December, with
a decline in nine of the twelve months of 1997 and an annual decline in 1997 of
1.2%. The decline in wholesale prices will be good news on the inflation front.
The stock market will likely have a period of consolidation as it works its way
through the Asian crisis, high price/earnings ratios and a slowing economy.

In today's fast-paced world, products, markets, client's needs, and individual
risk tolerance all change. In this environment, you may want to take some extra
time and review how well this product continues to meet your retirement
investment objectives. A Franklin Life representative would be happy to review
your financial situation with you and suggest the most appropriate mix of
products to provide financial security consistent with your risk tolerance.

Cordially yours,

/s/ William A. Simpson

William A. Simpson
Chairman, Chief Executive Officer
and President

1
<PAGE>

FRANKLIN LIFE VARIABLE ANNUITY FUND A
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>

<S> <C> <C>
Assets
Investments-at fair value (cost-$6,923,517):
Common stocks $ 10,325,291
Short-term notes 1,896,668
----------------
12,221,959
Cash on deposit 54,548
Dividends and interest receivable 19,871
----------------
Total Assets 12,296,378

Liability -due to The Franklin Life Insurance Company 1,489
----------------
Contract owners' equity
Annuity reserves $ 19,380
Value of 124,714.114 accumulation units outstanding,
equivalent to $98.42918992 per unit 12,275,509 $ 12,294,889
------------ ----------------

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997

Investment income
Dividends $ 167,447
Interest 83,552
------------
Total Income $ 250,999

Expenses
Mortality and expense charges $ 119,981
Investment management services 52,451
------------
Total expenses 172,432
----------------
Net investment income 78,567

Realized and unrealized gain on investments:
Net realized gain from investment transactions
(excluding short-term investments):
Proceeds from sales $1,508,962
Cost of investments sold (identified cost method) 1,056,000
------------
Net realized gain 452,962
Net unrealized appreciation of investments
Beginning of year $3,584,070
End of year 5,298,442
------------
Net unrealized appreciation 1,714,372
----------------
Net gain on investments 2,167,334
----------------
Net increase in contract owners'
equity resulting from operations $ 2,245,901
----------------
----------------

STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
--------------------------------------
<S> <C> <C>
Net investment income $ 78,567 $ 85,278
Net realized gain from investment transactions 452,962 269,793
Net unrealized appreciation of investments 1,714,372 1,406,762
--------------------------------------
Net increase In contract owners' equity resulting from operations 2,245,901 1,761,833
Net contract purchase payments 268,272 226,321
Reimbursement for contract guarantees 172 3,178
Annuity payments (4,568) (3,878)
Withdrawals (1,636,104) (995,151)
--------------------------------------
Net increase in contract owners' equity 873,673 992,303
Contract owners' equity at beginning of year 11,421,216 10,428,913
--------------------------------------
Contract owners' equity at end of year $12,294,889 $11,421,216
--------------------------------------
--------------------------------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

2
<PAGE>

FRANKLIN LIFE VARIABLE ANNUITY FUND A
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>

NUMBER
OF FAIR
SHARES VALUE
------------ ---------------
<S> <C> <C>
COMMON STOCKS (83.98%)
BANKING (4.16%)
3,675 SLM Holding Corporation $ 511,284
BEVERAGES (1.30%)
4,400 PepsiCo, Incorporated 159,500
BUSINESS SERVICES (1.61%)
5,600 Equifax Inc. 198,450
CHEMICALS (2.23%)
2,700 Dow Chemical 274,050
COMPUTER SERVICES (3.00%)
8,100 Ceridian Corporation* 371,081
COSMETICS & HOUSEHOLD PRODUCTS
(3.27%)
4,000 Gillette Company 401,750

ELECTRONICS & INSTRUMENTATIONS
(2.94%)
5,800 Hewlett-Packard Company 361,775
FOOD PROCESSING (2.86%)
10,600 ConAgra, Inc. 351,125
FOOD - RETAIL (2.19%)
5,700 Albertson's, Inc. 269,325
FOOD - WHOLESALE ( 2.48%)
6,700 Sysco Corporation 305,269
HOUSEHOLD PRODUCTS (1.28%)
3,700 Newell Co. 157,250
MACHINERY - INDUSTRIAL & CONSTRUCTION
(.46%)
1,500 Fluor Corporation 56,062

OFFICE EQUIPMENT & SERVICES (8.00%)
5,000 Compaq Computers Corporation* 282,500
5,350 Digital Equipment Corporation* 198,619

4,800 International Business Machines
Corporation 502,200
--------------
983,319

OIL SERVICES & DRILLING ( 2.62%)
6,200 Halliburton Company 321,625

OILS & OIL RELATED PRODUCTS (4.9%)
2,700 Amoco Corporation 229,838
2,600 Atlantic Richfield Company 208,325
2,600 Kerr-McGee Corporation 164,612
--------------
602,775
PACKAGING - CONTAINERS ( 3.06%)
8,400 Avery-Dennison Corporation 375,900
PHOTOGRAPHY ( 2.02%)
4,100 Eastman Kodak Company 248,306
RESTAURANTS/LODGING (1.92%)
3,400 Marriott International, Inc. 235,450
RETAIL-SPECIALTY (2.29%)
7,200 NIKE, Inc. 281,250
TECHNOLOGY (7.48%)
5,000 AMP, Incorporated 210,000
4,950 Diebold, Incorporated 250,594
4,800 Intel Corporation 337,200
3,600 Millipore Corporation 122,175
--------------
919,969

UTILITIES - TELEPHONE (2.29%)
5,000 BellSouth Corporation 281,562
--------------
TOTAL COMMON STOCKS
(COST-$5,026,849) 10,325,290
<CAPTION>

PRINCIPAL
AMOUNT
- ---------
<S> <C> <C>
SHORT-TERM NOTES (15.43%)
$ 450,000 United States Treasury Bill
4.93%, due 2/5/98 (cost-$446,549) 446,549
$1,460,000 United States Treasury Bill
5.05%, due 2/5/98 (cost-$1,450,119) 1,450,119
--------------
TOTAL SHORT-TERM NOTES
1,896,669
--------------

TOTAL INVESTMENTS (99.41%)
(COST -$6,923,517) 12,221,959

CASH AND RECEIVABLES, LESS
LIABILITY (.59 %) 72,930
--------------
TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $12,294,889
--------------
--------------
</TABLE>

*NON-INCOME PRODUCING INVESTMENT IN 1997.

SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE VARIABLE
ANNUITY FUND A CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.

3
<PAGE>

FRANKLIN LIFE VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS

NOTE A-SIGNIFICANT ACCOUNTING POLICIES

ANNUITY RESERVES: Reserves on contracts, all involving life contingencies, are
calculated using the Progressive Annuity Table with an assumed investment rate
of 3-1/2%.

NOTE B-INVESTMENTS

Exclusive of short-term investments, the cost of investments purchased and the
proceeds from investments sold during 1997 aggregated $70,929 and $1,508,962,
respectively.

NOTE C-EXPENSES

NOTE D-SALES AND ADMINISTRATIVE CHARGES

NOTE E-SUMMARY OF CHANGES IN ACCUMULATION UNITS

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------------------
UNITS AMOUNT UNITS AMOUNT
----- ------ ----- ------
<S> <C> <C> <C> <C>
Balance at
beginning of
year 139,945 $11,403,341 150,474 $10,412,808

Purchases 2,945 268,272 3,007 226,321

Net investment
income* - 78,354 - 85,005

Net realized gain
from investment
transactions* - 451,738 - 268,930

Net unrealized
appreciation
of investments* - 1,709,736 - 1,402,260
Withdrawals (18,176) (1,636,104) (13,536) (995,151)

Reimbursement
for contract
guarantees* - 172 - 3,168
------------------------------------------------------

Balance at end
of year 124,714 $12,275,509 139,945 $11,403,341
------------------------------------------------------
------------------------------------------------------
</TABLE>

*Excludes portion allocated to annuity reserves on a pro rata basis.

NOTE F-REMUNERATION OF MANAGEMENT

NOTE G-NET UNREALIZED APPRECIATION OF
INVESTMENTS

Net unrealized appreciation of investments at December 31, 1997 and 1996 was as
follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
--------------------------------
<S> <C> <C>
Gross unrealized appreciation $5,387,633 $3,670,260

4
<PAGE>

FRANKLIN LIFE VARIABLE ANNUITY FUND A
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $1.910 $1.685 $1.948 $1.408 $1.231
Expenses 1.312 1.090 .875 .773 .773
----------------------------------------------------------------------
Net investment income .598 .595 1.073 .635 .458
Net realized and unrealized gain (loss) on investments 16.346 11.690 14.139 (.240) .112
----------------------------------------------------------------------
Net increase in accumulation unit value 16.944 12.285 15.212 .395 .570
Accumulation unit value:
Beginning of year 81.485 69.200 53.988 53.593 53.023
----------------------------------------------------------------------
End of year $98.429 $81.485 $69.200 $53.988 $53.593
----------------------------------------------------------------------
----------------------------------------------------------------------

Ratio of expenses to average net assets 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net investment income to average net assets .66% .79% 1.76% 1.18% .85%
Portfolio turnover rate .70% 4.77% 14.66% 88.99% 68.62%
Number of accumulation units outstanding at end of year 124,714 139,945 150,474 172,507 198,763
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

MATTERS SUBMITTED TO VOTE OF CONTRACT OWNERS

An annual meeting of Contract Owners of the Fund was held on April 21, 1997. At
the meeting, the individuals named below were elected as Members of the Board of
Managers of the Fund, and Ernst & Young LLP was ratified as the Fund's
independent auditors for the ensuing fiscal year. The number of votes cast for,
against or withheld, as well as the number of abstentions and broker non-votes,
if applicable, as to each matter is set forth in the table below.

MATTER VOTES:
------------------- ------------------------------------
FOR AGAINST ABSTAIN
------- -------- -------
<S> <C> <C> <C>
Election of
Robert G. Spencer as
Member, Board of Managers 59,899 1,753 0

Election of
Dr. Robert C. Spencer as
Member, Board of Managers 59,899 1,753 0

Election of
James W. Voth as
Member, Board of Managers 60,015 1,637 0

Election of
Clifford L. Greenwalt as
Member, Board of Managers 60,015 1,637 0

Ratification of Selection
of Ernst & Young LLP as
independent auditors 59,688 1,135 829
</TABLE>

5
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Managers and Contract Owners
Franklin Life Variable Annuity Fund A

/s/ Ernst & Young LLP

Chicago, Illinois
January 30, 1998

6
<PAGE>

APPENDIX C

VARIABLE INSURANCE PRODUCTS FUND

VARIABLE INSURANCE PRODUCTS FUND II

STATEMENT OF ADDITIONAL INFORMATION

VARIABLE INSURANCE PRODUCTS FUND:
MONEY MARKET PORTFOLIO, HIGH INCOME PORTFOLIO, EQUITY-INCOME
PORTFOLIO,
GROWTH PORTFOLIO, AND OVERSEAS PORTFOLIO
VARIABLE INSURANCE PRODUCTS FUND II:
INVESTMENT GRADE BOND PORTFOLIO, ASSET MANAGER PORTFOLIO,
ASSET MANAGER: GROWTH PORTFOLIO, INDEX 500 PORTFOLIO, AND CONTRAFUND
PORTFOLIO
VARIABLE INSURANCE PRODUCTS FUND III:
BALANCED PORTFOLIO, GROWTH & INCOME PORTFOLIO,
AND GROWTH OPPORTUNITIES PORTFOLIO
INITIAL CLASS AND SERVICE CLASS
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1998
This Statement of Additional Information (SAI) is not a prospectus but
should be read in conjunction with the funds' current Prospectuses
(dated April 30, 1998) for Initial Class and Service Class shares.
Please retain this document for future reference. The funds' Annual
Reports are separate documents supplied with this SAI. To obtain a
free additional copy of a Prospectus or an Annual Report, please call
Fidelity at 1-800-544- 1916, or your insurance company.
TABLE OF CONTENTS PAGE

INVESTMENT POLICIES AND LIMITATIONS 3

PORTFOLIO TRANSACTIONS 12

VALUATION 16

PERFORMANCE 17

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION 41

DISTRIBUTIONS AND TAXES 41

FMR 42

BT 42

TRUSTEES AND OFFICERS 42

MANAGEMENT CONTRACTS 45

DISTRIBUTION AND SERVICE PLANS 55

CONTRACTS WITH FMR AFFILIATES 57

CONTRACTS WITH BT AFFILIATES 57

DESCRIPTION OF THE TRUSTS 57

FINANCIAL STATEMENTS 58

APPENDIX 58

For more information on any Fidelity fund, including charges and
expenses, call or write for a free prospectus. Read it carefully
before you invest or send money.
VIP/VIPII/VIPIII-ptb-0498
700593
INVESTMENT ADVISER
Fidelity Management & Research Company (FMR)
INVESTMENT SUB-ADVISERS
Money Market Portfolio:
Fidelity Investments Money Management, Inc. (FIMM)
High Income, Asset Manager, Contrafund, Balanced, Growth
Opportunities, Growth & Income, and Asset Manager: Growth Portfolios:
Fidelity Management & Research (U.K.) Inc. (FMR U.K.)
Fidelity Management & Research (Far East) Inc. (FMR Far East)
Index 500 Portfolio:
Bankers Trust Company (BT)
Overseas Portfolio:
FMR U.K.
FMR Far East
Fidelity International Investment Advisors (FIIA)
Fidelity International Investment Advisors (U.K.) Limited
(FIIA(U.K.)L)
DISTRIBUTOR
Fidelity Distributors Corporation (FDC)
TRANSFER AGENT
Fidelity Investments Institutional Operations Company, Inc. (FIIOC)
CUSTODIANS
Money Market, High Income, and Investment Grade Bond Portfolios:
The Bank of New York
Equity-Income, Overseas, Asset Manager: Growth, Asset Manager,
Balanced, and Growth & Income Portfolios:
The Chase Manhattan Bank
Growth, Growth Opportunities, and Contrafund Portfolios:
Brown Brothers Harriman & Co.
Index 500 Portfolio:
BT
INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy
or limitation states a maximum percentage of a fund's assets that may
be invested in any security or other asset, or sets forth a policy
regarding quality standards, such standard or percentage limitation
will be determined immediately after and as a result of the fund's
acquisition of such security or other asset. Accordingly, any
subsequent change in values, net assets, or other circumstances will
not be considered when determining whether the investment complies
with a fund's investment policies and limitations.
A fund's fundamental investment policies and limitations cannot be
changed without approval by a "majority of the outstanding voting
securities" (as defined in the Investment Company Act of 1940 (the
1940 Act)) of the fund. However, except for the fundamental investment
limitations listed below, the investment policies and limitations
described in this SAI are not fundamental and may be changed without
shareholder approval.
MONEY MARKET PORTFOLIO
THE FOLLOWING ARE MONEY MARKET PORTFOLIO'S FUNDAMENTAL INVESTMENT
LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE FUND MAY NOT:
(1) purchase the securities of any issuer (other than obligations
issued or guaranteed as to principal and interest by the United
States, its agencies or instrumentalities) if, as a result, more than
5% of its total assets would be invested in the securities of such
issuer, provided, however, that with respect to 25% of its total
assets, 10% of its assets may be invested in the securities of any
single issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that the fund may (i) borrow money for
temporary or emergency purposes (not for leveraging or investment) and
(ii) engage in reverse repurchase agreements for any purpose; provided
that (i) and (ii) in combination do not exceed 33 1/3% of the fund's
total assets (including the amount borrowed) less liabilities (other
than borrowings). Any borrowings that come to exceed this amount will
be reduced within three days (not including Sundays and holidays) to
the extent necessary to comply with the 33 1/3% limitation;
(4) underwrite securities issued by others, except to the extent that
the fund may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the fund's total
assets would be invested in the securities of companies whose
principal business activities are in the same industry, except that
the fund will invest more than 25% of its total assets in the
financial services industry;
(6) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent the fund from investing in securities or other instruments
backed by real estate or securities of companies engaged in the real
estate business);
(7) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments;
(8) lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other parties, but
this limitation does not apply to purchases of debt securities or to
repurchase agreements; or
(9) invest in companies for the purpose of exercising control or
management.
THE FOLLOWING INVESTMENT LIMITATIONS FOR MONEY MARKET PORTFOLIO ARE
NOT FUNDAMENTAL AND MAY BE CHANGED, AS REGULATORY AGENCIES PERMIT,
WITHOUT SHAREHOLDER APPROVAL.
(i) The fund does not currently intend to purchase a security (other
than securities issued or guaranteed by the U.S. government or any of
its agencies or instrumentalities) if, as a result, more than 5% of
its total assets would be invested in the securities of a single
issuer; provided that the fund may invest up to 10% of its total
assets in the first tier securities of a single issuer for up to three
business days. (This limit does not apply to investments of up to 10%
of total assets in securities of other open-end investment companies
managed by FMR or a successor or affiliate purchased pursuant to an
exemptive order granted by the SEC.)
(ii) The fund does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in
kind and amount to the securities sold short, and provided that
transactions in futures contracts and options are not deemed to
constitute selling securities short.
(iii) The fund does not currently intend to purchase securities on
margin, except that the fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin.
(iv) The fund may borrow money only (a) from a bank or from a
registered investment company or portfolio for which FMR or an
affiliate serves as investment adviser or (b) by engaging in reverse
repurchase agreements with any party. The fund will not borrow from
other funds advised by FMR or its affiliates if total outstanding
borrowings immediately after such borrowing would exceed 15% of the
fund's total assets.
(v) The fund does not currently intend to purchase any security if,
as a result, more than 10% of its net assets would be invested in
securities that are deemed to be illiquid because they are subject to
legal or contractual restrictions on resale or because they cannot be
sold or disposed of in the ordinary course of business at
approximately the prices at which they are valued.
(vi) The fund does not currently intend to purchase or sell futures
contracts or call options. This limitation does not apply to options
attached to, or acquired or traded together with, their underlying
securities, and does not apply to securities that incorporate features
similar to options or futures contracts.
(vii) The fund does not currently intend to lend assets other than
securities to other parties, except by lending money (up to 10% of the
fund's net assets) to a registered investment company or portfolio for
which FMR or an affiliate serves as investment adviser. (This
limitation does not apply to purchases of debt securities or to
repurchase agreements.)
(viii) The fund does not currently intend to invest in oil, gas, or
other mineral exploration or development programs or leases.
With respect to limitation (v), if through a change in values, net
assets, or other circumstances, the fund were in a position where more
than 10% of its net assets w as invested in illiquid securities,
it would consider appropriate steps to protect liquidity.
For the fund's policies on quality and maturity, see the section
entitled "Quality and Maturity" on page .
HIGH INCOME, EQUITY-INCOME, GROWTH, OVERSEAS, GROWTH & INCOME,
BALANCED, GROWTH OPPORTUNITIES, INVESTMENT GRADE BOND,
ASSET MANAGER, INDEX 500, CONTRAFUND, AND ASSET MANAGER: GROWTH
PORTFOLIOS
THE FOLLOWING ARE HIGH INCOME, EQUITY-INCOME, GROWTH, OVERSEAS, GROWTH
& INCOME, BALANCED, GROWTH OPPORTUNITIES, INVESTMENT GRADE BOND, ASSET
MANAGER, INDEX 500, CONTRAFUND, AND ASSET MANAGER: GROWTH PORTFOLIOS'
FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH IN THEIR ENTIRETY. EACH
FUND MAY NOT:
(1) (for High Income, Equity-Income, Growth, Overseas, Investment
Grade Bond, Asset Manager, Asset Manager: Growth, Contrafund,
Balanced, Growth & Income, and Growth Opportunities Portfolios) with
respect to 75% of the fund's total assets, purchase the securities of
any issuer (other than securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities) if, as a
result, (a) more than 5% of the fund's total assets would be invested
in the securities of that issuer, or (b) the fund would hold more than
10% of the outstanding voting securities of that issuer;
(for Index 500 Portfolio) with respect to 75% of the fund's total
assets, purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities, or securities of other investment companies) if, as
a result, (a) more than 5% of the fund's total assets would be
invested in the securities of that issuer, or (b) the fund would hold
more than 10% of the outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) (for High Income, Equity-Income, Growth, Overseas, Balanced, and
Growth Opportunities Portfolios) borrow money, except that the fund
(i) may borrow money for temporary or emergency purposes (not for
leveraging or investment) or (ii) engage in reverse repurchase
agreements, provided that (i) and (ii) in combination (borrowings) do
not exceed 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that come to
exceed 33 1/3% of the value of the fund's total assets by reason of a
decline in net assets will be reduced within three days (exclusive of
Sundays and holidays) to the extent necessary to comply with the 33
1/3% limitation;
(for Investment Grade Bond, Asset Manager, Asset Manager: Growth,
Index 500, Contrafund, and Growth & Income Portfolios) borrow money,
except that the fund may borrow money for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding
33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to
exceed this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with the 33
1/3% limitation;
(4) underwrite securities issued by others, except to the extent that
the fund may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of its total assets
would be invested in the securities of companies whose principal
business activities are in the same industry;
(6) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent the fund from investing in securities or other instruments
backed by real estate or securities of companies engaged in the real
estate business);
(7) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not
prevent the fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed
by physical commodities); or
(8) lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other parties, but
this limitation does not apply to purchases of debt securities or to
repurchase agreements.
(9) (for Balanced and Growth Opportunities Portfolios) Each fund may,
notwithstanding any other fundamental investment policy or limitation,
invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental
investment objective, policies, and limitations as the fund.
THE FOLLOWING INVESTMENT LIMITATIONS FOR HIGH INCOME, EQUITY-INCOME,
GROWTH, OVERSEAS, GROWTH & INCOME, BALANCED, GROWTH OPPORTUNITIES,
INVESTMENT GRADE BOND, ASSET MANAGER, INDEX 500, CONTRAFUND, AND ASSET
MANAGER: GROWTH PORTFOLIOS ARE NOT FUNDAMENTAL AND MAY BE CHANGED, AS
REGULATORY AGENCIES PERMIT, WITHOUT SHAREHOLDER APPROVAL.
(i) Each fund does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in
kind and amount to the securities sold short, and provided that
transactions in futures contracts and options are not deemed to
constitute selling securities short.
(ii) Each fund does not currently intend to purchase securities on
margin, except that the fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin.
(iii) Each fund may borrow money only (a) from a bank or from a
registered investment company or portfolio for which FMR or an
affiliate serves as investment adviser or (b) by engaging in reverse
repurchase agreements with any party (reverse repurchase agreements
are treated as borrowings for purposes of fundamental investment
limitation (3)). Each fund will not borrow from other funds advised by
FMR or its affiliates if total outstanding borrowings immediately
after such borrowing would exceed 15% of the fund's total assets.
(iv) Each fund does not currently intend to purchase any security if,
as a result, more than 10% (Equity-Income, Growth, Investment Grade
Bond, Asset Manager, Asset Manager: Growth, Index 500, Contrafund,
Balanced, Growth & Income, and Growth Opportunities Portfolios) or
more than 15% (High Income and Overseas Portfolios) of its net assets
would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or
because they cannot be sold or disposed of in the ordinary course of
business at approximately the prices at which they are valued.
(v) Each fund does not currently intend to lend assets other than
securities to other parties, except by: (a) lending money (up to 5% of
net assets for Equity-Income, Growth, Overseas, Asset Manager, Asset
Manager: Growth, Index 500, Contrafund, Balanced, Growth & Income, and
Growth Opportunities Portfolios and 7.5% of net assets for High Income
and Investment Grade Bond Portfolios) to a registered investment
company or portfolio for which FMR or an affiliate serves as
investment adviser or (b) acquiring loans, loan participations, or
other forms of direct debt instruments and, in connection therewith,
assuming any associated unfunded commitments of the sellers. (This
limitation does not apply to purchases of debt securities or to
repurchase agreements.)
(vi) Each fund does not currently intend to invest in oil, gas, or
other mineral exploration or development programs or leases.
(vii) (for Balanced and Growth Opportunities Portfolios) Each fund
does not currently intend to invest all of its assets in the
securities of a single open-end management investment company with
substantially the same fundamental investment objective, policies, and
limitations as the fund.
With respect to limitation (iv), if through a change in values, net
assets, or other circumstances, a fund were in a position where more
than 10% (Equity-Income, Growth, Investment Grade Bond, Asset Manager,
Asset Manager: Growth, Index 500, Contrafund, Balanced, Growth &
Income, and Growth Opportunities Portfolios ) or more than 15%
(High Income and Overseas Portfolios ) of its net assets
w as invested in illiquid securities, it would consider
appropriate steps to protect liquidity.
For the funds' limitations on futures and options transactions, see
the section entitled "Limitations on Futures and Options Transactions"
on page . For purposes of Index 500 Portfolio's limitation on
concentration in a single industry, the fund may use the industry
categorizations as defined by BARRA, Inc.
Higher yielding, fixed-income securities of the type in which High
Income Portfolio invests will at times be purchased at a discount from
or a premium over par value. The total return on such securities
includes the potential for a capital gain or loss. High Income
Portfolio generally does not intend to hold securities for the purpose
of achieving capital gains, however, unless current yields on these
securities remain attractive. Capital gain or loss may also be
realized upon the sale of portfolio securities.
The U.S. government has from time to time in the past imposed
restrictions, through taxation and otherwise, on foreign investments
by U.S. investors such as the funds. If such restrictions should be
reinstituted, it might become necessary for Overseas Portfolio to
invest all or substantially all of its assets in U.S. securities. In
such event, the Board of Trustees would reevaluate the fund's
investment objective and policies.
In accordance with the funds' fundamental investment policies, there
are no limitations on the percentage of the funds' assets which may be
invested in any one type of instrument. Nor are there limitations on
the percentage of the funds' assets which may be invested in any
foreign country. However, in order to comply with diversification
requirements under Section 817(h) of the Internal Revenue Code of
1986, as amended, in connection with FMR serving as investment
adviser, each fund has agreed to certain non-fundamental limitations.
Please refer to your insurance company's separate account prospectus
for more information.
THE FOLLOWING PAGES CONTAIN MORE DETAILED INFORMATION ABOUT TYPES OF
INSTRUMENTS IN WHICH A FUND MAY INVEST, STRATEGIES FMR (BT FOR INDEX
500) MAY EMPLOY IN PURSUIT OF A FUND'S INVESTMENT OBJECTIVE, AND A
SUMMARY OF RELATED RISKS. FMR (BT FOR INDEX 500) MAY NOT BUY ALL OF
THESE INSTRUMENTS OR USE ALL OF THESE TECHNIQUES UNLESS IT BELIEVES
THAT DOING SO WILL HELP A FUND ACHIEVE ITS GOAL.
AFFILIATED BANK TRANSACTIONS. A fund may engage in transactions with
financial institutions that are, or may be considered to be,
"affiliated persons" of the fund under the 1940 Act. These
transactions may involve repurchase agreements with custodian banks;
short-term obligations of, and repurchase agreements with, the 50
largest U.S. banks (measured by deposits); municipal securities; U.S.
Government securities with affiliated financial institutions that are
primary dealers in these securities; short-term currency transactions;
and short-term borrowings. In accordance with exemptive orders issued
by the Securities and Exchange Commission (SEC), the Board of Trustees
has established and periodically reviews procedures applicable to
transactions involving affiliated financial institutions.
ASSET ALLOCATION (ASSET MANAGER AND ASSET MANAGER: GROWTH
PORTFOLIOS ). The stock class includes domestic and foreign equity
securities of all types (other than adjustable rate preferred stocks,
which are included in the bond class). FMR seeks to maximize total
return within this asset class by actively allocating assets to
industry sectors expected to benefit from major trends, and to
individual stocks that FMR believes to have superior investment
potential. When FMR selects equity securities, it considers both
growth and anticipated dividend income. Securities in the stock class
may include common stocks, fixed-rate preferred stocks (including
convertible preferred stocks), warrants, rights, depositary receipts,
securities of closed-end investment companies, and other equity
securities issued by companies of any size, located anywhere in the
world.
The bond class includes all varieties of domestic and foreign
fixed-income securities maturing in more than one year. FMR will seek
to maximize total return within the bond class by adjusting a fund's
investments in securities with different credit qualities, maturities,
and coupon or dividend rates, and by seeking to take advantage of
yield differentials between securities. Securities in this class may
include bonds, notes, adjustable-rate preferred stocks, convertible
bonds, mortgage-related and asset-backed securities, domestic and
foreign government and government agency securities, zero coupon
bonds, and other intermediate and long-term securities. These
securities may be denominated in U.S. dollars or foreign currency.
The short-term/money market class includes all types of domestic and
foreign short-term and money market instruments. FMR will seek to
maximize total return within this asset class by taking advantage of
yield differentials between different instruments, issuers, and
currencies. Short-term and money market instruments may include
corporate debt securities, such as commercial paper and notes;
government securities issued by U.S. or foreign governments or their
agencies or instrumentalities; bank deposits and other financial
institution obligations; repurchase agreements involving any type of
security; and other similar short-term instruments. These instruments
may be denominated in U.S. dollars or foreign currency.
FMR may use its judgment to place a security in the most appropriate
class based on its investment characteristics. Fixed-income securities
may be classified in the bond or short-term/money market class
according to interest rate sensitivity as well as maturity. The funds
may also make other investments that do not fall within these classes.
In making asset allocation decisions, FMR will evaluate projections of
risk, market conditions, economic conditions, volatility, yields, and
returns. FMR's management will use database systems to help analyze
past situations and trends, research specialists in each of the asset
classes to help in securities selection, portfolio management
professionals to determine asset allocation and to select individual
securities, and its own credit analysis as well as credit analyses
provided by rating services.
ASSET-BACKED SECURITIES represent interests in pools of mortgages,
loans, receivables or other assets. Payment of interest and repayment
of principal may be largely dependent upon the cash flows generated by
the assets backing the securities and, in certain cases, supported by
letters of credit, surety bonds, or other credit enhancements.
Asset-backed security values may also be affected by the
creditworthiness of the servicing agent for the pool, the originator
of the loans or receivables, or the entities providing the credit
enhancement. In addition, these securities may be subject to
prepayment risk.
CLOSED-END INVESTMENT COMPANIES are investment companies that issue a
fixed number of shares which trade on a stock exchange or
over-the-counter. Closed-end investment companies are professionally
managed and may invest in any type of security. Shares of closed-end
investment companies may trade at a premium or a discount to their net
asset value. A fund may purchase shares of closed-end investment
companies to facilitate investment in certain foreign countries.
CONVERTIBLE SECURITIES are bonds, debentures, notes, preferred stocks
or other securities that may be converted or exchanged (by the holder
or by the issuer) into shares of the underlying common stock (or cash
or securities of equivalent value) at a stated exchange ratio. A
convertible security may also be called for redemption or conversion
by the issuer after a particular date and under certain circumstances
(including a specified price) established upon issue. If a convertible
security held by a fund is called for redemption or conversion, the
fund could be required to tender it for redemption, convert it into
the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss
than common stocks. Convertible securities generally provide yields
higher than the underlying common stocks (but generally lower than
comparable non-convertible) securities. Because of this higher yield,
convertible securities generally sell at prices above their
"conversion value," which is the current market value of the stock to
be received upon conversion. The difference between this conversion
value and the price of convertible securities will vary over time
depending on changes in the value of the underlying common stocks and
interest rates. When the underlying common stocks decline in value,
convertible securities will tend not to decline to the same extent
because of the interest or dividend payments and the repayment of
principal at maturity for certain types of convertible securities.
However, securities that are convertible other than at the option of
the holder generally do not limit the potential for loss to the same
extent as securities convertible at the option of the holder. When the
underlying common stocks rise in value, the value of convertible
securities may also be expected to increase. At the same time,
however, the difference between the market value of convertible
securities and their conversion value will narrow, which means that
the value of convertible securities will generally not increase to the
same extent as the value of the underlying common stocks. Because
convertible securities may also be interest-rate sensitive, their
value may increase as interest rates fall and decrease as interest
rates rise. Convertible securities are also subject to credit risk and
are often lower-quality securities.
DELAYED-DELIVERY TRANSACTIONS. Securities may be bought and sold on a
delayed-delivery or when-issued basis. These transactions involve a
commitment to purchase or sell specific securities at a predetermined
price or yield, with payment and delivery taking place after the
customary settlement period for that type of security. Typically, no
interest accrues to the purchaser until the security is delivered. A
non-money market fund may receive fees or price concessions for
entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the purchaser
assumes the rights and risks of ownership, including the risks of
price and yield fluctuations and the risk that the security will not
be issued as anticipated. Because payment for the securities is not
required until the delivery date, these risks are in addition to the
risks associated with a fund's investments. If a fund remains
substantially fully invested at a time when delayed-delivery purchases
are outstanding, the delayed-delivery purchases may result in a form
of leverage. When delayed-delivery purchases are outstanding, a fund
will set aside appropriate liquid assets in a segregated custodial
account to cover the purchase obligations. When a fund has sold a
security on a delayed-delivery basis, the fund does not participate in
further gains or losses with respect to the security. If the other
party to a delayed-delivery transaction fails to deliver or pay for
the securities, a fund could miss a favorable price or yield
opportunity or could suffer a loss.
A fund may renegotiate a delayed-delivery transaction and may sell the
underlying securities before delivery, which may result in capital
gains or losses for the fund.
DOMESTIC AND FOREIGN INVESTMENTS ( M ONEY M ARKET
PORTFOLIO ) include U.S. dollar-denominated time deposits,
certificates of deposit, and bankers' acceptances of U.S. banks and
their branches located outside of the United States, U.S. branches and
agencies of foreign banks, and foreign branches of foreign banks.
Domestic and foreign investments may also include U.S.
dollar-denominated securities issued or guaranteed by other U.S. or
foreign issuers, including U.S. and foreign corporations or other
business organizations, foreign governments, foreign government
agencies or instrumentalities, and U.S. and foreign financial
institutions, including savings and loan institutions, insurance
companies, mortgage bankers, and real estate investment trusts, as
well as banks.
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or
may be limited by the terms of a specific obligation and by
governmental regulations. Payment of interest and repayment of
principal on these obligations may also be affected by governmental
action in the country of domicile of the branch (generally referred to
as sovereign risk). In addition, evidence of ownership of portfolio
securities may be held outside of the United States and the fund may
be subject to the risks associated with the holding of such property
overseas. Various provisions of federal law governing the
establishment and operation of U.S. branches do not apply to foreign
branches of U.S. banks.
Obligations of U.S. branches and agencies of foreign banks may be
general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and by
federal and state regulation, as well as by governmental action in the
country in which the foreign bank has its head office.
Obligations of foreign issuers involve certain additional risks. These
risks may include future unfavorable political and economic
developments, withholding taxes, seizures of foreign deposits,
currency controls, interest limitations, or other governmental
restrictions that might affect repayment of principal or payment of
interest, or the ability to honor a credit commitment. Additionally,
there may be less public information available about foreign entities.
Foreign issuers may be subject to less governmental regulation and
supervision than U.S. issuers. Foreign issuers also generally are not
bound by uniform accounting, auditing, and financial reporting
requirements comparable to those applicable to U.S. issuers.
EXPOSURE TO FOREIGN MARKETS. Foreign securities, foreign currencies,
and securities issued by U.S. entities with substantial foreign
operations may involve significant risks in addition to the risks
inherent in U.S. investments.
Foreign investments involve risks relating to local political,
economic, regulatory, or social instability, military action or
unrest, or adverse diplomatic developments, and may be affected by
actions of foreign governments adverse to the interests of U.S.
investors. Such actions may include expropriation or nationalization
of assets, confiscatory taxation, restrictions on U.S. investment or
on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There is no assurance that
FMR (BT for Index 500) will be able to anticipate these potential
events or counter their effects. In addition, the value of securities
denominated in foreign currencies and of dividends and interest paid
with respect to such securities will fluctuate based on the relative
strength of the U.S. dollar.
It is anticipated that in most cases the best available market for
foreign securities will be on an exchange or in over-the-counter (OTC)
markets located outside of the United States. Foreign stock markets,
while growing in volume and sophistication, are generally not as
developed as those in the United States, and securities of some
foreign issuers may be less liquid and more volatile than securities
of comparable U.S. issuers. Foreign security trading, settlement and
custodial practices (including those involving securities settlement
where fund assets may be released prior to receipt of payment) are
often less developed than those in U.S. markets, and may result in
increased risk or substantial delays in the event of a failed trade or
the insolvency of, or breach of duty by, a foreign broker-dealer,
securities depository or foreign subcustodian. In addition, the costs
associated with foreign investments, including withholding taxes,
brokerage commissions and custodial costs, are generally higher than
with U.S. investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers are generally not bound by uniform
accounting, auditing, and financial reporting requirements and
standards of practice comparable to those applicable to U.S. issuers.
Adequate public information on foreign issuers may not be available,
and it may be difficult to secure dividends and information regarding
corporate actions on a timely basis. In general, there is less overall
governmental supervision and regulation of securities exchanges,
brokers, and listed companies than in the United States. OTC markets
tend to be less regulated than stock exchange markets and, in certain
countries, may be totally unregulated. Regulatory enforcement may be
influenced by economic or political concerns, and investors may have
difficulty enforcing their legal rights in foreign countries.
Some foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to such
transfer restrictions may be marketable abroad, they may be less
liquid than foreign securities of the same class that are not subject
to such restrictions.
American Depositary Receipts (ADRs) as well as other "hybrid" forms of
ADRs, including European Depositary Receipts (EDRs) and Global
Depositary Receipts (GDRs), are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by
depository banks and generally trade on an established market in the
United States or elsewhere. The underlying shares are held in trust by
a custodian bank or similar financial institution in the issuer's home
country. The depository bank may not have physical custody of the
underlying securities at all times and may charge fees for various
services, including forwarding dividends and interest and corporate
actions. ADRs are alternatives to directly purchasing the underlying
foreign securities in their national markets and currencies. However,
ADRs continue to be subject to many of the risks associated with
investing directly in foreign securities. These risks include foreign
exchange risk as well as the political and economic risks of the
underlying issuer's country.
The risks of foreign investing may be magnified for investments in
emerging markets. Security prices in emerging markets can be
significantly more volatile than those in more developed markets,
reflecting the greater uncertainties of investing in less established
markets and economies. In particular, countries with emerging markets
may have relatively unstable governments, may present the risks of
nationalization of businesses, restrictions on foreign ownership and
prohibitions on the repatriation of assets, and may have less
protection of property rights than more developed countries. The
economies of countries with emerging markets may be based on only a
few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt
burdens or inflation rates. Local securities markets may trade a small
number of securities and may be unable to respond effectively to
increases in trading volume, potentially making prompt liquidation of
holdings difficult or impossible at times.
FOREIGN CURRENCY TRANSACTIONS. A bond or equity fund may conduct
foreign currency transactions on a spot (i.e., cash) or forward basis
(i.e., by entering into forward contracts to purchase or sell foreign
currencies). Although foreign exchange dealers generally do not charge
a fee for such conversions, they do realize a profit based on the
difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign
currency at one rate, while offering a lesser rate of exchange should
the counterparty desire to resell that currency to the dealer. Forward
contracts are customized transactions that require a specific amount
of a currency to be delivered at a specific exchange rate on a
specific date or range of dates in the future. Forward contracts are
generally traded in an interbank market directly between currency
traders (usually large commercial banks) and their customers. The
parties to a forward contract may agree to offset or terminate the
contract before its maturity, or may hold the contract to maturity and
complete the contemplated currency exchange. A fund may use currency
forward contracts for any purpose consistent with its investment
objective.
The following discussion summarizes the principal currency management
strategies involving forward contracts that could be used by a fund. A
fund may also use swap agreements, indexed securities, and options and
futures contracts relating to foreign currencies for the same
purposes.
A "settlement hedge" or "transaction hedge" is designed to protect a
fund against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is
made or received. Entering into a forward contract for the purchase or
sale of the amount of foreign currency involved in an underlying
security transaction for a fixed amount of U.S. dollars "locks in" the
U.S. dollar price of the security. Forward contracts to purchase or
sell a foreign currency may also be used by a fund in anticipation of
future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected
by FMR (BT for Index 500).
A fund may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For
example, if a fund owned securities denominated in pounds sterling, it
could enter into a forward contract to sell pounds sterling in return
for U.S. dollars to hedge against possible declines in the pound's
value. Such a hedge, sometimes referred to as a "position hedge,"
would tend to offset both positive and negative currency fluctuations,
but would not offset changes in security values caused by other
factors. A fund could also hedge the position by selling another
currency expected to perform similarly to the pound sterling. This
type of hedge, sometimes referred to as a "proxy hedge," could offer
advantages in terms of cost, yield, or efficiency, but generally would
not hedge currency exposure as effectively as a direct hedge into U.S.
dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged
securities are denominated.
A fund may enter into forward contracts to shift its investment
exposure from one currency into another. This may include shifting
exposure from U.S. dollars to a foreign currency, or from one foreign
currency to another foreign currency. This type of strategy, sometimes
known as a "cross-hedge," will tend to reduce or eliminate exposure to
the currency that is sold, and increase exposure to the currency that
is purchased, much as if a fund had sold a security denominated in one
currency and purchased an equivalent security denominated in another.
Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause a fund to assume the risk of
fluctuations in the value of the currency it purchases.
Under certain conditions, SEC guidelines require mutual funds to set
aside appropriate liquid assets in a segregated custodial account to
cover currency forward contracts. As required by SEC guidelines, a
fund will segregate assets to cover currency forward contracts, if
any, whose purpose is essentially speculative. A fund will not
segregate assets to cover forward contracts entered into for hedging
purposes, including settlement hedges, position hedges, and proxy
hedges.
Successful use of currency management strategies will depend on FMR's
(BT's for Index 500) skill in analyzing currency values. Currency
management strategies may substantially change a fund's investment
exposure to changes in currency exchange rates and could result in
losses to a fund if currencies do not perform as FMR (BT for Index
500) anticipates. For example, if a currency's value rose at a time
when FMR (BT for Index 500) had hedged a fund by selling that currency
in exchange for dollars, a fund would not participate in the
currency's appreciation. If FMR (BT for Index 500) hedges currency
exposure through proxy hedges, a fund could realize currency losses
from both the hedge and the security position if the two currencies do
not move in tandem. Similarly, if FMR (BT for Index 500) increases a
fund's exposure to a foreign currency and that currency's value
declines, a fund will realize a loss. There is no assurance that FMR's
(BT's for Index 500) use of currency management strategies will be
advantageous to a fund or that it will hedge at appropriate times.
FOREIGN REPURCHASE AGREEMENTS. Foreign repurchase agreements may
include agreements to purchase and sell foreign securities in exchange
for fixed U.S. dollar amounts, or in exchange for specified amounts of
foreign currency. Unlike typical U.S. repurchase agreements, foreign
repurchase agreements may not be fully collateralized at all times.
However, pursuant to certain state insurance regulations, any foreign
repurchase agreements a fund enters into will be secured by collateral
consisting of liquid assets having a market value of not less than
102% of the cash or assets transferred to the other party. The value
of a security purchased by a fund may be more or less than the price
at which the counterparty has agreed to repurchase the security. In
the event of default by the counterparty, the fund may suffer a loss
if the value of the security purchased is less than the agreed-upon
repurchase price, or if the fund is unable to successfully assert a
claim to the collateral under foreign laws. As a result, foreign
repurchase agreements may involve higher credit risks than repurchase
agreements in U.S. markets, as well as risks associated with currency
fluctuations. In addition, as with other emerging market investments,
repurchase agreements with counterparties located in emerging markets
or relating to emerging market securities may involve issuers or
counterparties with lower credit ratings than typical U.S. repurchase
agreements.
FUNDS' RIGHTS AS SHAREHOLDERS. The funds do not intend to direct or
administer the day-to-day operations of any company. A fund, however,
may exercise its rights as a shareholder and may communicate its views
on important matters of policy to management, the Board of Directors,
and shareholders of a company when FMR (BT for Index 500) determines
that such matters could have a significant effect on the value of the
fund's investment in the company. The activities in which a fund may
engage, either individually or in conjunction with others, may
include, among others, supporting or opposing proposed changes in a
company's corporate structure or business activities; seeking changes
in a company's directors or management; seeking changes in a company's
direction or policies; seeking the sale or reorganization of the
company or a portion of its assets; or supporting or opposing
third-party takeover efforts. This area of corporate activity is
increasingly prone to litigation and it is possible that a fund could
be involved in lawsuits related to such activities. FMR (BT for Index
500) will monitor such activities with a view to mitigating, to the
extent possible, the risk of litigation against a fund and the risk of
actual liability if a fund is involved in litigation. No guarantee can
be made, however, that litigation against a fund will not be
undertaken or liabilities incurred.
FUTURES AND OPTIONS. The following paragraphs pertain to futures and
options: Asset Coverage for Futures and Options Positions, Combined
Positions, Correlation of Price Changes, Futures Contracts, Futures
Margin Payments, Limitations on Futures and Options Transactions,
Liquidity of Options and Futures Contracts, Options and Futures
Relating to Foreign Currencies, OTC Options, Purchasing Put and Call
Options, and Writing Put and Call Options.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The funds will
comply with guidelines established by the SEC with respect to coverage
of options and futures strategies by mutual funds and, if the
guidelines so require, will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held
in a segregated account cannot be sold while the futures or option
strategy is outstanding, unless they are replaced with other suitable
assets. As a result, there is a possibility that segregation of a
large percentage of a fund's assets could impede portfolio management
or the fund's ability to meet redemption requests or other current
obligations.
COMBINED POSITIONS involve purchasing and writing options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the
overall position. For example, purchasing a put option and writing a
call option on the same underlying instrument would construct a
combined position whose risk and return characteristics are similar to
selling a futures contract. Another possible combined position would
involve writing a call option at one strike price and buying a call
option at a lower price to reduce the risk of the written call option
in the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction
costs and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely
that the standardized contracts available will not match a fund's
current or anticipated investments exactly. A fund may invest in
options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in
which the fund typically invests, which involves a risk that the
options or futures position will not track the performance of the
fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a
fund's investments well. Options and futures prices are affected by
such factors as current and anticipated short-term interest rates,
changes in volatility of the underlying instrument, and the time
remaining until expiration of the contract, which may not affect
security prices the same way. Imperfect correlation may also result
from differing levels of demand in the options and futures markets and
the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A fund may purchase or sell
options and futures contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to
attempt to compensate for differences in volatility between the
contract and the securities, although this may not be successful in
all cases. If price changes in a fund's options or futures positions
are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
FUTURES CONTRACTS. In purchasing a futures contract, the buyer agrees
to purchase a specified underlying instrument at a specified future
date. In selling a futures contract, the seller agrees to sell a
specified underlying instrument at a specified future date. The price
at which the purchase and sale will take place is fixed when the buyer
and seller enter into the contract. Some currently available futures
contracts are based on specific securities, such as U.S. Treasury
bonds or notes, and some are based on indices of securities prices,
such as the Standard & Poor's 500 Index (S&P 500). Futures can be held
until their delivery dates, or can be closed out before then if a
liquid secondary market is available.
Overseas Portfolio may invest in futures based on such indexes as the
CAC 40 (France), DAX 30 (Germany), EuroTop 100 (Europe), IBEX (Spain),
FTSE 100 (United Kingdom), All Ordinary (Australia), Hang Seng (Hong
Kong), and Nikkei 225, Nikkei 300 and TOPIX (Japan).
The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore,
purchasing futures contracts will tend to increase a fund's exposure
to positive and negative price fluctuations in the underlying
instrument, much as if it had purchased the underlying instrument
directly. When a fund sells a futures contract, by contrast, the value
of its futures position will tend to move in a direction contrary to
the market. Selling futures contracts, therefore, will tend to offset
both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract
is not required to deliver or pay for the underlying instrument unless
the contract is held until the delivery date. However, both the
purchaser and seller are required to deposit "initial margin" with a
futures broker, known as a futures commission merchant (FCM), when the
contract is entered into. Initial margin deposits are typically equal
to a percentage of the contract's value. If the value of either
party's position declines, that party will be required to make
additional "variation margin" payments to settle the change in value
on a daily basis. The party that has a gain may be entitled to receive
all or a portion of this amount. Initial and variation margin payments
do not constitute purchasing securities on margin for purposes of a
fund's investment limitations. In the event of the bankruptcy of an
FCM that holds margin on behalf of a fund, the fund may be entitled to
return of margin owed to it only in proportion to the amount received
by the FCM's other customers, potentially resulting in losses to the
fund.
Although futures exchanges generally operate similarly in the U.S. and
abroad, foreign futures exchanges may follow different trading,
settlement and margin procedures than U.S. exchanges do. Futures
contracts traded outside the United States may involve greater risk of
loss than U.S.-traded contracts, including potentially greater risks
of losses due to insolvency of a futures broker, exchange member or
other party that may owe initial or variation margin to a fund.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. Each bond and equity
fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the Commodity
Futures Trading Commission (CFTC) and the National Futures
Association, which regulate trading in the futures markets. The funds
intend to comply with Rule 4.5 under the Commodity Exchange Act, which
limits the extent to which the funds can commit assets to initial
margin deposits and option premiums.
In addition, each fund (excluding Index 500) will not: (a) sell
futures contracts, purchase put options, or write call options if, as
a result, more than 25% of the fund's total assets would be hedged
with futures and options under normal conditions; (b) purchase futures
contracts or write put options if, as a result, the fund's total
obligations upon settlement or exercise of purchased futures contracts
and written put options would exceed 25% of its total assets; or (c)
purchase call options if, as a result, the current value of option
premiums for call options purchased by the fund would exceed 5% of the
fund's total assets. These limitations do not apply to options
attached to or acquired or traded together with their underlying
securities, and do not apply to securities that incorporate features
similar to options.
BT also intends to follow certain other limitations on Index 500's
futures and options activities. The fund will not purchase any option
if, as a result, more than 5% of its total assets would be invested in
option premiums. Under normal conditions, the fund will not enter into
any futures contract or option if, as a result, the sum of (i) the
current value of the assets hedged in the case of strategies involving
the sale of securities, and (ii) the current value of the indices or
other instruments underlying the fund's other futures or options
positions, would exceed 35% of the fund's total assets. These
limitations do not apply to options attached to, or acquired or traded
together with, their underlying securities, and do not apply to
securities that incorporate features similar to options.
The above limitations on the bond and equity funds' investments in
futures contracts and options, and the funds' policies regarding
futures contracts and options discussed elsewhere in this SAI, may be
changed as regulatory agencies permit.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid secondary market will exist for any particular options or
futures contract at any particular time. Options may have relatively
low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges
may establish daily price fluctuation limits for options and futures
contracts, and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days
when the price fluctuation limit is reached or a trading halt is
imposed, it may be impossible to enter into new positions or close out
existing positions. If the secondary market for a contract is not
liquid because of price fluctuation limits or otherwise, it could
prevent prompt liquidation of unfavorable positions, and potentially
could require a fund to continue to hold a position until delivery or
expiration regardless of changes in its value. As a result, a fund's
access to other assets held to cover its options or futures positions
could also be impaired.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES. Currency futures
contracts are similar to forward currency exchange contracts, except
that they are traded on exchanges (and have margin requirements) and
are standardized as to contract size and delivery date. Most currency
futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency,
which generally is purchased or delivered in exchange for U.S.
dollars, or may be a futures contract. The purchaser of a currency
call obtains the right to purchase the underlying currency, and the
purchaser of a currency put obtains the right to sell the underlying
currency.
The uses and risks of currency options and futures are similar to
options and futures relating to securities or indices, as discussed
above. A fund may purchase and sell currency futures and may purchase
and write currency options to increase or decrease its exposure to
different foreign currencies. Currency options may also be purchased
and written in conjunction with each other or with currency futures or
forward contracts. Currency futures and options values can be expected
to correlate with exchange rates, but may not reflect other factors
that affect the value of a fund's investments. A currency hedge, for
example, should protect a Yen-denominated security from a decline in
the Yen, but will not protect a fund against a price decline resulting
from deterioration in the issuer's creditworthiness. Because the value
of a fund's foreign-denominated investments changes in response to
many factors other than exchange rates, it may not be possible to
match the amount of currency options and futures to the value of the
fund's investments exactly over time.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract
size, and strike price, the terms of over-the-counter (OTC) options
(options not traded on exchanges) generally are established through
negotiation with the other party to the option contract. While this
type of arrangement allows the purchaser or writer greater flexibility
to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed
by the clearing organization of the exchanges where they are traded.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the
purchaser obtains the right (but not the obligation) to sell the
option's underlying instrument at a fixed strike price. In return for
this right, the purchaser pays the current market price for the option
(known as the option premium). Options have various types of
underlying instruments, including specific securities, indices of
securities prices, and futures contracts. The purchaser may terminate
its position in a put option by allowing it to expire or by exercising
the option. If the option is allowed to expire, the purchaser will
lose the entire premium. If the option is exercised, the purchaser
completes the sale of the underlying instrument at the strike price. A
purchaser may also terminate a put option position by closing it out
in the secondary market at its current price, if a liquid secondary
market exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying
instrument's price does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss
(limited to the amount of the premium plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right
to purchase, rather than sell, the underlying instrument at the
option's strike price. A call buyer typically attempts to participate
in potential price increases of the underlying instrument with risk
limited to the cost of the option if security prices fall. At the same
time, the buyer can expect to suffer a loss if security prices do not
rise sufficiently to offset the cost of the option.
WRITING PUT AND CALL OPTIONS. The writer of a put or call option takes
the opposite side of the transaction from the option's purchaser. In
return for receipt of the premium, the writer assumes the obligation
to pay the strike price for the option's underlying instrument if the
other party to the option chooses to exercise it. The writer may seek
to terminate a position in a put option before exercise by closing out
the option in the secondary market at its current price. If the
secondary market is not liquid for a put option, however, the writer
must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position. When writing an option on a
futures contract, a fund will be required to make margin payments to
an FCM as described above for futures contracts.
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it
is likely that the writer will also profit, because it should be able
to close out the option at a lower price. If security prices fall, the
put writer would expect to suffer a loss. This loss should be less
than the loss from purchasing the underlying instrument directly,
however, because the premium received for writing the option should
mitigate the effects of the decline.
Writing a call option obligates the writer to sell or deliver the
option's underlying instrument, in return for the strike price, upon
exercise of the option. The characteristics of writing call options
are similar to those of writing put options, except that writing calls
generally is a profitable strategy if prices remain the same or fall.
Through receipt of the option premium, a call writer mitigates the
effects of a price decline. At the same time, because a call writer
must be prepared to deliver the underlying instrument in return for
the strike price, even if its current value is greater, a call writer
gives up some ability to participate in security price increases.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed
of in the ordinary course of business at approximately the prices at
which they are valued. Under the supervision of the Board of Trustees,
FMR determines the liquidity of each fund's (except Index 500's)
investments and, through reports from FMR, the Board monitors
investments in illiquid instruments. Under the supervision of the
Board of Trustees and FMR, BT determines the liquidity of Index 500's
investments and, through reports from FMR and/or BT, the Board
monitors investments in illiquid instruments. In determining the
liquidity of a fund's investments, FMR (BT for Index 500) may consider
various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature
of the security (including any demand or tender features), and (5) the
nature of the marketplace for trades (including the ability to assign
or offset the fund's rights and obligations relating to the
investment).
Investments currently considered by FMR (BT for Index 500) to
be illiquid include repurchase agreements not entitling the holder to
repayment of principal and payment of interest within seven days,
over-the-counter options, and non-government stripped fixed-rate
mortgage-backed securities. Also, FMR (BT for Index 500) may determine
some restricted securities, time deposits, government-stripped
fixed-rate mortgage-backed securities, loans and other direct debt
instruments, emerging market securities, and swap agreements to be
illiquid. However, with respect to over-the-counter options a fund
writes, all or a portion of the value of the underlying instrument may
be illiquid depending on the assets held to cover the option and the
nature and terms of any agreement the fund may have to close out the
option before expiration.
In the absence of market quotations, illiquid investments are priced
at fair value as determined in good faith by a committee appointed by
the Board of Trustees. For Money Market, illiquid investments are
valued by this method for purposes of monitoring amortized cost
valuation.
INDEXED SECURITIES are instruments whose prices are indexed to the
prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits
whose value at maturity or coupon rate is determined by reference to a
specific instrument or statistic. Mortgage-indexed securities, for
example, could be structured to replicate the performance of mortgage
securities and the characteristics of direct ownership. Gold-indexed
securities typically provide for a maturity value that depends on the
price of gold, resulting in a security whose price tends to rise and
fall together with gold prices. Currency-indexed securities typically
are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields
than U.S. dollar-denominated securities. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value
may increase when the specified currency value increases, resulting in
a security that performs similarly to a foreign-denominated
instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each
other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which
they are indexed, and may also be influenced by interest rate changes
in the United States and abroad. Indexed securities may be more
volatile than the underlying instruments. Indexed securities are also
subject to the credit risks associated with the issuer of the
security, and their values may decline substantially if the issuer's
creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. Government
agencies.
In addition, for Index 500, indexed securities include commercial
paper, certificates of deposit, and other fixed-income securities
whose values at maturity or coupon interest rates are determined by
reference to the returns of the S&P 500 or comparable stock indices.
Indexed securities can be affected by stock prices as well as changes
in interest rates and the creditworthiness of their issuers and may
not track the indices as accurately as direct investments in the
indices.
INTERFUND BORROWING AND LENDING PROGRAM. Pursuant to an exemptive
order issued by the SEC, a fund may lend money to, and borrow money
from, other funds advised by FMR or its affiliates. A fund will lend
through the program only when the returns are higher than those
available from an investment in repurchase agreements, and will borrow
through the program only when the costs are equal to or lower than the
cost of bank loans. Interfund loans and borrowings normally extend
overnight, but can have a maximum duration of seven days. Loans may be
called on one day's notice. A fund may have to borrow from a bank at a
higher interest rate if an interfund loan is called or not renewed.
Any delay in repayment to a lending fund could result in a lost
investment opportunity or additional borrowing costs.
ISSUER LOCATION. FMR determines where an issuer is located by looking
at such factors as the issuer's country of organization, the primary
trading market for the issuer's securities, and the location of the
issuer's assets, personnel, sales, and earnings. The issuer of a
security is considered to be located in a particular country if (1)
the security is issued or guaranteed by the government of that country
or any of its agencies, political subdivisions, or instrumentalities;
(2) the security has its primary trading market in that country; or
(3) the issuer is organized under the laws of that country, derives at
least 50% of its revenues or profits from goods sold, investments
made, or services performed in that country, or has at least 50% of
its assets located in that country.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Direct debt instruments are
interests in amounts owed by a corporate, governmental, or other
borrower to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or
other receivables), or to other parties. Direct debt instruments are
subject to a fund's policies regarding the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of
interest and repayment of principal. Direct debt instruments may not
be rated by any nationally recognized statistical rating service. If
scheduled interest or principal payments are not made, the value of
the instrument may be adversely affected. Loans that are fully secured
provide more protections than an unsecured loan in the event of
failure to make scheduled interest or principal payments. However,
there is no assurance that the liquidation of collateral from a
secured loan would satisfy the borrower's obligation, or that the
collateral could be liquidated. Indebtedness of borrowers whose
creditworthiness is poor involves substantially greater risks and may
be highly speculative. Borrowers that are in bankruptcy or
restructuring may never pay off their indebtedness, or may pay only a
small fraction of the amount owed. Direct indebtedness of developing
countries also involves a risk that the governmental entities
responsible for the repayment of the debt may be unable, or unwilling,
to pay interest and repay principal when due.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional
risks. For example, if a loan is foreclosed, the purchaser could
become part owner of any collateral, and would bear the costs and
liabilities associated with owning and disposing of the collateral. In
addition, it is conceivable that under emerging legal theories of
lender liability, a purchaser could be held liable as a co-lender.
Direct debt instruments may also involve a risk of insolvency of the
lending bank or other intermediary. Direct debt instruments that are
not in the form of securities may offer less legal protection to the
purchaser in the event of fraud or misrepresentation. In the absence
of definitive regulatory guidance, FMR uses its research to attempt to
avoid situations where fraud or misrepresentation could adversely
affect a fund.
A loan is often administered by a bank or other financial institution
that acts as agent for all holders. The agent administers the terms of
the loan, as specified in the loan agreement. Unless, under the terms
of the loan or other indebtedness, the purchaser has direct recourse
against the borrower, the purchaser may have to rely on the agent to
apply appropriate credit remedies against a borrower. If assets held
by the agent for the benefit of a purchaser were determined to be
subject to the claims of the agent's general creditors, the purchaser
might incur certain costs and delays in realizing payment on the loan
or loan participation and could suffer a loss of principal or
interest.
Direct indebtedness may include letters of credit, revolving credit
facilities, or other standby financing commitments that obligate
purchasers to make additional cash payments on demand. These
commitments may have the effect of requiring a purchaser to increase
its investment in a borrower at a time when it would not otherwise
have done so, even if the borrower's condition makes it unlikely that
the amount will ever be repaid. A fund will set aside appropriate
liquid assets in a segregated custodial account to cover its potential
obligations under standby financing commitments.
Each fund limits the amount of total assets that it will invest in any
one issuer or in issuers within the same industry (see each fund's
investment limitations). For purposes of these limitations, a fund
generally will treat the borrower as the "issuer" of indebtedness held
by the fund. In the case of loan participations where a bank or other
lending institution serves as financial intermediary between a fund
and the borrower, if the participation does not shift to the fund the
direct debtor-creditor relationship with the borrower, SEC
interpretations require the fund, in appropriate circumstances, to
treat both the lending bank or other lending institution and the
borrower as "issuers" for these purposes. Treating a financial
intermediary as an issuer of indebtedness may restrict a fund's
ability to invest in indebtedness related to a single financial
intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different
companies and industries.
LOWER-QUALITY DEBT SECURITIES. Lower-quality debt securities have poor
protection with respect to the payment of interest and repayment of
principal, or may be in default. These securities are often considered
to be speculative and involve greater risk of loss or price changes
due to changes in the issuer's capacity to pay. The market prices of
lower-quality debt securities may fluctuate more than those of
higher-quality debt securities and may decline significantly in
periods of general economic difficulty, which may follow periods of
rising interest rates.
While the market for high-yield corporate debt securities has been in
existence for many years and has weathered previous economic
downturns, the 1980s brought a dramatic increase in the use of such
securities to fund highly leveraged corporate acquisitions and
restructurings. Past experience may not provide an accurate indication
of the future performance of the high-yield bond market, especially
during periods of economic recession.
The market for lower-quality debt securities may be thinner and less
active than that for higher-quality debt securities, which can
adversely affect the prices at which the former are sold. If market
quotations are not available, lower-quality debt securities will be
valued in accordance with procedures established by the Board of
Trustees, including the use of outside pricing services. Judgment
plays a greater role in valuing high-yield debt securities than is the
case for securities for which more external sources for quotations and
last-sale information are available. Adverse publicity and changing
investor perceptions may affect the liquidity of lower-quality debt
securities and the ability of outside pricing services to value
lower-quality debt securities.
Since the risk of default is higher for lower-quality debt securities,
FMR's research and credit analysis are an especially important part of
managing securities of this type. FMR will attempt to identify those
issuers of high-yielding securities whose financial condition is
adequate to meet future obligations, has improved, or is expected to
improve in the future. FMR's analysis focuses on relative values based
on such factors as interest or dividend coverage, asset coverage,
earnings prospects, and the experience and managerial strength of the
issuer.
A fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security
holder to seek to protect the interests of security holders if it
determines this to be in the best interest of the fund's shareholders.
MONEY MARKET SECURITIES are high-quality, short-term obligations.
Money market securities may be structured or may employ a trust or
other similar structure so that they are eligible investments for
money market funds. For example, put features can be used to modify
the maturity of a security or interest rate adjustment features can be
used to enhance price stability. If the structure does not perform as
intended, adverse tax or investment consequences may result. Neither
the Internal Revenue Service (IRS) nor any other regulatory authority
has ruled definitively on certain legal issues presented by structured
securities. Future tax or other regulatory determinations could
adversely affect the value, liquidity, or tax treatment of the income
received from these securities or the nature and timing of
distributions made by a fund.
MORTGAGE-BACKED SECURITIES are issued by government and non-government
entities such as banks, mortgage lenders, or other institutions. A
mortgage-backed security is an obligation of the issuer backed by a
mortgage or pool of mortgages or a direct interest in an underlying
pool of mortgages. Some mortgage-backed securities, such as
collateralized mortgage obligations (or CMOs), make payments of both
principal and interest at a range of specific intervals; others make
semiannual interest payments at a predetermined rate and repay
principal at maturity (like a typical bond). Mortgage-backed
securities are based on different types of mortgages, including those
on commercial real estate or residential properties. Stripped
mortgage-backed securities are created when the interest and principal
components of a mortgage-backed security are separated and sold as
individual securities. In the case of a stripped mortgage-backed
security, the holder of the "principal-only" security (PO) receives
the principal payments made by the underlying mortgage, while the
holder of the "interest-only" security (IO) receives interest payments
from the same underlying mortgage.
The value of mortgage-backed securities may change due to shifts in
the market's perception of issuers and changes in interest rates. In
addition, regulatory or tax changes may adversely affect the
mortgage-backed securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued
by government entities, but also may be subject to greater price
changes than government issues. Mortgage-backed securities are subject
to prepayment risk. Prepayment occurs when unscheduled or early
payments are made on the underlying mortgages, usually in response to
a reduction in interest rates. Mortgage-backed security values may
also be adversely affected when prepayments on underlying mortgages do
not occur. The prices of stripped mortgage-backed securities tend to
be more volatile in response to changes in interest rates than those
of non-stripped mortgage-backed securities.
MUNICIPAL SECURITIES are issued to raise money for a variety of public
or private purposes, including general financing for state and local
governments, or financing for specific projects or public facilities.
They may be issued in anticipation of future revenues and may be
backed by the full taxing power of a municipality, the revenues from a
specific project, or the credit of a private organization. The value
of some or all municipal securities may be affected by uncertainties
in the municipal market related to legislation or litigation involving
the taxation of municipal securities or the rights of municipal
securities holders. A municipal security may be owned directly or
through a participation interest.
OTHER INVESTMENT COMPANIES. A fund may purchase the shares of other
investment companies.
PUT FEATURES entitle the holder to sell a security back to the issuer
or a third party at any time or at specified intervals. They are
subject to the risk that the put provider is unable to honor the put
feature (purchase the security). Put providers often support their
ability to buy securities on demand by obtaining letters of credit or
other guarantees from other entities. Demand features, standby
commitments, and tender options are types of put features.
QUALITY AND MATURITY ( M ONEY M ARKET PORTFOLIO ).
Pursuant to procedures adopted by the Board of Trustees, the fund may
purchase only high-quality securities that FMR believes present
minimal credit risks. To be considered high-quality, a security must
be rated in accordance with applicable rules in one of the two highest
categories for short-term securities by at least two nationally
recognized rating services (or by one, if only one rating service has
rated the security) or, if unrated, judged to be of equivalent quality
by FMR.
High-quality securities are divided into "first tier" and "second
tier" securities. First tier securities are those deemed to be in the
highest rating category (e.g., Standard & Poor's A-1) and second tier
securities are those deemed to be in the second highest rating
category (e.g., Standard & Poor's A-2). Split-rated securities may be
determined to be either first tier or second tier based on applicable
regulations.
The fund may not invest more than 5% of its total assets in second
tier securities. In addition, the fund may not invest more than 1% of
its total assets or $1 million (whichever is greater) in the second
tier securities of a single issuer.
The fund currently intends to limit its investments to securities with
remaining maturities of 397 days or less, and to maintain a
dollar-weighted average maturity of 90 days or less. When determining
the maturity of a security, the fund may look to an interest rate
reset or demand feature.
REAL ESTATE INVESTMENT TRUSTS. Equity real estate investment trusts
own real estate properties, while mortgage real estate investment
trusts make construction, development, and long-term mortgage loans.
Their value may be affected by changes in the value of the underlying
property of the trusts, the creditworthiness of the issuer, property
taxes, interest rates, and tax and regulatory requirements, such as
those relating to the environment. Both types of trusts are dependent
upon management skill, are not diversified, and are subject to heavy
cash flow dependency, defaults by borrowers, self-liquidation, and the
possibility of failing to qualify for tax-free status of income under
the Internal Revenue Code and failing to maintain exemption from the
1940 Act.
REPURCHASE AGREEMENTS. In a repurchase agreement, a fund purchases a
security and simultaneously commits to sell that security back to the
original seller at an agreed-upon price. The resale price reflects the
purchase price plus an agreed-upon incremental amount which is
unrelated to the coupon rate or maturity of the purchased security. As
protection against the risk that the original seller will not fulfill
its obligation, the securities are held in a separate account at a
bank, marked-to-market daily, and maintained at a value at least equal
to the sale price plus the accrued incremental amount. While it does
not presently appear possible to eliminate all risks from these
transactions (particularly the possibility that the value of the
underlying security will be less than the resale price, as well as
delays and costs to a fund in connection with bankruptcy proceedings),
a fund will engage in repurchase agreement transactions with parties
whose creditworthiness has been reviewed and found satisfactory by FMR
(for Index 500, by BT or, under certain circumstances, by FMR or an
FMR affiliate). Pursuant to certain state insurance regulations, any
repurchase agreements a fund enters into will be secured by collateral
consisting of liquid assets having a market value of not less than
102% of the cash or assets transferred to the other party.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the
Securities Act of 1933, or in a registered public offering. Where
registration is required, a fund may be obligated to pay all or part
of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time it may
be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, a fund might obtain a less favorable price than prevailed
when it decided to seek registration of the security. However, in
general, Money Market anticipates holding restricted securities to
maturity or selling them in an exempt transaction.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a
fund sells a security to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase that
security at an agreed-upon price and time. While a reverse repurchase
agreement is outstanding, a fund will maintain appropriate liquid
assets in a segregated custodial account to cover its obligation under
the agreement. A fund will enter into reverse repurchase agreements
only with parties whose creditworthiness has been reviewed and found
satisfactory by FMR (for Index 500, by BT or, under certain
circumstances, by FMR or an FMR affiliate). Such transactions may
increase fluctuations in the market value of fund assets and may be
viewed as a form of leverage.
SECURITIES LENDING. A fund may lend securities to parties such as
broker-dealers or institutional investors, including Fidelity
Brokerage Services, Inc. (FBSI). FBSI is a member of the New York
Stock Exchange and a subsidiary of FMR Corp. Index 500 will not lend
securities to BT or its affiliates. BT receives a portion of the
securities lending income earned by Index 500.
Securities lending allows a fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Since there
may be delays in the recovery of loaned securities, or even a loss of
rights in collateral supplied should the borrower fail financially,
loans will be made only to parties deemed by FMR (for Index 500, by BT
or, under certain circumstances, by FMR or an FMR affiliate) to be of
good standing. Furthermore, they will be made only if, in FMR's (BT's
for Index 500) judgment, the consideration to be earned from such
loans would justify the risk.
FMR and BT understand that it is the current view of the SEC Staff
that a fund may engage in loan transactions only under the following
conditions: (1) the fund must receive 100% collateral in the form of
cash or cash equivalents (e.g., U.S. Treasury bills or notes) from the
borrower; (2) the borrower must increase the collateral whenever the
market value of the securities loaned (determined on a daily basis)
rises above the value of the collateral; (3) after giving notice, the
fund must be able to terminate the loan at any time; (4) the fund must
receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest, or
other distributions on the securities loaned and to any increase in
market value; (5) the fund may pay only reasonable custodian fees in
connection with the loan; and (6) the Board of Trustees must be able
to vote proxies on the securities loaned, either by terminating the
loan or by entering into an alternative arrangement with the borrower.
Cash received through loan transactions may be invested in other
eligible securities. Investing this cash subjects that investment, as
well as the security loaned, to market forces (i.e., capital
appreciation or depreciation). If Index 500 cannot recover the loaned
securities on termination, the fund may sell the collateral and
purchase a replacement investment in the market.
SHORT SALES "AGAINST THE BOX." A money market or growth fund may sell
securities short when it owns or has the right to obtain securities
equivalent in kind or amount to the securities sold short. Such short
sales are known as short sales "against the box." If a fund enters
into a short sale against the box, it will be required to set aside
securities equivalent in kind and amount to the securities sold short
(or securities convertible or exchangeable into such securities) and
will be required to hold such securities while the short sale is
outstanding.
Short sales against the box could be used to protect the net asset
value per share of a money market fund in anticipation of increased
interest rates, without sacrificing the current yield of the
securities sold short. A money market fund will incur transaction
costs in connection with opening and closing short sales against the
box. A growth fund will incur transaction costs, including interest
expenses, in connection with opening, maintaining, and closing short
sales against the box.
SHORT SALES. A growth and income, asset allocation, or high income
fund may enter into short sales with respect to stocks underlying its
convertible security holdings. For example, if FMR anticipates a
decline in the price of the stock underlying a convertible security a
fund holds, it may sell the stock short. If the stock price
subsequently declines, the proceeds of the short sale could be
expected to offset all or a portion of the effect of the stock's
decline on the value of the convertible security. A fund currently
intends to hedge no more than 15% of its total assets with short sales
on equity securities underlying its convertible security holdings
under normal circumstances.
When a fund enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or
securities convertible or exchangeable into such securities) and will
be required to hold them aside while the short sale is outstanding. A
fund will incur transaction costs, including interest expenses, in
connection with opening, maintaining, and closing short sales.
SOURCES OF CREDIT OR LIQUIDITY SUPPORT. FMR may rely on its evaluation
of the credit of a bank or other entity in determining whether to
purchase a security supported by a letter of credit guarantee, put or
demand feature, insurance or other source of credit or liquidity. In
evaluating the credit of a foreign bank or other foreign entities, FMR
will consider whether adequate public information about the entity is
available and whether the entity may be subject to unfavorable
political or economic developments, currency controls, or other
government restrictions that might affect its ability to honor its
commitment.
SOVEREIGN DEBT OBLIGATIONS are issued or guaranteed by foreign
governments or their agencies, including debt of Latin American
nations or other developing countries. Sovereign debt may be in the
form of conventional securities or other types of debt instruments
such as loans or loan participations. Sovereign debt of developing
countries may involve a high degree of risk, and may be in default or
present the risk of default. Governmental entities responsible for
repayment of the debt may be unable or unwilling to repay principal
and pay interest when due, and may require renegotiation or
rescheduling of debt payments. In addition, prospects for repayment of
principal and payment of interest may depend on political as well as
economic factors. Although some sovereign debt, such as Brady Bonds,
is collateralized by U.S. Government securities, repayment of
principal and payment of interest is not guaranteed by the U.S.
Government.
STRIPPED GOVERNMENT SECURITIES. Stripped government securities are
created by separating the income and principal components of a U.S.
Government security and selling them separately. STRIPS (Separate
Trading of Registered Interest and Principal of Securities) are
created when the coupon payments and the principal payment are
stripped from an outstanding U.S. Treasury security by a Federal
Reserve Bank.
Privately stripped government securities are created when a dealer
deposits a U.S. Treasury security or other U.S. Government security
with a custodian for safekeeping. The custodian issues separate
receipts for the coupon payments and the principal payment, which the
dealer then sells.
Because the SEC does not consider privately stripped government
securities to be U.S. Government securities for purposes of Rule 2a-7,
a money market fund must evaluate them as it would non-government
securities pursuant to regulatory guidelines applicable to money
market funds.
SWAP AGREEMENTS. Swap agreements can be individually negotiated and
structured to include exposure to a variety of investments or market
factors. Depending on their structure, swap agreements may increase or
decrease a fund's exposure to long- or short-term interest rates (in
the United States or abroad), foreign currency values, mortgage
securities, corporate borrowing rates, or other factors such as
security prices or inflation rates. Swap agreements can take many
different forms and are known by a variety of names.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a
fee by the other party. For example, the buyer of an interest rate cap
obtains the right to receive payments to the extent that a specified
interest rate exceeds an agreed-upon level, while the seller of an
interest rate floor is obligated to make payments to the extent that a
specified interest rate falls below an agreed-upon level. An interest
rate collar combines elements of buying a cap and selling a floor.
Swap agreements will tend to shift a fund's investment exposure from
one type of investment to another. For example, if a fund agreed to
exchange payments in dollars for payments in foreign currency, the
swap agreement would tend to decrease the fund's exposure to U.S.
interest rates and increase its exposure to foreign currency and
interest rates. Caps and floors have an effect similar to buying or
writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a fund's investments
and its share price and yield.
Under a typical equity swap agreement, a counterparty such as a bank
or broker-dealer agrees to pay the fund a return equal to the dividend
payments and increase in value, if any, of an index or group of
stocks, and the fund agrees in return to pay a fixed or floating rate
of interest, plus any declines in value of the index. Swap agreements
can also have features providing for maximum or minimum exposure to a
designated index. In order to track the return of its designated index
effectively, Index 500 would generally have to own other assets
returning approximately the same amount as the interest rate payable
by the fund under the swap agreement.
The most significant factor in the performance of swap agreements is
the change in value of the specific index, the change in the specific
interest rate or currency, or other factors that determine the amounts
of payments due to and from a fund. If a swap agreement calls for
payments by a fund, the fund must be prepared to make such payments
when due. In addition, if the counterparty's creditworthiness
declined, the value of a swap agreement would be likely to decline,
potentially resulting in losses and, for Index 500, impairing the
fund's correlation with the S&P 500. A fund may be able to eliminate
its exposure under a swap agreement either by assignment or other
disposition, or by entering into an offsetting swap agreement with the
same party or a similarly creditworthy party.
A fund will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap
agreements. If a fund enters into a swap agreement on a net basis, it
will segregate assets with a daily value at least equal to the excess,
if any, of the fund's accrued obligations under the swap agreement
over the accrued amount the fund is entitled to receive under the
agreement. If a fund enters into a swap agreement on other than a net
basis, it will segregate assets with a value equal to the full amount
of the fund's accrued obligations under the agreement.
VARIABLE AND FLOATING RATE SECURITIES provide for periodic adjustments
in the interest rate paid on the security. Variable rate securities
provide for a specified periodic adjustment in the interest rate,
while floating rate securities have interest rates that change
whenever there is a change in a designated benchmark rate. Some
variable or floating rate securities are structured with put features
that permit holders to demand payment of the unpaid principal balance
plus accrued interest from the issuers or certain financial
intermediaries.
WARRANTS. Warrants are instruments which entitle the holder to buy an
equity security at a specific price for a specific period of time.
Changes in the value of a warrant do not necessarily correspond to
changes in the value of its underlying security. The price of a
warrant may be more volatile than the price of its underlying
security, and a warrant may offer greater potential for capital
appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with
respect to the underlying security and do not represent any rights in
the assets of the issuing company. A warrant ceases to have value if
it is not exercised prior to its expiration date. These factors can
make warrants more speculative than other types of investments.
ZERO COUPON BONDS do not make interest payments; instead, they are
sold at a discount from their face value and are redeemed at face
value when they mature. Because zero coupon bonds do not pay current
income, their prices can be more volatile than other types of
fixed-income securities when interest rates change. In calculating a
fund's dividend, a portion of the difference between a zero coupon
bond's purchase price and its face value is considered income.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of each fund by FMR (BT for Index 500) pursuant to authority
contained in the management contract (and, for Index 500, in the
sub-advisory agreement). FMR (BT for Index 500) is also responsible
for the placement of transaction orders for other investment companies
and accounts for which it or its affiliates act as investment adviser.
Securities purchased and sold by Money Market generally will be traded
on a net basis (i.e., without commission). In selecting
broker-dealers, subject to applicable limitations of the federal
securities laws, FMR (BT for Index 500) considers various relevant
factors, including, but not limited to: the size and type of the
transaction; the nature and character of the markets for the security
to be purchased or sold; the execution efficiency, settlement
capability, and financial condition of the broker-dealer firm; the
broker-dealer's execution services rendered on a continuing basis; the
reasonableness of any commissions; and, if applicable ,
arrangements for payment of fund expenses.
Except for Index 500, if FMR grants investment management authority
to a sub-adviser (see the section entitled "Management Contracts"),
that sub-adviser is authorized to place orders for the purchase and
sale of portfolio securities, and will do so in accordance with the
policies described above.
Generally, commissions for investments traded on foreign exchanges
will be higher than for investments traded on U.S. exchanges and may
not be subject to negotiation.
Each fund may execute portfolio transactions with
broker-dealers who provide research and execution services to the fund
or other accounts over which FMR or BT or their affiliates exercise
investment discretion. Such services may include advice concerning the
value of securities; the advisability of investing in, purchasing, or
selling securities; and the availability of securities or the
purchasers or sellers of securities. In addition, such
broker - dealers may furnish analyses and reports concerning
issuers, industries, securities, economic factors and trends,
portfolio strategy, and performance of accounts; and effect
securities transactions and perform functions incidental thereto (such
as clearance and settlement).
The selection of such broker-dealers for transactions in equity
securities is generally made by FMR (BT for Index 500) (to the extent
possible consistent with execution considerations) in accordance with
a ranking of broker-dealers determined periodically by FMR's (BT's for
Index 500) investment staff based upon the quality of research and
execution services provided.
For transactions in fixed-income securities, FMR's (BT's for Index
500) selection of broker-dealers is generally based on the
availability of a security and its price and, to a lesser extent, on
the overall quality of execution and other services, including
research, provided by the broker-dealer.
The receipt of research from broker-dealers that execute transactions
on behalf of a fund may be useful to FMR (BT for Index 500) in
rendering investment management services to th at fund or its
other clients, and conversely, such research provided by
broker-dealers who have executed transaction orders on behalf of other
FMR (BT for Index 500) clients may be useful to FMR (BT for Index 500)
in carrying out its obligations to a fund. The receipt of such
research has not reduced FMR's (BT's for Index 500) normal independent
research activities; however, it enables FMR (BT for Index 500) to
avoid the additional expenses that could be incurred if FMR (BT for
Index 500) tried to develop comparable information through its own
efforts.
Fixed-income securities are generally purchased from an issuer or
underwriter acting as principal for the securities, on a net basis
with no brokerage commission paid. However, the dealer is compensated
by a difference between the security's original purchase price and the
selling price, the so-called "bid-asked spread." Securities may also
be purchased from underwriters at prices that include underwriting
fees.
Subject to applicable limitations of the federal securities laws, a
fund may pay a broker-dealer commissions for agency transactions
that are in excess of the amount of commissions charged by other
broker-dealers in recognition of their research and execution
services. In order to cause a fund to pay such higher commissions, FMR
(BT for Index 500) must determine in good faith that such commissions
are reasonable in relation to the value of the brokerage and research
services provided by such executing broker-dealers, viewed in terms of
a particular transaction or FMR's (BT's for Index 500) overall
responsibilities to th at fund or its other clients. In
reaching this determination, FMR (BT for Index 500) will not attempt
to place a specific dollar value on the brokerage and research
services provided, or to determine what portion of the compensation
should be related to those services.
FMR (BT for Index 500) is authorized to use research services provided
by and to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the funds or
shares of other Fidelity funds to the extent permitted by law. FMR (BT
for Index 500) may use research services provided by and place agency
transactions with National Financial Services Corporation (NFSC) and
Fidelity Brokerage Services Japan (FBSJ), indirect subsidiaries
of FMR Corp. (and, for Index 500, BT Brokerage Corporation and
BT Futures Corporation, indirect subsidiaries of Bankers Trust New
York Corporation), if the commissions are fair, reasonable, and
comparable to commissions charged by non-affiliated, qualified
brokerage firms for similar services. Prior to December 9, 1997,
FMR used research services provided by and placed agency transactions
with Fidelity Brokerage Services (FBS), an indirect subsidiary of FMR
Corp.
FMR may allocate brokerage transactions to broker-dealers
(including affiliates of FMR) who have entered into
arrangements with FMR under which the broker-dealer allocates a
portion of the commissions paid by a fund toward reduction of
th at fund's expenses . The transaction quality must,
however, be comparable to those of other qualified broker-dealers.
Section 11(a) of the Securities Exchange Act of 1934 prohibits members
of national securities exchanges from executing exchange transactions
for accounts which they or their affiliates manage, unless certain
requirements are satisfied. Pursuant to such requirements, the Board
of Trustees has authorized NFSC to execute portfolio transactions on
national securities exchanges in accordance with approved procedures
and applicable SEC rules.
The Trustees of each fund periodically review FMR's or
BT's performance of its responsibilities in connection with the
placement of portfolio transactions on behalf of the fund and review
the commissions paid by the fund over representative periods of
time to determine if they are reasonable in relation to the benefits
to the fund.
Because a high turnover rate increases transaction costs and may
increase taxable gains, FMR carefully weighs the anticipated benefits
of short-term investing against these consequences. An increased
turnover rate is due to a greater volume of shareholder purchase
orders, short-term interest rate volatility and other special market
conditions. For the fiscal years ended December 31, 1997 and 1996, the
funds (except Money Market) had the following portfolio turnover
rates:

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
YEAR HIGH EQUITY- GROWTH GROWTH OVERSEAS ASSET
INCOME INCOME OPPORTUNITIES MANAGER

1997 118 % 44 % 113 % 26 % 67 % 101 %

1996 123% 186% 81% 28% 92% 168%

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
YEAR ASSET MANAGER: BALANCED CONTRAFUND GROWTH & INCOME INVESTMENT INDEX 500
GROWTH GRADE BOND

1997 90 % 98 % 142 % 81 % 191 % 9 %

1996 120% 163% 178% 0% 81% 14%

</TABLE>

BROKERAGE COMMISSIONS. The following tables list the total brokerage
commissions paid, the percentage of the brokerage commissions paid to
brokerage firms that provided research services, and the commissions
paid to NFSC and FBS in dollars and as a percentage of the dollar
value of all transactions in which brokerage commissions were paid,
for the fiscal periods ended December 31, 1997, 1996, and 1995 for the
funds (no commissions were paid by Money Market or Investment Grade
Bond). The funds pay both commissions and spreads in connection with
the placement of portfolio transactions. The difference between the
percentage of brokerage commissions paid to, and the percentage of the
dollar amount of transactions effected through, NFSC is a result of
the low commission rates charged by NFSC.
HIGH INCOME PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD TOTAL % TO TO % TO NFSC % TO FBS % %
ENDED PAID TO FIRMS NFSC FBS TRANSACTIONS TRANSACTIONS
PROVIDING THROUGH THROUGH
RESEARCH NFSC FBS

1997 $ 252,741 77 % $ 13,664 $ 0 5 % 0 % 7 % 0 %

1996 $ 501,544 69% $ 10,168 $ 0 2% 0% 2% 0%

1995 $ 185,561 95% $ 21,896 $ 0 12% 0% 16% 0%

</TABLE>

EQUITY-INCOME PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD TOTAL % TO TO % TO NFSC % TO FBS % %
ENDED PAID TO FIRMS NFSC FBS TRANSACTIONS TRANSACTIONS
PROVIDING THROUGH THROUGH
RESEARCH NFSC FBS

1997 $ 6,731,778 91% $ 836,386 $ 13,815 12% 0% 21% 0%

1996 $ 13,450,350 66% $ 3,563,724 $ 19,906 27% 0% 40% 0%

1995 $ 5,473,128 94% $ 2,043,797 $ 33,242 37% 1% 51% 0%

</TABLE>

GROWTH OPPORTUNITIES PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD TOTAL % TO TO % TO NFSC % TO FBS % %
ENDED PAID TO FIRMS NFSC FBS TRANSACTIONS TRANSACTIONS
PROVIDING THROUGH THROUGH
RESEARCH NFSC FBS

1997 $ 476,366 83 % $ 95,777 $ 5,043 20 % 1 % 29 % 0 %

1996 $ 195,409 64% $ 43,699 $ 2,978 22% 2% 33% 1%

1995 $ 105,477 67% $ 40,358 $ 100 38% 0% 58% 0%

</TABLE>

GROWTH PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD TOTAL % TO TO % TO NFSC % TO FBS % %
ENDED PAID TO
FIRMS NFSC FBS TRANSACTIONS TRANSACTIONS
PROVIDING THROUGH THROUGH
RESEARCH NFSC FBS

1997 $ 9,024,141 94% $ 2,325,582 $ 17,682 26 % 0 % 36 % 0 %

1996 $ 4,689,993 68% $ 1,167,932 $ 41,903 25% 1% 37% 1%

1995 $ 3,835,624 97% $ 1,237,372 $ 13,081 32% 0% 43% 0%

</TABLE>

OVERSEAS PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD TOTAL % PAID TO TO % TO NFSC % TO FBS % %
ENDED TO FIRMS NFSC FBS TRANSACTIONS TRANSACTIONS
PROVIDING THROUGH THROUGH
RESEARCH NFSC FBS

1997 $ 4,298,667 92 % $ 8,726 $ 286,119 0 % 7 % 1 % 7 %

1996 $ 4,851,584 86% $ 23,341 $ 338,852 1% 7% 2% 9%

1995 $ 2,495,829 96% $ 10,057 $ 240,170 0% 10% 1% 12%

</TABLE>

BALANCED PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD TOTAL % PAID TO TO % TO NFSC % TO FBS % %
ENDED TO FIRMS NFSC FBS TRANSACTIONS TRANSACTIONS
PROVIDING THROUGH THROUGH
RESEARCH NFSC FBS

1997 $ 110,250 95 % $ 21,583 $ 110 20 % 0 % 29 % 0 %

1996 $ 138,649 70% $ 32,871 $ 1,221 24% 1% 39% 1%

1995 $ 65,835 89% $ 12,056 $ 195 18% 0% 37% 0%

</TABLE>

ASSET MANAGER PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD TOTAL % PAID TO TO % TO NFSC % TO FBS % %
ENDED TO FIRMS NFSC FBS TRANSACTIONS TRANSACTIONS
PROVIDING THROUGH THROUGH
RESEARCH NFSC FBS

1997 $ 2,804,490 90 % $ 507,147 $ 32,266 18 % 1 % 24 % 0 %

1996 $ 5,969,816 85% $ 600,978 $ 27,964 10% 0% 22% 0%

1995 $ 12,537,406 96% $ 1,793,406 $ 218,281 14% 2% 33% 2%

</TABLE>

ASSET MANAGER: GROWTH PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD TOTAL % PAID TO TO % TO NFSC % TO FBS % %
ENDED TO FIRMS NFSC FBS TRANSACTIONS TRANSACTIONS
PROVIDING THROUGH THROUGH
RESEARCH NFSC FBS

1997 $ 385,678 85 % $ 66,125 $ 3,506 17 % 1 % 20 % 0 %

1996 $ 296,932 70% $ 52,039 $ 2,173 18% 1% 30% 1%

1995 $ 335,353 93% $ 4,540 $ 14 13% 0% 30% 0%

</TABLE>

CONTRAFUND PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD TOTAL % PAID TO TO % TO NFSC % TO FBS % %
ENDED TO FIRMS NFSC FBS TRANSACTIONS TRANSACTIONS
PROVIDING THROUGH THROUGH
RESEARCH NFSC FBS

1997 $ 6,500,753 95% $ 1,306,677 $ 86,392 20 % 1 % 30 % 1 %

1996 $ 4,846,349 73% $ 1,020,036 $ 8,210 21% 0% 32% 0%

1995 $ 672,767 97% $ 246,389 $ 0 37% 0% 49% 0%

</TABLE>

GROWTH & INCOME PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD TOTAL % PAID TO TO % TO NFSC % TO FBS % %
ENDED TO FIRMS NFSC FBS TRANSACTIONS TRANSACTIONS
PROVIDING THROUGH THROUGH
RESEARCH NFSC FBS

1997 $ 314,270 85 % $ 65,536 $ 50 21 % 0 % 24 % 0 %

</TABLE>

INDEX 500 PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD TOTAL % PAID TO TO % TO NFSC % TO FBS % %
ENDED TO FIRMS NFSC FBS TRANSACTIONS TRANSACTIONS
PROVIDING THROUGH THROUGH
RESEARCH NFSC FBS

1997 $ 98,894 13 % $ 28 $ 371 0 % 0 % 0 % 0 %

1996 $ 51,591 91% $ 374 $ 0 1% 0% 0% 0%

1995 $ 133,659 31% $ 20 $ 0 0% 0% 0% 0%

</TABLE>

The Trustees of each fund have approved procedures in conformity
with Rule 10f-3 under the 1940 Act whereby a fund may purchase
securities that are offered in underwritings in which an affiliate of
FMR participates. These procedures prohibit the funds from directly or
indirectly benefiting an FMR affiliate in connection with such
underwritings. In addition, for underwritings where an FMR affiliate
participates as a principal underwriter, certain restrictions may
apply that could, among other things, limit the amount of securities
that the funds could purchase in the underwriting.
From time to time the Trustees will review whether the recapture for
the benefit of the funds of some portion of the brokerage commissions
or similar fees paid by the funds on portfolio transactions is legally
permissible and advisable. Each fund seeks to recapture soliciting
broker-dealer fees on the tender of portfolio securities, but at
present no other recapture arrangements are in effect. The Trustees
intend to continue to review whether recapture opportunities are
available and are legally permissible and, if so, to determine in the
exercise of their business judgment whether it would be advisable for
each fund to seek such recapture.
Although the Trustees and officers of each fund are substantially the
same as those of other funds managed by FMR or its affiliates ,
investment decisions for each fund are made independently (and by BT
for Index 500) from those of other funds managed by FMR or BT or
accounts managed by FMR or BT affiliates. It sometimes happens that
the same security is held in the portfolio of more than one of these
funds or accounts. Simultaneous transactions are inevitable when
several funds and accounts are managed by the same investment adviser,
particularly when the same security is suitable for the investment
objective of more than one fund or account.
When two or more funds are simultaneously engaged in the purchase or
sale of the same security, the prices and amounts are allocated in
accordance with procedures believed to be appropriate and equitable
for each fund. In some cases this system could have a detrimental
effect on the price or value of the security as far as each fund is
concerned. In other cases, however, the ability of the funds to
participate in volume transactions will produce better executions and
prices for the funds. It is the current opinion of the Trustees that
the desirability of retaining FMR as investment adviser to each fund
and BT as sub-adviser to Index 500 outweighs any disadvantages that
may be said to exist from exposure to simultaneous transactions.
VALUATION
FSC normally determines each class's net asset value per share (NAV)
as of the close of the New York Stock Exchange (NYSE) (normally 4:00
p.m. Eastern time). The valuation of portfolio securities is
determined as of this time for the purpose of computing each class's
NAV.
MONEY MARKET PORTFOLIO
Portfolio securities and other assets are valued on the basis of
amortized cost. This technique involves initially valuing an
instrument at its cost as adjusted for amortization of premium or
accretion of discount rather than its current market value. The
amortized cost value of an instrument may be higher or lower than the
price the fund would receive if it sold the instrument.
Securities of other investment companies are valued at their
respective NAVs.
During periods of declining interest rates, the fund's yield based on
amortized cost valuation may be higher than would result if the fund
used market valuations to determine its NAV. The converse would apply
during periods of rising interest rates.
Valuing the fund's investments on the basis of amortized cost and use
of the term "money market fund" are permitted pursuant to Rule 2a-7
under the 1940 Act. The fund must adhere to certain conditions under
Rule 2a-7, as summarized in the section entitled "Quality and
Maturity " on page 10.
The Board of Trustees oversees FMR's adherence to the provisions of
Rule 2a-7 and has established procedures designed to stabilize the
fund's NAV at $1.00. At such intervals as they deem appropriate, the
Trustees consider the extent to which NAV calculated by using market
valuations would deviate from $1.00 per share. If the Trustees believe
that a deviation from the fund's amortized cost per share may result
in material dilution or other unfair results to shareholders, the
Trustees have agreed to take such corrective action, if any, as they
deem appropriate to eliminate or reduce, to the extent reasonably
practicable, the dilution or unfair results. Such corrective action
could include selling portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average portfolio
maturity; withholding dividends; redeeming shares in kind;
establishing NAV by using available market quotations; and such other
measures as the Trustees may deem appropriate.
HIGH INCOME AND INVESTMENT GRADE BOND PORTFOLIOS
Portfolio securities are valued by various methods depending on the
primary market or exchange on which they trade. Fixed-income
securities and other assets for which market quotations are readily
available may be valued at market values determined by such
securities' most recent bid prices (sales prices if the principal
market is an exchange) in the principal market in which they normally
are traded, as furnished by recognized dealers in such securities or
assets.
Or, fixed-income securities and convertible securities may be valued
on the basis of information furnished by a pricing service that uses a
valuation matrix which incorporates both dealer-supplied valuations
and electronic data processing techniques. Use of pricing services has
been approved by the Board of Trustees. A number of pricing services
are available, and the funds may use various pricing services or
discontinue the use of any pricing service.
Most equity securities for which the primary market is the United
States are valued at last sale price or, if no sale has occurred, at
the closing bid price. Most equity securities for which the primary
market is outside the United States are valued using the official
closing price or the last sale price in the principal market in which
they are traded. If the last sale price (on the local exchange) is
unavailable, the last evaluated quote or last bid price normally is
used.
Futures contracts and options are valued on the basis of market
quotations, if available. Securities of other open-end investment
companies are valued at their respective NAVs.
Foreign securities are valued based on prices furnished by independent
brokers or quotation services which express the value of securities in
their local currency. FSC gathers all exchange rates daily at the
close of the NYSE using the last quoted price on the local currency
and then translates the value of foreign securities from their local
currencies into U.S. dollars. Any changes in the value of forward
contracts due to exchange rate fluctuations and days to maturity are
included in the calculation of NAV. If an extraordinary event that is
expected to materially affect the value of a portfolio security occurs
after the close of an exchange on which that security is traded, then
that security will be valued as determined in good faith by a
committee appointed by the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less
for which market quotations and information furnished by a pricing
service are not readily available are valued either at amortized cost
or at original cost plus accrued interest, both of which approximate
current value. In addition, securities and other assets for which
there is no readily available market value may be valued in good faith
by a committee appointed by the Board of Trustees. The procedures set
forth above need not be used to determine the value of the securities
owned by a fund if, in the opinion of a committee appointed by the
Board of Trustees, some other method would more accurately reflect the
fair market value of such securities.
EQUITY-INCOME, GROWTH, OVERSEAS, ASSET MANAGER, ASSET MANAGER: GROWTH,
INDEX 500, CONTRAFUND, BALANCED, GROWTH & INCOME AND GROWTH
OPPORTUNITIES PORTFOLIOS
Portfolio securities are valued by various methods depending on the
primary market or exchange on which they trade. Most equity securities
for which the primary market is the United States are valued at last
sale price or, if no sale has occurred, at the closing bid price. Most
equity securities for which the primary market is outside the United
States are valued using the official closing price or the last sale
price in the principal market in which they are traded. If the last
sale price (on the local exchange) is unavailable, the last evaluated
quote or last bid price normally is used. Securities of other open-end
investment companies are valued at their respective NAVs.
Fixed-income securities and other assets for which market quotations
are readily available may be valued at market values determined by
such securities' most recent bid prices (sales prices if the principal
market is an exchange) in the principal market in which they normally
are traded, as furnished by recognized dealers in such securities or
assets. Or, fixed-income securities and convertible securities may be
valued on the basis of information furnished by a pricing service that
uses a valuation matrix which incorporates both dealer-supplied
valuations and electronic data processing techniques. Use of pricing
services has been approved by the Board of Trustees. A number of
pricing services are available, and the funds may use various pricing
services or discontinue the use of any pricing service.
Futures contracts and options are valued on the basis of market
quotations, if available.
Foreign securities are valued based on prices furnished by independent
brokers or quotation services which express the value of securities in
their local currency. FSC gathers all exchange rates daily at the
close of the NYSE using the last quoted price on the local currency
and then translates the value of foreign securities from their local
currencies into U.S. dollars. Any changes in the value of forward
contracts due to exchange rate fluctuations and days to maturity are
included in the calculation of NAV. If an extraordinary event that is
expected to materially affect the value of a portfolio security occurs
after the close of an exchange on which that security is traded, then
that security will be valued as determined in good faith by a
committee appointed by the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less
for which market quotations and information furnished by a pricing
service are not readily available are valued either at amortized cost
or at original cost plus accrued interest, both of which approximate
current value. In addition, securities and other assets for which
there is no readily available market value may be valued in good faith
by a committee appointed by the Board of Trustees. The procedures set
forth above need not be used to determine the value of the securities
owned by a fund if, in the opinion of a committee appointed by the
Board of Trustees, some other method would more accurately reflect the
fair market value of such securities.
PERFORMANCE
A class may quote performance in various ways. All performance
information supplied by the funds in advertising is historical and is
not intended to indicate future returns. The share price of each
class of a bond or equity fund, the yield, if applicable, of each
class of a bond, equity, or money market fund, and the total
return fluctuate in response to market conditions and other factors,
and the value of a bond or equity fund's shares when redeemed
may be more or less than their original cost.
YIELD CALCULATIONS (MONEY MARKET PORTFOLIO). To compute the yield
for the money market fund for a period, the net change in value of
a hypothetical account containing one share reflects the value of
additional shares purchased with dividends from the one original share
and dividends declared on both the original share and any additional
shares. The net change is then divided by the value of the account at
the beginning of the period to obtain a base period return. This base
period return is annualized to obtain a current annualized yield. The
money market fund also may calculate a n effective yield by
compounding the base period return over a one-year period. In addition
to the current yield, the money market fund may quote yields in
advertising based on any historical seven-day period. Yields for the
money market fund are calculated on the same basis as other money
market funds, as required by applicable regulation.
YIELD CALCULATIONS (EXC EPT MONEY MARKET PORTFOLIO). Yields for
a class are computed by dividing the class's pro rata share of the
fund's interest and dividend income for a given 30-day or
one-month period, net of expenses, by the average number of shares of
that class entitled to receive distributions during the period,
dividing this figure by the class's net asset value (NAV) at the end
of the period, and annualizing the result (assuming compounding of
income) in order to arrive at an annual percentage rate. Income is
calculated for purposes of yield quotations in accordance with
standardized methods applicable to all stock and bond funds. Dividends
from equity investments are treated as if they were accrued on a daily
basis, solely for the purposes of yield calculations. In general,
interest income is reduced with respect to bonds trading at a premium
over their par value by subtracting a portion of the premium from
income on a daily basis, and is increased with respect to bonds
trading at a discount by adding a portion of the discount to daily
income. For a fund's investments denominated in foreign currencies,
income and expenses are calculated first in their respective
currencies, and are then converted to U.S. dollars, either when they
are actually converted or at the end of the 30-day or one month
period, whichever is earlier. Income is adjusted to reflect gains
and losses from principal repayments received by a fund with respect
to mortgage-related securities and other asset-backed securities.
Other c apital gains and losses generally are excluded from the
calculation as are gains and losses from currency exchange rate
fluctuations.
Income calculated for the purposes of calculating a class's yield
differs from income as determined for other accounting purposes.
Because of the different accounting methods used, and because of the
compounding of income assumed in yield calculations, a class's yield
may not equal its distribution rate, the income paid to your account,
or the income reported in the fund's financial statements.
In calculating a class's yield, a fund may from time to time use a
portfolio security's coupon rate instead of its yield to maturity in
order to reflect the risk premium on that security. This practice will
have the effect of reducing the class's yield.
Yield information may be useful in reviewing a class's performance and
in providing a basis for comparison with other investment
alternatives. However, a class's yield fluctuates, unlike
investments that pay a fixed interest rate over a stated period of
time. When comparing investment alternatives, investors should also
note the quality and maturity of the portfolio securities of
respective investment companies they have chosen to consider.
Investors should recognize that in periods of declining interest rates
a class's yield will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates a class's yield will
tend to be somewhat lower. Also, when interest rates are falling, the
inflow of net new money to a fund from the continuous sale of its
shares will likely be invested in instruments producing lower yields
than the balance of the fund's holdings, thereby reducing the class's
current yield. In periods of rising interest rates, the opposite can
be expected to occur.
TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect
all aspects of a class's return, including the effect of reinvesting
dividends and capital gain distributions, and any change in the
class's NAV over a stated period. A class's total return may be
calculated by using the performance data of a previously existing
class prior to the date that the new class commenced operations,
adjusted to reflect differences in sales charges but not 12b-1 fees.
Average annual total returns are calculated by determining the
growth or decline in value of a hypothetical historical investment in
a class over a stated period, and then calculating the annually
compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the
period. For example, a cumulative total return of 100% over ten years
would produce an average annual total return of 7.18%, which is the
steady annual rate of return that would equal 100% growth on a
compounded basis in ten years. While average annual total returns are
a convenient means of comparing investment alternatives, investors
should realize that a class's performance is not constant over time,
but changes from year to year, and that average annual total returns
represent averaged figures as opposed to the actual year-to-year
performance of the class.
In addition to average annual total returns, a class may quote
unaveraged or cumulative total returns reflecting the simple change in
value of an investment over a stated period. Average annual and
cumulative total returns may be quoted as a percentage or as a dollar
amount, and may be calculated for a single investment, a series of
investments, or a series of redemptions, over any time period. Total
returns may be broken down into their components of income and capital
(including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions
to total return. Total returns may be quoted on a before-tax or
after-tax basis. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph, or similar
illustration.
NET ASSET VALUE. Charts and graphs using a class's NAVs, adjusted
NAVs, and benchmark indices may be used to exhibit performance. An
adjusted NAV includes any distributions paid by a fund and
reflects all elements of a class's return. Unless otherwise
indicated, a class's adjusted NAVs are not adjusted for sales charges,
if any.
MOVING AVERAGES. A growth, growth and income, or asset allocation
fund may illustrate performance using moving averages. A long-term
moving average is the average of each week's adjusted closing NAV for
a specified period. A short-term moving average is the average of each
day's adjusted closing NAV for a specified period. Moving Average
Activity Indicators combine adjusted closing NAVs from the last
business day of each week with moving averages for a specified period
to produce indicators showing when a NAV has crossed, stayed above, or
stayed below its moving average. On December 26, 1997, the 13-week and
39-week long-term moving averages were $23.68 and $22.46 for
Equity-Income - Initial Class; $36.87 and $34.95 for Growth - Initial
Class; $19.42 and $19.44 for Overseas - Initial Class; $17.68 and
$16.92 for Asset Manager - Initial Class; $16.01 and $15.25 for Asset
Manager: Growth - Initial Class; $111.61 and $105.59 for Index 500 -
Initial Class; $19.84 and $18.61 for Contrafund - Initial Class;
$14.29 and $13.74 for Balanced - Initial Class; $18.64 and $17.58 for
Growth Opportunities - Initial Class; and $12.16 and $11.44 for Growth
& Income - Initial Class, respectively. The initial offering of
Service Class shares of each fund (except Money Market, Investment
Grade Bond, and Index 500) began on November 3, 1997.
HISTORICAL FUND RESULTS. The following table shows each class's
yield (money market and bond funds) and total return for the
periods ended December 31, 1997. The initial offering of Service Class
shares of each fund (except Money Market, Investment Grade Bond, and
Index 500) began on November 3, 1997. A fund's Service Class returns
prior to the initial offering date are those of Initial Class, the
original class of the fund, which does not have a 12b-1 fee. Service
Class returns would have been lower if the applicable Service Class
12b-1 fee had been reflected in returns prior to the initial offering
date.
AVERAGE ANNUAL TOTAL RETURNS CUMULATIVE TOTAL RETURNS

<TABLE>
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AS OF 12/31/97

7-DAY/30-DAY ONE FIVE 10 ONE FIVE 10 YEARS/
YIELD YEAR YEARS YEARS/LIFE YEAR YEARS LIFE OF
OF FUND*
FUND*

MONEY MARKET PORTFOLIO:
5.56 % (7-DAY) 5.51 % 4.85 % 5.87 % 5.51 % 26.71 % 76.82 %
INITIAL CLASS

INVESTMENT GRADE
5.79% (30-DAY) 9.06 % 7.11 % 8.29 % 9.06 % 41.00 % 106.02 %
BOND PORTFOLIO:
INITIAL CLASS

INDEX 500 PORTFOLIO:
N/A 32.83 % 19.91 % 19.87 % 32.83 % 147.95 % 163.59 %
INITIAL CLASS

HIGH INCOME PORTFOLIO:
8.41% (30-DAY) 17.67 % 13.91 % 12.81 % 17.67 % 91.82 % 233.79 %
INITIAL CLASS

HIGH INCOME PORTFOLIO:
N/A 17.58 % 13.90 % 12.80 % 17.58 % 91.68 % 233.55 %
SERVICE CLASS

ASSET MANAGER PORTFOLIO:
N/A 20.65 % 12.98 % 12.73 % 20.65 % 84.11 % 171.19 %
INITIAL CLASS

ASSET MANAGER PORTFOLIO:
N/A 20.52 % 12.96 % 12.72 % 20.52 % 83.91 % 170.89 %
SERVICE CLASS

ASSET MANAGER:
N/A 25.07 % N/A 22.73 % 25.07 % N/A 84.69 %
GROWTH PORTFOLIO:
INITIAL CLASS

ASSET MANAGER:
N/A 24.99 % N/A 22.71 % 24.99 % N/A 84.58 %
GROWTH PORTFOLIO:
SERVICE CLASS

EQUITY-INCOME PORTFOLIO:
N/A 28.11 % 20.16 % 16.72 % 28.11 % 150.50 % 369.43 %
INITIAL CLASS

EQUITY-INCOME PORTFOLIO:
N/A 28.05 % 20.15 % 16.72 % 28.05 % 150.39 % 369.24 %
SERVICE CLASS

CONTRAFUND PORTFOLIO:
N/A 24.14 % N/A 28.16 % 24.14 % N/A 110.26 %
INITIAL CLASS

CONTRAFUND PORTFOLIO:
N/A 24.08 % N/A 28.14 % 24.08 % N/A 110.15 %
SERVICE CLASS

GROWTH PORTFOLIO:
N/A 23.48 % 18.00 % 17.19 % 23.48 % 128.82 % 388.38 %
INITIAL CLASS

GROWTH PORTFOLIO:
N/A 23.45 % 18.00 % 17.18 % 23.45 % 128.76 % 388.25 %
SERVICE CLASS

OVERSEAS PORTFOLIO:
N/A 11.56 % 14.12 % 9.62 % 11.56 % 93.54 % 150.57 %
INITIAL CLASS

OVERSEAS PORTFOLIO:
N/A 11.56 % 14.12 % 9.62 % 11.56 % 93.54 % 150.57 %
SERVICE CLASS

GROWTH & INCOME
N/A 30.09 % N/A 28.69% 30.09 % N/A 28.79 %
PORTFOLIO:
INITIAL CLASS

GROWTH & INCOME
N/A 30.10 % N/A 28.70% 30.10 % N/A 28.79 %
PORTFOLIO:
SERVICE CLASS

BALANCED PORTFOLIO:
N/A 22.18 % N/A 15.28 % 22.18 % N/A 53.07 %
INITIAL CLASS

BALANCED PORTFOLIO:
N/A 22.27 % N/A 15.30 % 22.27 % N/A 53.18 %
SERVICE CLASS

GROWTH OPPORTUNITIES
N/A 29.95 % N/A 26.81 % 29.95 % N/A 103.68 %
PORTFOLIO:
INITIAL CLASS

GROWTH OPPORTUNITIES
N/A 29.95 % N/A 26.81 % 29.95 % N/A 103.68 %
PORTFOLIO:
SERVICE CLASS

</TABLE>

Note: If FMR had not reimbursed certain expenses during these
periods, yields and total returns would have been lower.
* 10-year return for Money Market, High Income, Equity-Income, Growth
and Overseas Portfolios . Life of fund: Investment Grade Bond
Portfolio commenced operations December 5, 1988; Asset Manager
Portfolio commenced operations September 6, 1989; Index 500 Portfolio
commenced operations August 27, 1992; Contrafund, Asset Manager:
Growth, Balanced and Growth Opportunities Portfolios commenced
operations January 3, 1995; and Growth & Income Portfolio commenced
operations December 31, 1996.
The following tables show the income and capital elements of each
class's cumulative total return. The tables compare each class's
return to the record of the S&P 500, the Dow Jones Industrial Average
(DJIA), and the cost of living, as measured by the Consumer Price
Index (CPI), over the same period. The CPI information is as of the
month-end closest to the initial investment date for each class. The
S&P 500 and DJIA comparisons are provided to show how each class's
total return compared to the record of a broad unmanaged index of
common stocks and a narrower set of stocks of major industrial
companies, respectively, over the same period. Because each of Money
Market, High Income and Investment Grade Bond invests in fixed-income
securities, common stocks represent a different type of investment
from the fund. Common stocks generally offer greater growth potential
than the funds, but generally experience greater price volatility,
which means greater potential for loss. In addition, common stocks
generally provide lower income than a fixed-income investment such as
a money market or bond fund. Each of Index 500, Asset Manager, Asset
Manager: Growth, Equity-Income, Contrafund, Growth, Overseas, Growth &
Income, Balanced, and Growth Opportunities has the ability to invest
in securities not included in either index, and its investment
portfolio may or may not be similar in composition to the indexes.
The S&P 500 and DJIA returns are based on the prices of unmanaged
groups of stocks and, unlike each class's returns, do not include the
effect of brokerage commissions or other costs of investing.
The initial offering of Service Class shares of each fund (except
Money Market, Investment Grade Bond, and Index 500) began on November
3, 1997. A fund's Service Class figures prior to the initial offering
date are those of Initial Class, the original class of the fund, which
does not have a 12b-1 fee. Service Class figures would have been lower
if the applicable Service Class 12b-1 fee had been reflected in
figures prior to the initial offering date.
The following tables show the growth in value of a hypothetical
$10,000 investment in each class of each fund during the 10-year
period ended December 31, 1997, or life of each fund, as applicable,
assuming all distributions were reinvested. Total returns are based
on past results and are not an indication of future performance .
Tax consequences of different investments have not been factored into
the figures below.
MONEY MARKET PORTFOLIO. During the ten-year period ended December 31,
1997, a hypothetical $10,000 investment in Initial Class of Money
Market Portfolio would have grown to $ 17,682 .
MONEY MARKET PORTFOLIO - INITIAL CLASS INDICES

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YEAR VALUE OF VALUE OF VALUE OF TOTAL S&P 500 DJIA COST OF
ENDED INITIAL REINVESTED REINVESTED VALUE LIVING
$10,000 DIVIDEND CAPITAL GAIN
INVESTMENT DISTRIBUTIONS DISTRIBUTIONS

1997 $ 10,000 $ 7,682 $ 0 $ 17,682 $ 52,577 $ 54,688 $ 13,977

1996 $ 10,000 $ 6,759 $ 0 $ 16,759 $ 39,424 $ 43,801 $ 13,744

1995 $ 10,000 $ 5,899 $ 0 $ 15,899 $ 32,063 $ 34,032 $ 13,302

1994 $ 10,000 $ 5,017 $ 0 $ 15,017 $ 23,305 $ 24,891 $ 12,972

1993 $ 10,000 $ 4,405 $ 0 $ 14,405 $ 23,002 $ 23,712 $ 12,634

1992 $ 10,000 $ 3,954 $ 0 $ 13,954 $ 20,896 $ 20,268 $ 12,296

1991 $ 10,000 $ 3,431 $ 0 $ 13,431 $ 19,412 $ 18,890 $ 11,950

1990 $ 10,000 $ 2,660 $ 0 $ 12,660 $ 14,877 $ 15,192 $ 11,594

1989 $ 10,000 $ 1,718 $ 0 $ 11,718 $ 15,356 $ 15,274 $ 10,927

1988 $ 10,000 $ 739 $ 0 $ 10,739 $ 11,661 $ 11,592 $ 10,442

</TABLE>

Explanatory Notes: With an initial investment of $10,000 in Initial
Class of Money Market Portfolio on January 1, 1988, the net amount
invested in Initial Class shares was $10,000. The cost of the initial
investment ($10,000), together with the aggregate cost of reinvested
dividends for the period covered (their cash value at the time they
were reinvested), amounted to $ 17,682 . If distributions had not
been reinvested, the amount of distributions earned from the class
over time would have been smaller, and cash payments for the period
would have amounted to $ 5,714 for dividends . The fund did not
distribute any capital gains during the period.
HIGH INCOME PORTFOLIO. During the ten-year period ended December 31,
1997, a hypothetical $10,000 investment in Initial Class of High
Income Portfolio would have grown to $ 33,379 .
HIGH INCOME PORTFOLIO - INITIAL CLASS INDICES

1997 $ 14,029 $ 17,713 $ 1,637 $ 33,379

$ 52,577 $ 54,688 $ 13,977

1996 $ 12,934 $ 14,190 $ 1,244 $ 28,368 $ 39,424 $ 43,801 $ 13,744

1995 $ 12,448 $ 11,628 $ 801 $ 24,877 $ 32,063 $ 34,032 $ 13,302

1994 $ 11,105 $ 8,789 $ 714 $ 20,608 $ 23,305 $ 24,891 $ 12,972

1993 $ 12,386 $ 8,453 $ 112 $ 20,951 $ 23,002 $ 23,712 $ 12,634

1992 $ 11,178 $ 6,223 $ 0 $ 17,401 $ 20,896 $ 20,268 $ 12,296

1991 $ 9,866 $ 4,262 $ 0 $ 14,128 $ 19,412 $ 18,890 $ 11,950

1990 $ 7,304 $ 3,155 $ 0 $ 10,459 $ 14,877 $ 15,192 $ 11,594

1989 $ 8,378 $ 2,320 $ 0 $ 10,698 $ 15,356 $ 15,274 $ 10,927

1988 $ 9,979 $ 1,185 $ 0 $ 11,164 $ 11,661 $ 11,592 $ 10,442

</TABLE>

Explanatory Notes: With an initial investment of $10,000 in Initial
Class of High Income Portfolio on January 1, 1988, the net amount
invested in Initial Class shares was $10,000. The cost of the initial
investment ($10,000), together with the aggregate cost of reinvested
dividends and capital gain distributions for the period covered (their
cash value at the time they were reinvested), amounted to
$ 24,456 . If distributions had not been reinvested, the amount
of distributions earned from the class over time would have been
smaller, and cash payments for the period would have amounted to
$ 8,399 for dividends and $ 744 for capital gain
distributions.
During the ten-year period ended December 31, 1997, a hypothetical
$10,000 investment in Service Class of High Income Portfolio would
have grown to $ 33,355 .
HIGH INCOME PORTFOLIO - SERVICE CLASS INDICES

1997 $ 14,019 $ 17,700 $ 1,636 $ 33,355 $ 52,577 $ 54,688 $ 13,977