TEMPLETON VARIABLE PRODUCTS SERIES FUND, 485BPOS, 1998-04-29

TEMPLETON VARIABLE PRODUCTS SERIES FUND
485BPOS, 1998-04-29

Previous: MOUNTAIN STATES GUARANTY MORTGAGE CO, 10-Q, 1998-04-29

Next: LAB HOLDINGS INC, SC 13G/A, 1998-04-29

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1998.

File Nos. 33-20313
811-5479

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No. (X)

Post-Effective Amendment No. 18

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 21

TEMPLETON VARIABLE PRODUCTS SERIES FUND
(Exact Name of Registrant as Specified in Charter)

500 East Broward Blvd., Suite 2100

FORT LAUDERDALE, FLORIDA 33396-3091
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code:(954)527-7500
Barbara J. Green

Templeton Variable Product Series Fund
500 East Broward Blvd., Suite 2100
Fort Lauderdale, FLORIDA 33396-3091

(Name and Address of Agent for Service of Process)

Approximate Date of Proposed Public Offering:

It is proposed that this filing will become effective (check appropriate box):

[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph(a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on May 1, 1998 pursuant to paragraph (a)(2)of Rule 485

If appropriate, check the following box:

[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment

Title of Securities Being Registered:

Shares of Beneficial Interest:

Templeton Variable Products Series Fund
Templeton Stock Fund - Class 1
Templeton Stock Fund - Class 2
Templeton Asset Allocation Fund - Class 1
Templeton Asset Allocation Fund - Class 2
Templeton International Fund - Class 1
Templeton International Fund - Class 2
Templeton Bond Fund - Class 1
Templeton Bond Fund - Class 2
Templeton Developing Markets Fund - Class 1
Templeton Developing Markets Fund - Class 2
Templeton Money Market Fund
Franklin Growth Investments Fund - Class 1
Franklin Growth Investments Fund - Class 2
Franklin Small Cap Investments Fund - Class 1
Franklin Small Cap Investments Fund - Class 2
Mutual Discovery Investments Fund - Class 1
Mutual Discovery Investments Fund - Class 2
Mutual Shares Investment Fund - Class 1
Mutual Shares Investment Fund - Class 2

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
CROSS REFERENCE SHEET

FORM N-1A

Part A: Information Required in Prospectus
(Templeton Money Market Fund and Class 1 Shares of All Other Series)

N-1A

Item No. Item Location in Registration Statement
<S> <C> <C>

1. Cover Page Cover Page

2. Synopsis "Expense Summary" (each series)

3 Condensed Financial Information "Financial Highlights" (each series)

4. General Description "Investment Objective and Policies" and "Risk
Considerations" (each series); "Explanation of
Securities and Investment Techniques;"
"Explanations of Risk Factors"

5. Management of the Fund "Portfolio Management" (each series); "Management
of the Trust"

5A. Management's Discussion of Fund Performance Contained in Annual Report to Shareholders

6. Capital Stock and Other Securities "Dividends and Distributions"; "Other Information"

7. Purchase of Securities Being Offered "Purchase of Shares"; "Net Asset Value"

8. Redemption or Repurchase "Redemption of Shares"

9. Pending Legal Proceedings Not Applicable

</TABLE>

PAGE

CROSS REFERENCE SHEET
FORM N-1A

Part A: Information Required in Prospectus
(Class 2 Shares of All Series Except Templeton Money Market Fund)

N-1A

Item No. Item Location in Registration Statement
<S> <C> <C>

1. Cover Page Cover Page

2. Synopsis "Expense Summary" (each series)

3. Condensed Financial Information "Financial Highlights" (each series)

4. General Description "Investment Objective and Policies" and "Risk
Considerations" (each series); "Explanations
of Securities and Investment Techniques;"
"Explanations of Risk Factors"

5. Management of the Fund "Portfolio Management" (each series);
"Management of the Trust"

5A. Management's Discussion of Contained in Registrant's
Fund Performance Annual Report to Shareholders

6. Capital Stock and Other Securities "Dividends and Distributions"; "
Distribution Plan;" "Other
Information"

7. Purchase of Securities Being Offered "Purchase of Shares";
"Distribution Plan;" "Net Asset
Value"

8. Redemption or Repurchase "Redemption of Shares"

9. Pending Legal Proceedings Not Applicable

</TABLE>

CROSS REFERENCE SHEET
FORM N-1A

Part B: Information Required in Statement of Additional Information
(For All Series)

N-1A
Item No. Item Location in Registration Statement
<S> <C> <C>

10. Cover Page Cover Page

11. Table of Contents Table of Contents

12. General Information and History "Introduction"

13. Fund Investment Objectives and Policies "Investment Objectives and Policies;"
"Investment Restrictions"

14. Management of the Fund "Officers and Trustees"

15. Control Persons and Principal Holders of "Officers and Trustees"
Securities

16. Investment Advisory and Other Services "Investment Management and Other Services"

17. Brokerage Allocation "Brokerage Allocation"

18. Capital Stock and Other Securities "Description of Shares"

19. Purchase, Redemption and Pricing of "Purchase Redemption and Pricing of
Securities Being Offered Shares"; "Class 2 Distribution Plan"

20 Tax Status "Tax Status"

21. Underwriters Not Applicable

22. Calculation of Performance Data "Performance Information"

23. Financial Statements "Financial Statements"
</TABLE>

PAGE

LOGO
TEMPLETON VARIABLE PRODUCTS SERIES FUND

PROSPECTUS -- MAY 1, 1998
CLASS 1 SHARES

FRANKLIN GROWTH INVESTMENTS FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
MUTUAL DISCOVERY INVESTMENTS FUND
MUTUAL SHARES INVESTMENTS FUND
TEMPLETON ASSET ALLOCATION FUND
TEMPLETON BOND FUND
TEMPLETON DEVELOPING MARKETS FUND
TEMPLETON INTERNATIONAL FUND
TEMPLETON MONEY MARKET FUND
TEMPLETON STOCK FUND

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

Templeton Variable Products Series Fund (the "Trust"), is an open-end,
management investment company, consisting of ten separate investment portfolios
or funds (each a "Fund"), each of which has different investment objectives.
This prospectus contains information that a prospective investor should know
before investing.

Shares of each Fund are currently sold only to insurance company separate
accounts ("Separate Accounts") to serve as the investment vehicle for both
variable annuity and variable life insurance contracts (the "Contracts"). The
Contracts involve certain fees and expenses not described in this Prospectus and
also may involve certain restrictions or limitations on the allocation of
purchase payments or Contract values to different investment vehicles. In
particular, certain Funds or classes of the Trust may not be available in
connection with a particular Contract or in a particular state. See the
applicable Contract prospectus for information regarding fees and expenses of
the Contract and any applicable restrictions or limitations.

Each Fund, except the Templeton Money Market Fund, has two classes of shares:
Class 1 and Class 2. This prospectus offers only Class 1 shares of multiclass
Funds and is for use with Contacts that make Class 1 shares of these Funds
available. For more information about the Trust's classes, see "Other
Information -- Capitalization and Voting Rights," below.

A statement of additional information ("SAI") dated May 1, 1998, has been filed
with the Securities and Exchange Commission and is incorporated in its entirety
by reference in and made a part of this prospectus. The SAI is available without
charge upon request to the Trust's underwriter, Franklin Templeton Distributors
Inc., 100 Fountain Parkway, St. Petersburg, Florida 33716-1205 or by calling
1-800-774-5001.

Shares of each Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Shares of each Fund involve investment risks, including the
possible loss of principal.

AN INVESTMENT IN THE TEMPLETON MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE TEMPLETON
MONEY MARKET FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1 PER
SHARE.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES
OR INSURANCE COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED OR PRECEDED BY A CURRENT
PROSPECTUS OFFERING THE VARIABLE INSURANCE CONTRACT. BOTH PROSPECTUSES SHOULD BE
READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.

This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus.

PAGE

TABLE OF CONTENTS

FRANKLIN GROWTH INVESTMENTS FUND
Investment Objective and Policies......................... FG-1
Risk Considerations....................................... FG-1
Portfolio Management...................................... FG-2
Expense Summary........................................... FG-3
- ----------------------------------------------------------------------
FRANKLIN SMALL CAP INVESTMENTS FUND
Investment Objective and Policies......................... FS-1
Risk Considerations....................................... FS-2
Portfolio Management...................................... FS-2
Expense Summary........................................... FS-3
- ----------------------------------------------------------------------
MUTUAL DISCOVERY INVESTMENTS FUND
Investment Objective and Policies......................... MD-1
Risk Considerations....................................... MD-2
Portfolio Management...................................... MD-3
Expense Summary........................................... MD-5
- ----------------------------------------------------------------------
MUTUAL SHARES INVESTMENTS FUND
Investment Objective and Policies......................... MS-1
Risk Considerations....................................... MS-2
Portfolio Management...................................... MS-3
Expense Summary........................................... MS-5
- ----------------------------------------------------------------------
TEMPLETON ASSET ALLOCATION FUND
Investment Objective and Policies......................... TA-1
Risk Considerations....................................... TA-1
Portfolio Management...................................... TA-2
Expense Summary........................................... TA-3
Financial Highlights...................................... TA-4
- ----------------------------------------------------------------------
TEMPLETON BOND FUND
Investment Objective and Policies......................... TB-1
Risk Considerations....................................... TB-1
Portfolio Management...................................... TB-2
Expense Summary........................................... TB-3
Financial Highlights...................................... TB-4
- ----------------------------------------------------------------------
TEMPLETON DEVELOPING MARKETS FUND
Investment Objective and Policies......................... TD-1
Risk Considerations....................................... TD-2
Portfolio Management...................................... TD-2
Expense Summary........................................... TD-4
Financial Highlights...................................... TD-5
- ----------------------------------------------------------------------
TEMPLETON INTERNATIONAL FUND
Investment Objective and Policies......................... TI-1
Risk Considerations....................................... TI-1
Portfolio Management...................................... TI-2
Expense Summary........................................... TI-3
Financial Highlights...................................... TI-4
- ----------------------------------------------------------------------
</TABLE>

PAGE

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TEMPLETON MONEY MARKET FUND
Investment Objective and Policies......................... TM-1
Risk Considerations....................................... TM-2
Portfolio Management...................................... TM-2
Expense Summary........................................... TM-3
Financial Highlights...................................... TM-4
- ----------------------------------------------------------------------
TEMPLETON STOCK FUND
Investment Objective and Policies......................... TS-1
Risk Considerations....................................... TS-1
Portfolio Management...................................... TS-2
Expense Summary........................................... TS-3
Financial Highlights...................................... TS-4
- ----------------------------------------------------------------------
EXPLANATIONS OF SECURITIES AND INVESTMENT TECHNIQUES........ 1
EXPLANATIONS OF RISK FACTORS................................ 6
PURCHASE OF SHARES.......................................... 9
NET ASSET VALUE............................................. 9
REDEMPTION OF SHARES........................................ 9
EXCHANGES................................................... 10
MANAGEMENT OF THE TRUST..................................... 10
DIVIDENDS AND DISTRIBUTIONS................................. 10
FEDERAL INCOME TAX STATUS................................... 11
OTHER INFORMATION........................................... 12
APPENDIX.................................................... 14
</TABLE>

PAGE

INVESTMENT OBJECTIVE AND POLICIES

FRANKLIN GROWTH INVESTMENTS FUND

The primary investment objective of the Franklin Growth Investments Fund is
capital appreciation. Current income is only a secondary consideration in
selecting portfolio securities. There can be no assurance that the Fund will
achieve its investment objective.

PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund will invest
primarily (at least 65% of assets) in equity securities, including common and
preferred stocks, or securities convertible into common stocks, which are
believed to offer favorable possibilities for capital appreciation, but some of
which may yield little or no current income. The Fund's assets may be invested
in shares of common or capital stock traded on any national securities exchange
or over-the-counter, and in convertible securities. The Fund may also keep a
significant portion of its assets in cash from time to time. The Fund seeks to
reduce the risks involved in equity investments through extensive research, and
emphasis on more globally competitive companies.

The Investment Manager will generally make long-term investments in equity
securities which have been selected based upon fundamental and quantitative
analysis. Following these policies, the Fund will typically invest predominantly
in equity securities issued by large-cap or mid-cap U.S. companies, which have
market capitalizations of $1 billion or more. It may also invest in smaller
capitalization companies, which may be subject to different and greater risks.
As an operating policy, the Fund currently intends to invest no more than 15% of
its assets in foreign securities, including Depositary Receipts, which involve
special risks including currency fluctuations and political uncertainty.

Consistent with its investment objective, the Fund expects to have a portion of
its assets invested in securities of companies involved in computing
technologies or computing technology-related companies. The technology sector as
a whole has historically been volatile and issues from this sector tend to be
subject to abrupt or erratic price movements.

OTHER INVESTMENTS. The Fund currently intends to invest no more than 5% of its
assets in debt obligations, including convertible debt obligations, rated Ba or
lower by Moody's or BB or lower by Standard & Poor's, or unrated securities
determined by the Manager to be of comparable quality. SEE "EXPLANATIONS OF RISK
FACTORS," "EXPLANATIONS OF SECURITIES AND INVESTMENT TECHNIQUES" AND THE
APPENDIX. The Fund may invest in convertible preferred stocks, which are equity
securities, generally carry a higher degree of market risk than debt
obligations, and often may be regarded as speculative in nature. SEE
"EXPLANATIONS OF SECURITIES AND INVESTMENT TECHNIQUES" Under the policies
discussed in "Explanations of Securities and Investment Techniques" and in the
SAI, the Fund may also borrow up to one-third of the value of its total assets
(thought it does not currently expect any borrowing to exceed 5%); write covered
call options; purchase put options on securities; loan its portfolio securities;
enter into repurchase transactions; invest in restricted or illiquid securities;
and engage in other activities specifically identified for this Fund.

RISK CONSIDERATIONS

FRANKLIN GROWTH INVESTMENTS FUND

The Fund carries the risks common to all stock investments, plus special risks
because it may invest a portion of its assets in small cap companies and foreign
securities. Stocks, and other equity securities representing an ownership
interest in a corporation, have historically outperformed other asset classes
over the long term, but tend to fluctuate more dramatically over the shorter
term.

Securities of smaller or unseasoned companies have historically presented
greater risks of price swings than securities of larger, more established
companies. Foreign securities, especially in developing markets, are subject to
special and additional risks related to currency fluctuations, market volatility
and economic, social and political uncertainty. For more details about these and
other risks, please see "EXPLANATIONS OF SECURITIES AND INVESTMENT TECHNIQUES"
AND "EXPLANATIONS OF RISK FACTORS."

FG-1

PAGE

PORTFOLIO MANAGEMENT

FRANKLIN GROWTH INVESTMENTS FUND

Franklin Advisers, Inc., 777 Mariners Island Blvd., San Mateo, California,
94404, is the Investment Manager. The Investment Manager manages the Fund's
assets and makes its investment decisions. For its services, the Investment
Manager receives a fee equivalent on an annual basis to 0.60% of the average
daily net assets of the Fund, reduced to 0.50% of such assets in excess of $200
million, and to 0.40% of such assets in excess of $1.3 billion. See "Management
of the Trust" for more information about fees.

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.

CONRAD B. HERRMANN
Vice President and Portfolio Manager
Franklin Advisers, Inc.

Mr. Herrmann holds a Master of Business Administration degree from Harvard
University and a Bachelor of Arts degree from Brown University. Mr. Herrmann is
a Chartered Financial Analyst has been with the Franklin Templeton Group since
1989. He will manage the Fund from inception.

KEVIN CARRINGTON
Portfolio Manager
Franklin Advisers, Inc.

Mr. Carrington is a Charter Financial Analyst and holds a Bachelor of Science
degree in Business Administration from California State University at Chico. He
has been with the Franklin Templeton Group since 1992 and will manage the Fund
from inception.

VIVIAN J. PALMIERI
Vice President
Franklin Advisers, Inc.

Mr. Palmieri holds a Bachelor of Arts degree in Economics from Williams College.
He has been with the Franklin Templeton Group since 1965. Mr. Palmieri will
manage the Fund from inception.

FG-2

PAGE

EXPENSE SUMMARY

FRANKLIN GROWTH INVESTMENTS FUND -- CLASS 1

This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. It is based on the Fund's estimated expenses for the current
fiscal year. The Fund's actual expenses may vary.

SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANIES FOR USE IN VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). INVESTORS IN SUCH
CONTRACTS SHOULD CONSIDER THE FUND EXPENSES LISTED BELOW AS WELL AS THE
ADDITIONAL EXPENSES LISTED IN THE CONTRACT PROSPECTUS OR DISCLOSURE DOCUMENT.

A. SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge (as a percentage of Offering Price)
Paid at purchase............................................ 0.00%
Paid at redemption.......................................... 0.00%
</TABLE>

B. ANNUAL FUND OPERATING EXPENSES -- AFTER FEE WAIVER*
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<TABLE>
<S> <C>
Management Fees............................................. 0.40%
Other Expenses.............................................. 0.60%
----
TOTAL FUND OPERATING EXPENSES............................... 1.00%
</TABLE>

C. EXAMPLE

Assume the annual return on the Fund's Class 1 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund.

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS
- ----------------------
<S> <C>
$10 $32
</TABLE>

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 1 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.

*The Investment Manager has agreed in advance to waive management fees and make
certain payments to reduce Fund expenses as necessary so that Total Fund
Operating Expenses do not exceed 1.00% of the Fund's Class 1 net assets through
1998. The Investment Manager may end this arrangement at a later date. Estimated
Management Fees, Other Expenses and Total Fund Operating Expenses before any
waivers would be 0.60%, 0.60% and 1.20%, respectively.

FG-3

PAGE

INVESTMENT OBJECTIVE AND POLICIES

FRANKLIN SMALL CAP INVESTMENTS FUND

The investment objective of the Franklin Small Cap Investments Fund is long-term
capital growth. There can be no assurance that the Fund will achieve its
investment objective.

PORTFOLIO INVESTMENTS. The Fund seeks to accomplish its objective by investing
primarily (normally at least 65% of its assets) in equity securities of smaller
capitalization growth companies ("small cap companies"). Investments in small
cap companies may involve greater risks and greater volatility than investments
in larger and more established companies. A small cap company generally has a
market capitalization of less than $1 billion at the time of the Fund's
investment and, in the opinion of the Fund's Manager, is positioned for rapid
growth in revenues, earnings or assets. Market capitalization is defined as the
total market value of a company's outstanding common stock. The securities of
small cap companies are traded on U.S. or foreign stock exchanges and
over-the-counter. As an operating policy the Fund will not invest more than 10%
of its assets in securities issued by companies with less than three years of
continuous operation.

The Fund seeks to invest at least one-third of its assets in equity securities
of companies with market capitalizations of $550 million or less; there is no
assurance, however, that the Fund will always be able to find suitable companies
to include in this one-third portion. The Manager will monitor the availability
of securities suitable for investment by the Fund and recommend appropriate
action to the Board of Trustees of the Trust if it appears that this goal will
not be attainable under the Fund's current objective and other policies. Equity
securities of small cap companies may consist of common stock, preferred stock,
warrants for the purchase of common stock, and convertible securities. The Fund
currently does not intend to invest more than 10% of its assets in convertible
securities. See "Explanations of Securities and Investment Techniques."

SELECTION OF PORTFOLIO INVESTMENTS. The Fund has been designed to provide
investors with potentially greater long-term rewards by investing in securities
of small cap companies which may offer the potential for significant capital
appreciation since they may be overlooked by investors or undervalued in
relation to their earnings power. Small cap companies generally are not as well
known to the investing public and have less of an investor following than larger
companies, and therefore may provide greater opportunities for long-term capital
growth as a result of relative inefficiencies in the marketplace. Such companies
may be undervalued because they are part of an industry that is out of favor
with investors, although the individual companies may have high rates of earning
growth and be financially sound. Selection of small cap company equity
securities for the Fund will be based on characteristics such as the financial
strength of the company, the expertise of management, the growth potential of
the company within its industry and the growth potential of the industry itself.
Small cap companies often pay no dividends and current income is not a factor in
the selection of stocks. The Manager uses a disciplined approach to stock
selection, blending fundamental and quantitative analysis.

FOREIGN INVESTMENTS. The Fund may invest up to 25% of its assets in foreign
securities, including those of developing market issuers and Depositary
Receipts. The Fund presently does not intend to invest more than 5% of its
assets in developing markets securities.

OTHER INVESTMENTS. Although the Fund's assets will be invested primarily in
equity securities of small cap companies, the Fund may invest up to 35% of its
assets in other securities, which may cause its performance to vary from that of
the small capitalization equity markets. The Fund may invest in equity
securities of larger capitalization companies which the Fund's Manager believes
have strong growth potential, or in equity securities of relatively well-known,
larger companies in mature industries which the Manager believes have the
potential for capital appreciation. From time to time, the Fund may hold
significant cash positions until suitable investment opportunities are
available.

The Fund may also invest in debt securities which the Manager believes have the
potential for capital appreciation as a result of improvement in the
creditworthiness of the issuer. The receipt of income is incidental to the
Fund's objective of capital growth. The Fund may invest in debt securities rated
B or above by Moody's or Standard & Poor's ("S&P"), or in unrated securities the
Manager has determined are of comparable quality. Currently, however, the Fund
does not intend to invest more than 5% of its assets in debt obligations
(including convertible debt securities) rated lower than BBB by S&P or Baa by
Moody's or, if unrated, determined by the Manager to be of comparable quality.
SEE "EXPLANATIONS OF SECURITIES AND INVESTMENT TECHNIQUES," "EXPLANATIONS OF
RISK FACTORS," AND THE APPENDIX. The Fund currently does not intend to invest
more than 10% of its assets in real estate investment trusts ("REITs") including
smaller capitalization REITs.

OTHER INVESTMENT POLICIES. Under the policies discussed in "Explanations of
Securities and Investment Techniques," "Explanations of Risk Factors," and the
SAI, the Fund may also write covered put and call options on securities or
financial indices; purchase put and call options on securities or financial
indices; purchase and sell

FS-1

PAGE

futures contracts or related options with respect to securities, indices and
currencies; invest in restricted or illiquid securities; lend portfolio
securities; borrow up to one-third of the value of its total assets; enter into
repurchase or reverse repurchase agreements; and engage in other activities
specifically identified for this Fund.

RISK CONSIDERATIONS

FRANKLIN SMALL CAP INVESTMENTS FUND

The Fund carries the risks common to all stock investments, plus special risks
because it invests primarily in small cap companies and foreign securities.
Stocks, and other equity securities representing an ownership interest in a
corporation, have historically outperformed other asset classes over the long
term, but tend to fluctuate more dramatically over the shorter term.

The Fund will primarily invest in relatively new or unseasoned companies which
are in their early stages of development, or small cap companies positioned in
new and emerging industries where the opportunity for rapid growth is expected
to be above average. Securities of smaller or unseasoned companies present
greater risks than securities of larger, more established companies. The
companies may have relatively small revenues, limited product lines, and may
have a small share of the market for their products or services. Small cap
companies may lack depth of management, they may be unable to internally
generate funds necessary for growth or potential development or to generate such
funds through external financing on favorable terms, or they may be developing
or marketing new products or services for which markets are not yet established
and may never become established. Due to these and other factors, small cap
companies may suffer significant losses as well as realize substantial growth,
and investments in such companies tend to be more volatile and are therefore
speculative. Besides exhibiting greater volatility, small cap company stocks
may, to a degree, fluctuate independently of larger company stocks. SEE
"EXPLANATIONS OF RISK FACTORS." THE PORTFOLIO MAY NOT BE APPROPRIATE FOR
SHORT-TERM INVESTORS, AND AN INVESTMENT IN THE PORTFOLIO SHOULD NOT BE
CONSIDERED A COMPLETE INVESTMENT PROGRAM.

The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar domestic securities. INVESTMENTS IN
FOREIGN SECURITIES, PARTICULARLY IN DEVELOPING MARKETS, INVOLVE SPECIAL AND
ADDITIONAL RISKS. SEE "EXPLANATIONS OF RISK FACTORS" BELOW AND IN THE SAI.

PORTFOLIO MANAGEMENT

FRANKLIN SMALL CAP INVESTMENTS FUND

Franklin Advisers, Inc., 777 Mariners Island Blvd., San Mateo, California,
94404, is the Investment Manager. The Investment Manager manages the Fund's
assets and makes its investment decisions. For its services, the Investment
Manager receives a fee equivalent on an annual basis to 0.75% of the average
daily net assets of the Fund, reduced to 0.65% of such assets in excess of $200
million, and to 0.55% of such assets in excess of $1.3 billion. See "Management
of the Trust" for more information about fees.

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.

EDWARD B. JAMIESON
Senior Vice President
Franklin Advisers, Inc.

Mr. Jamieson holds a Bachelor of Arts degree from Bucknell University and a
Master's degree in accounting and finance from the University of Chicago
Graduate School of Business. He has been with the Franklin Templeton Group since
1987. He will manage the Fund from inception.

MICHAEL MCCARTHY
Portfolio Manager
Franklin Advisers, Inc.

Mr. McCarthy holds a Bachelor of Arts degree in history from the University of
California at Los Angeles. He has been with the Franklin Templeton Group since
1992. He will manage the Fund from inception.

FS-2

PAGE

EXPENSE SUMMARY

FRANKLIN SMALL CAP INVESTMENTS FUND -- CLASS 1

A. SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge (as a percentage of Offering Price)
Paid at purchase............................................ 0.00%
Paid at redemption.......................................... 0.00%
</TABLE>

B. ANNUAL FUND OPERATING EXPENSES -- AFTER FEE WAIVER*
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

C. EXAMPLE

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS
- ----------------------
<S> <C>
$10 $32
</TABLE>

FS-3

PAGE

INVESTMENT OBJECTIVE AND POLICIES

MUTUAL DISCOVERY INVESTMENTS FUND

The investment objective of the Mutual Discovery Investments Fund is capital
appreciation. There can be no assurance that the Fund will achieve its
investment objective.

PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund invests in
domestic and foreign equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt obligations of
any quality. Debt obligations may include securities or indebtedness issued by
corporations or governments in any form, including notes, bonds, or debentures,
as well as distressed mortgage obligations and other debt secured by real
property. The Investment Manager has no pre-set limits as to the percentages
which may be invested in equity securities, debt securities (including
lower-rated debt securities) or money market instruments. The Fund may invest in
securities from any size issuer, and may invest a substantial portion of its
assets in securities of smaller capitalization ("small cap") issuers, which have
market capitalizations of less than $1 billion. Securities of foreign or small
cap issuers may be subject to different and greater risks, as discussed below.
The Fund may invest in securities that are traded on U.S. or foreign exchanges,
NASDAQ national market or in the over-the-counter market. It may invest in any
industry sector, although it will not concentrate in any one industry. From time
to time, the Fund may hold significant cash positions until suitable investment
opportunities are available, consistent with its policy on temporary
investments.

The Fund also seeks to invest in securities of domestic and foreign companies
involved in mergers, consolidations, liquidations and reorganizations or as to
which there exist tender or exchange offers, and may participate in such
transactions. The Fund does not presently anticipate investing more than 50% of
its assets in such investments, but is not restricted to that amount. There can
be no assurance that any such transaction proposed at the time of the Fund's
investment will be consummated or will be consummated on the terms and within
the time period contemplated. The Fund may also invest in other forms of secured
or unsecured indebtedness or participations ("Special Indebtedness"), including
without limitation loan participations and trade claims, of debtor companies
involved in reorganization or financial restructuring, some of which may have
very long maturities. Some of the Indebtedness is illiquid.

SELECTION OF PORTFOLIO INVESTMENTS. The Fund's general policy is to invest in
securities which, in the opinion of its Investment Manager, are available at
prices less than their intrinsic values. The Investment Manager's opinions are
based upon analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, and
multiples of earnings of comparable securities. These factors are not applied
formulaically, as the Investment Manager examines each security separately; the
Investment Manager has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.

The Fund generally purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, in
certain circumstances when the Investment Manager perceives that the Fund may
benefit, the Investment Manager may itself seek to influence or control
management or may cause the Fund to invest in other entities that purchase
securities for the purpose of influencing or controlling management, such as
investing in a potential takeover or leveraged buyout or investing in other
entities engaged in such practices.

FOREIGN INVESTMENTS. The Fund may purchase securities in any foreign country,
developed or undeveloped, and currently expects to invest up to 50% or more of
its total assets in foreign securities, including Depositary Receipts. The Fund
presently does not intend to invest more than 5% of its assets in securities of
developing markets including Eastern European countries and Russia. Foreign
investments may include both voting and non-voting securities, sovereign debt
and participation in foreign government deals.

CURRENCY TECHNIQUES. The Fund generally expects to hedge against currency risks
to the extent that hedging is available. Currency hedging techniques may include
investments in foreign currency futures contracts, options on foreign currencies
or currency futures, forward foreign currency exchange contracts ("forward
contracts") and currency swaps, all of which involve specialized risks. See
"EXPLANATIONS OF RISK FACTORS."

MD-1

PAGE

companies which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated or
low rated securities that are often in, or are about to, default, that the
Investment Manager seeks to identify securities which are sometimes available at
prices which it believes are less than their intrinsic values. The purchase of
Special Indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.

DEFAULTED DEBT OBLIGATIONS. The Fund may invest without limit in defaulted debt
obligations, subject to the Fund's restriction on investments in illiquid
securities. Defaulted debt obligations may be considered speculative. See the
discussion above under "Credit Quality" for the circumstances under which the
Fund generally invests in defaulted debt obligations.

OTHER INVESTMENT POLICIES. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities subject to
the limitation that it will not purchase more than 3% of the voting securities
of another investment company. In addition, the Fund will not invest more than
5% of its assets in the securities of any single investment company and will not
invest more than 10% of its assets in investment company securities. Investors
should recognize that an investment in the securities of such investment
companies results in layering of expenses such that investors indirectly bear a
proportionate share of the expenses of such investment companies, including
operating costs, and investment advisory and administrative fees. The Fund may
also sell short securities it does not own up to 5% of its assets. Short sales
have risks of loss if the price of the security sold short increases after the
sale, but the Fund can profit if the price decreases. The Fund may also sell
securities "short against the box" (i.e., securities which the Fund owns or has
the immediate and unconditional right to acquire at no additional cost) without
limit. See the SAI for further details concerning short sales.

Under the policies discussed in "Explanations of Securities and Investment
Techniques," "Explanations of Risk Factors," and in the SAI, the Fund may also
loan its portfolio securities; enter into repurchase transactions; purchase
securities and debt obligations on a "when-issued" or "delayed delivery" basis;
invest in collateralized mortgage obligations; borrow up to one-third of the
value of its total assets; enter into reverse repurchase agreements; invest in
restricted or illiquid securities; purchase and sell exchange-listed and
over-the-counter put and call options on securities, equity and fixed-income
indices and other financial instruments; purchase and sell financial futures
contracts and options thereon; and engage in other activities specifically
identified for this Fund.

RISK CONSIDERATIONS

MUTUAL DISCOVERY INVESTMENTS FUND

The Fund carries the risks common to all stock investments, plus special risks
because it may invest in foreign securities, small cap companies, lower-rated
debt obligations, reorganizing companies, and Special Indebtedness.

Stocks, and other equity securities representing an ownership interest in a
corporation, have historically outperformed other asset classes over the long
term, but tend to fluctuate more dramatically over the shorter term.

Investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar domestic securities. Investments in
foreign developing markets involve heightened risks relating to the smaller size
and lesser liquidity of those markets. INVESTORS SHOULD CONSIDER CAREFULLY THE
SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE
HEIGHTENED IN DEVELOPING MARKETS. SEE "EXPLANATIONS OF RISK FACTORS."

Securities of smaller companies, particularly if they are unseasoned, present
greater risks than securities of larger, more established companies. The smaller
companies in which the Fund invests are often not well known, may often trade at
a discount and may not be followed by institutions. The companies may have
relatively small revenues, limited product lines, and a small share of the
market for their products or services. Small cap companies may lack depth of
management, they may be unable to internally generate funds necessary for growth
or potential development or to generate such funds through external financing on
favorable terms, or they may be developing or marketing new products or services
for which markets are not yet established and may never become established. Due
to these and other factors, small cap companies may suffer significant losses as
well as realize substantial growth, and investments in such companies tend to be
more volatile and are therefore speculative. Besides exhibiting greater
volatility, small cap company stocks may fluctuate independently of larger
company stocks. See also "Explanations of Risk Factors."

MD-2

PAGE

Higher yields are generally available from debt securities in the higher risk,
lower rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities and
involve greater risk of loss of income and principal. Moreover, securities rated
BB or lower by S&P or Ba or lower by Moody's are predominantly speculative with
respect to the issuer's ability to pay principal and interest and may be in
default. In addition, the secondary market for these securities may be less
liquid and market quotations less readily available than higher rated
securities, thereby increasing the degree to which judgment plays a role in
valuing such securities. BECAUSE OF THE FUND'S POLICY OF INVESTING IN LOWER
RATED AND UNRATED, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT IN THE FUND IS
ACCOMPANIED BY A HIGHER DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT IN
HIGHER RATED, LOWER YIELDING OBLIGATIONS. ACCORDINGLY, INVESTORS CONSIDERING THE
FUND SHOULD EVALUATE THEIR OVERALL INVESTMENT GOALS AND TOLERANCE FOR RISK. SEE
"EXPLANATIONS OF RISK FACTORS" AND APPENDIX.

When the Fund invests in a reorganizing company, there can be no assurance that
any merger, consolidation, liquidation, reorganization or tender or exchange
offer proposed at the time of the investment will be completed on the terms or
with the time contemplated by the Investment Manager, or at all. Special
Indebtedness involves risk as to the creditworthiness of the issuer and, in the
case of loan participations, the creditworthiness and reliability of the issuing
financial institution as well. Certain Special Indebtedness may be illiquid.

PORTFOLIO MANAGEMENT

MUTUAL DISCOVERY INVESTMENTS FUND

Franklin Mutual Advisers, Inc. ("Franklin Mutual"), 51 John F. Kennedy Parkway,
Short Hills, New Jersey, 07078 is the Investment Manager. The Investment Manager
manages the Fund's assets and makes its investment decisions. For its services,
the Investment Manager receives a fee equivalent on an annual basis to 0.80% of
the average daily net assets of the Fund. See "Management of the Trust" for more
information about fees.

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.

MICHAEL F. PRICE
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.

Mr. Price has a Bachelor of Arts degree in Business Administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, the predecessor of Franklin Mutual. He
became Chief Executive Officer of Franklin Mutual in November 1996 and will
manage the Fund from inception.

PETER LANGERMAN
Senior Vice President and Chief Operating Officer
Franklin Mutual Advisers, Inc.

Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters in
Science from New York University Graduate School of Business and a Juris Doctor
from Stanford University Law School. Prior to November 1996, he was a Research
Analyst for Heine Securities Corporation, the predecessor of Franklin Mutual. He
joined the Franklin Templeton Group in November 1996 and will manage the Fund
from inception.

JEFFREY ALTMAN
Senior Vice President
Franklin Mutual Advisers, Inc.

Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for Heine
Securities Corporation, the predecessor of Franklin Mutual. He joined the
Franklin Templeton Group in November 1996 and will manage the Fund from
inception.

ROBERT FRIEDMAN
Senior Vice President
Franklin Mutual Advisers, Inc.

Mr. Friedman has a Bachelor of Arts degree in Humanities from the John Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine Securities Corporation, the predecessor of Franklin Mutual. He
joined the Franklin Templeton Group in November 1996 and will manage the Fund
from inception.

MD-3

PAGE

RAYMOND GAREA
Senior Vice President
Franklin Mutual Advisers, Inc.

Mr. Garea has a Bachelor of Science degree in Engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, the predecessor of Franklin Mutual. He joined the Franklin
Templeton Group in November 1996 and will manage the Fund from inception.

LAWRENCE SONDIKE
Senior Vice President
Franklin Mutual Advisers, Inc.

Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, the predecessor of Franklin Mutual. He joined the Franklin
Templeton Group in November 1996, and will manage the Fund from inception.

DAVID MARCUS
Senior Vice President
Franklin Mutual Advisers, Inc.

Mr. Marcus holds a Bachelor of Science in Business Administration/Finance from
Northeastern University. Prior to November 1996, Mr. Marcus was a research
analyst for Heine Securities Corporation, the predecessor of Franklin Mutual. He
has been with the Franklin Templeton Group since November 1996 and will manage
the Fund from inception.

DAVID J. WINTERS
Senior Vice President
Franklin Mutual Advisers, Inc.

Mr. Winters is a Chartered Financial Analyst and holds a Bachelor of Arts degree
in Economics from Cornell University. Prior to November 1996, he was a research
analyst for Heine Securities Corporation, the predecessor of Franklin Mutual. He
has been with the Franklin Templeton Group since November 1996 and will manage
the Fund from inception.

MD-4

PAGE

EXPENSE SUMMARY

MUTUAL DISCOVERY INVESTMENTS FUND -- CLASS 1

A. SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge (as a percentage of Offering Price)
Paid at purchase............................................ 0.00%
Paid at redemption.......................................... 0.00%
</TABLE>

B. ANNUAL FUND OPERATING EXPENSES -- AFTER FEE WAIVER*
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

C. EXAMPLE

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS
- ----------------------
<S> <C>
$10 $32
</TABLE>

MD-5

PAGE

INVESTMENT OBJECTIVE AND POLICIES

MUTUAL SHARES INVESTMENTS FUND

The principal investment objective of the Mutual Shares Investments Fund is
capital appreciation, with income as a secondary objective. There can be no
assurance that the Fund will achieve its investment objective.

PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund invests
primarily in domestic equity securities and domestic debt obligations. Equity
securities include common and preferred stocks and securities convertible into
common stocks. Debt obligations may include securities or indebtedness of any
quality issued by corporations or governments in any form, including notes,
bonds, or debentures, as well as distressed mortgage obligations and other debt
secured by real property. The Investment Manager has no pre-set limits as to the
percentages which may be invested in equity securities, debt securities
(including lower-rated debt securities) or money market instruments. The Fund
may invest in securities from any size issuer, including smaller capitalization
companies, which may be subject to different and greater risks. See
"Explanations of Risk Factors." It will tend to invest, however, in securities
of issuers with market capitalizations in excess of $500 million. It may invest
in securities that are traded on U.S. or foreign exchanges, NASDAQ national
market or in the over-the-counter market. It may invest in any industry sector,
although it will not concentrate in any one industry. From time to time, the
Fund may hold significant cash positions, consistent with its policy on
temporary investments, until suitable investment opportunities are available.

The Fund also seeks to invest in securities of companies involved in mergers,
consolidations, liquidations and reorganizations or as to which there exist
tender or exchange offers, and may participate in such transactions. The Fund
does not presently anticipate investing more than 50% of its assets in such
investments, but is not restricted to that amount. There can be no assurance
that any such transaction proposed at the time of the Fund's investment will be
consummated or will be consummated on the terms and within the time period
contemplated. The Fund may also invest in other forms of secured or unsecured
indebtedness or participations ("Special Indebtedness"), including without
limitation, loan participations and trade claims, of debtor companies involved
in reorganization or financial restructuring, some of which may have very long
maturities. Some of the Indebtedness is illiquid.

SELECTION OF PORTFOLIO INVESTMENTS. The Fund's general policy is to invest in
securities which, in the opinion of the Investment Manager, are available at
prices less than their intrinsic values. The Investment Manager's opinions are
based upon analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, and
multiples of earnings of comparable securities. These factors are not applied
formulaically, as the Investment Manager examines each security separately; the
Investment Manager has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.

The Fund purchases securities for investment purposes and not for the purpose of
influencing or controlling management of the issuer. However, in certain
circumstances when the Investment Manager perceives that the Fund may benefit,
the Investment Manager may itself seek to influence or control management or may
cause the Fund to invest in other entities that purchase securities for the
purpose of influencing or controlling management, such as investing in a
potential takeover or leveraged buyout or investing in other entities engaged in
such practices.

CREDIT QUALITY. Debt obligations (including Special Indebtedness) in which the
Fund invests may be rated or unrated and, if rated, ratings may range from the
very highest to the very lowest categories (currently C for Moody's and D for
Standard & Poor's ("S&P"); see the Appendix concerning rating categories).
Medium and lower-rated debt obligations are commonly referred to as "junk
bonds." In general, it will invest in these instruments for the same reasons
underlying its investments in equity securities, i.e., that the instruments are
available, in the Investment Manager's opinion, at prices less than their
intrinsic values. Consequently, the Investment Manager's own analysis of a debt
instrument exercises a greater influence over the investment decision than the
stated coupon rate or credit rating. The Fund expects to invest in debt
obligations issued by reorganizing or restructuring companies, or companies
which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated or
low rated securities that are often in, or are about to, default, that the
Investment Manager seeks to identify securities which are sometimes available at
prices which it believes are less than their intrinsic values. The purchase of
Special Indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.

MS-1

PAGE

FOREIGN INVESTMENTS. Although the Fund reserves the right to purchase
securities in any foreign country, developed or undeveloped, the Fund's current
investment strategy is to invest primarily in domestic securities, with
approximately 15%-20% of its total assets in foreign securities, including
Depositary Receipts. The Fund presently does not intend to invest more than 5%
of its assets in securities of developing markets including Eastern European
countries and Russia. Foreign investments may include both voting and non-voting
securities, sovereign debt and participation in foreign government deals. The
Fund's investments in foreign securities involve risks related to currency
fluctuations and political uncertainty. See "Explanations of Risk Factors" below
and the SAI.

RISK CONSIDERATIONS

MUTUAL SHARES INVESTMENTS FUND

The Fund carries the risks common to all stock investments, plus special risks
because it may invest in lower-rated debt obligations, foreign securities,
reorganizing companies, and Special Indebtedness.

MS-2

PAGE

PORTFOLIO MANAGEMENT

MUTUAL SHARES INVESTMENTS FUND

Franklin Mutual Advisers, Inc., 51 John F. Kennedy Parkway, Short Hills, New
Jersey, 07078 is the Investment Manager. The Investment Manager manages the
Fund's assets and makes its investment decisions. For its services, the
Investment Manager receives a fee equivalent on an annual basis to 0.60% of the
average daily net assets of the Fund. See "Management of the Trust" for more
information about fees.

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.

MICHAEL F. PRICE
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.

PETER LANGERMAN
Senior Vice President and Chief Operating Officer
Franklin Mutual Advisers, Inc.

JEFFREY ALTMAN
Senior Vice President
Franklin Mutual Advisers, Inc.

ROBERT FRIEDMAN
Senior Vice President
Franklin Mutual Advisers, Inc.

RAYMOND GAREA
Senior Vice President
Franklin Mutual Advisers, Inc.

Mr. Garea has a Bachelor of Science degree in Engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, the predecessor of Franklin Mutual. Mr. Garea has also been a
Manager (Director) of MB Metroplis L.L.C. since 1994. He joined the Franklin
Templeton Group in November 1996 and will manage the Fund from inception.

MS-3

PAGE

LAWRENCE SONDIKE
Senior Vice President
Franklin Mutual Advisers, Inc.

DAVID MARCUS
Senior Vice President
Franklin Mutual Advisers, Inc.

DAVID J. WINTERS
Senior Vice President
Franklin Mutual Advisers, Inc.

MS-4

PAGE

EXPENSE SUMMARY

MUTUAL SHARES INVESTMENTS FUND -- CLASS 1

A. SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge (as a percentage of Offering Price)
Paid at purchase............................................ 0.00%
Paid at redemption.......................................... 0.00%
</TABLE>

B. ANNUAL FUND OPERATING EXPENSES -- AFTER FEE WAIVER*
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

C. EXAMPLE

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS
- ----------------------
<S> <C>

$10 $32
</TABLE>

MS-5

PAGE

INVESTMENT OBJECTIVE AND POLICIES

TEMPLETON ASSET ALLOCATION FUND

The Templeton Asset Allocation Fund seeks a high level of total return through a
flexible policy of investing in the following market segments: stocks of
companies in any nation, debt securities of companies and governments of any
nation, and money market instruments. There can be no assurance that the Fund
will achieve its investment objective.

PORTFOLIO INVESTMENTS. The mix of investments among these three market segments
will be adjusted in an attempt to capitalize on total return potential produced
by changing economic conditions throughout the world. The Fund's Investment
Manager may, from time to time, use various methods of selecting securities for
the Fund's portfolio, and may also employ and rely on independent or affiliated
sources of information and ideas in connection with the management of the Fund's
portfolio.

There are no minimum or maximum percentages as to the amount of the Fund's
assets which may be invested in each of the market segments, or as to the amount
which may be invested in the U.S. or any other nation. As a non-fundamental
policy, however, the Fund will limit its investments in securities of Russian
issuers to 5% of its assets. Except as noted below and under "Investment
Restrictions" in the SAI, the Fund's Investment Manager has complete flexibility
in determining the amount and nature of stock and other equity securities
(including Depositary Receipts), debt securities or money market instruments in
which the Fund may invest.

The Fund seeks investment opportunities in all types of securities issued by
companies or governments of any nation. It has the flexibility to invest in
preferred stocks and certain debt securities, rated or unrated, such as
convertible bonds and bonds selling at a discount. The Fund may invest in medium
and lower quality debt securities that are rated between BBB and as low as D by
Standard & Poor's ("S&P"), and between Baa and as low as C by Moody's or, if
unrated, are of equivalent investment quality as determined by the Investment
Manager. The Fund may, from time to time, purchase defaulted debt securities if,
in the opinion of the Investment Manager, the issuer may resume interest
payments in the near future or other advantageous developments appear likely in
the future. As an operating policy, which may be changed without shareholder
approval, the Fund will not invest more than 15% of its total assets in
lower-rated debt securities. Lower-rated debt securities include securities
rated lower than BBB by S&P or Baa by Moody's, unrated securities of equivalent
investment quality as determined by the Investment Manager, and defaulted debt
securities. Consistent with the overall 15% limit on lower-rated debt
securities, the Fund will not invest more than 10% of its total assets in
defaulted debt securities, which may be illiquid. Bonds rated BB or lower,
commonly referred to as "junk bonds," are predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation and may be in default. See "Risk Considerations" for
this Fund, and "Explanations of Risk Factors," below. See the Appendix
concerning rating categories.

OTHER INVESTMENT POLICIES. The Fund may invest in collateralized mortgage
obligations and restricted securities, purchase securities on a "when-issued
basis," lend its portfolio securities, and borrow up to 30% of the value of its
total assets for investment purposes. The Fund may purchase and sell financial
futures contracts, stock index futures contracts, and foreign currency futures
contracts for hedging purposes only and not for speculation. It may engage in
such transactions only if the total contract value of the futures contracts does
not exceed 20% of the Fund's total assets. The Fund may also invest in forward
foreign currency exchange contracts and options on foreign currencies. These and
other types of investments and investment techniques are described in greater
detail under "Explanations of Securities and Investment Techniques" in this
Prospectus and in the SAI.

RISK CONSIDERATIONS

TEMPLETON ASSET ALLOCATION FUND

The Fund carries the risks common to all stock and bond investments, plus
special risks due to its substantial investments in foreign securities. Stocks,
and other equity securities representing an ownership interest in a corporation,
have historically outperformed other asset classes over the long term, but tend
to fluctuate more dramatically over the shorter term. Bonds, and other debt
obligations, are affected by changes in interest rates and the creditworthiness
of their issuers.

Investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
Investments in foreign developing markets involve heightened risks related to
the smaller size and lesser liquidity of these markets. INVESTORS SHOULD
CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN
SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. SEE
"EXPLANATIONS OF RISK FACTORS."

TA-1

PAGE

Higher yields are generally available from debt securities in the higher risk,
lower rating categories of S&P or Moody's (commonly referred to as "junk
bonds"); however, the values of lower rated securities generally fluctuate more
than those of higher rated securities and involve greater risk of loss of income
and principal. SEE "EXPLANATIONS OF RISK FACTORS," AND THE APPENDIX.

PORTFOLIO MANAGEMENT

TEMPLETON ASSET ALLOCATION FUND

The Investment Manager for the Templeton Asset Allocation Fund is Templeton
Investment Counsel, Inc. ("TICI"), 500 East Broward Boulevard, Fort Lauderdale,
Florida 33394-3091. TICI manages the Fund's assets and makes its investment
decisions.

Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Asset Allocation Fund will pay its Investment Manager a monthly fee equal on an
annual basis to 0.65% of the Fund's average daily net assets up to $200 million,
0.585% of such net assets up to $1.3 billion, and 0.52% of such net assets over
$1.3 billion. For the fiscal year ended December 31, 1997, the Fund paid 0.56%
and 0.74% of the average daily net assets of its Class 1 shares in management
fees and total operating expenses (including management fees), respectively. See
"Management of the Trust" for more information about fees.

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.

THOMAS LATTA
Vice President
Templeton Global Bond Managers, a division of TICI

Mr. Latta received a Bachelor of Business Administration degree from the
University of Miami (Florida). Mr. Latta is a Chartered Financial Analyst, and a
member of the Association for Investment Management and Research and the
Institute of Chartered Financial Analysts. He joined the Franklin Templeton
Group in 1991 and has managed the fixed income portion of the Fund's portfolio
since 1993.

NEIL S. DEVLIN
Chief Investment Officer and Executive Vice President
Templeton Global Bond Managers, a division of TICI

Mr. Devlin holds a Bachelor of Arts degree in Economics and Philosophy from
Brandeis University and is a Chartered Financial Analyst. He joined the Franklin
Templeton Group in 1987 and has managed the fixed income portion of the Fund's
portfolio since 1995.

GARY CLEMONS
Senior Vice President
Templeton Investment Counsel Inc.

Mr. Clemons holds a Bachelor of Science degree from the University of Nevada at
Reno and a Master of Business Administration degree from the University of
Wisconsin at Madison. He has been with the Franklin Templeton Group since 1990
and has managed the equity portion of the Fund's portfolio since 1995.

PETER NORI
Vice President
Templeton Investment Counsel, Inc.

Mr. Nori holds both a Master of Business Administration degree and a Bachelor of
Science degree with emphasis in finance from the University of San Francisco. He
is a Chartered Financial Analyst and a member of the Association for Investment
Management and Research. After completing the Franklin management training
program, Mr. Nori joined Franklin portfolio research in 1990 as an equity
analyst. In 1994, Mr. Nori joined the Templeton organization. He has managed the
equity portion of the Fund's portfolio since 1996.

WILLIAM T. HOWARD, JR.
Senior Vice President
Templeton Investment Counsel, Inc.

Mr. Howard holds a Master of Business Administration degree from Emory
University and a Bachelor of Arts degree from Rhodes College. He is a Chartered
Financial Analyst and a member of the Financial Analysts Society. Before joining
the Templeton Group in 1993, Mr. Howard was the international portfolio manager
and analyst with the State of Tennessee Consolidated Retirement System. He has
managed the equity portion of the Fund's portfolio since 1996.

TA-2

PAGE

EXPENSE SUMMARY

TEMPLETON ASSET ALLOCATION FUND -- CLASS 1

This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 1 shares for the fiscal year ended December 31, 1997. The
Fund's actual expenses may vary.

A. SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge (as a percentage of Offering Price)
Paid at purchase............................................ 0.00%
Paid at redemption.......................................... 0.00%
</TABLE>

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)*

<TABLE>
<S> <C>
Management Fees............................................. 0.60%
Other Expenses.............................................. 0.18%
----
TOTAL FUND OPERATING EXPENSES............................... 0.78%
</TABLE>

C. EXAMPLE

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -----------------------------------------------
<S> <C> <C> <C>

$8 $25 $43 $97
</TABLE>

*Management Fees and Total Fund Operating Expenses have been restated to reflect
the management fee schedule approved by shareholders and effective May 1, 1997.
Actual Management Fees and Total Fund Operating Expenses before May 1, 1997 were
lower. See the section "Management Fees" under "Portfolio Management".

TA-3

PAGE

FINANCIAL HIGHLIGHTS

TEMPLETON ASSET ALLOCATION FUND -- CLASS 1

This table summarizes the financial history of Templeton Asset Allocation
Fund -- Class 1. The information has been audited by McGladrey & Pullen, LLP,
the Trust's independent auditors. Their audit report for each of the most recent
five fiscal years appears in the financial statements in the Trust's Annual
Report for the fiscal year ended December 31, 1997. The Trust's annual report
also includes more information about the Fund's performance. For a free copy,
please call 1-800-774-5001.

<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>
PER SHARE OPERATING
PERFORMANCE -- CLASS 1
(for a share outstanding
throughout the year)
NET ASSET VALUE, BEGINNING
OF YEAR................. $ 21.08 $ 18.72 $ 15.69 $ 16.55 $ 13.49 $ 12.85 $ 10.45 $ 11.62 $ 10.28 $10.00
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income... .67 .63 .57 .44 .42 .39 .40 .34 .25 .07
Net realized and
unrealized gain
(loss)................ 2.44 2.76 2.87 (.92) 3.03 .66 2.38 (1.23) 1.11 .21
-------- -------- -------- -------- -------- ------- ------- ------- ------- ------
TOTAL FROM INVESTMENT
OPERATIONS.......... 3.11 3.39 3.44 (.48) 3.45 1.05 2.78 (.89) 1.36 .28
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income... (.63) (.58) (.41) (.31) (.35) (.41) (.38) (.25) (.02) --
Net realized gains...... (1.21) (.45) -- (.07) (.04) -- -- (.03) -- --
-------- -------- -------- -------- -------- ------- ------- ------- ------- ------
TOTAL DISTRIBUTIONS... (1.84) (1.03) (.41) (.38) (.39) (.41) (.38) (.28) (.02) --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR.................... $ 22.35 $ 21.08 $ 18.72 $ 15.69 $ 16.55 $ 13.49 $ 12.85 $ 10.45 $ 11.62 $10.28
=================================================================================================================================
TOTAL RETURN+............. 15.52% 18.93% 22.48% (2.96)% 26.12% 8.42% 27.05% (7.80)% 13.25% 2.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's)................. $735,568 $556,027 $406,123 $288,172 $183,360 $79,242 $35,821 $22,702 $13,150 $ 388
Ratios to average net
assets:
Expenses................ .74% .64% .66% .75% .77% .80% .89% 1.03% 1.41% 14.92%**
Expenses, net of
reimbursement......... .74% .64% .66% .75% .77% .80% .89% 1.00% 1.00% 1.50%**
Net investment income... 3.32% 3.56% 3.73% 4.02% 4.16% 4.47% 3.99% 4.56% 4.81% 2.86%**
Portfolio turnover rate... 45.27% 57.50% 43.02% 51.36% 81.50% 120.53% 76.65% 8.46% 10.68% --
Average commission rate
paid++.................. $ .0071 $ .0008 -- -- -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Period from August 31, 1988 (commencement of operations) to December 31,
1988.
** Annualized.
+ Total return does not include deductions at the Fund or contract level for
cost of insurance charges, premium load, administrative charges, mortality
and expense risk charges or other charges that may be incurred under the
variable annuity and variable life insurance contracts for which the Fund
serves as an underlying investment vehicle. Inclusion of such charges would
reduce the total return figures for all periods shown. Total return is not
annualized.
++ Relates to purchases and sales of equity securities. Prior to fiscal year
1996 disclosure of average commission rate was not required.

TA-4

PAGE

INVESTMENT OBJECTIVE AND POLICIES

TEMPLETON BOND FUND

The Templeton Bond Fund's investment objective is high current income.
Consistent with this objective, the Fund may also consider the potential for
capital appreciation due to changes in interest rates, currency exchange rates
and credit quality when purchasing securities. There can be no assurance that
the Fund will achieve its investment objective.

PORTFOLIO INVESTMENTS. The Fund seeks to achieve its objective through a
flexible policy of investing primarily (normally at least 65% of its assets) in
debt securities of companies, governments and government agencies of various
nations throughout the world, and in debt securities which are convertible into
common stock of such companies. The Fund may invest without limit in debt
securities of the U.S. or any other nation. As a non-fundamental policy,
however, the Fund will limit its investments in securities of Russian issuers to
5% of its assets. The Fund may invest in debt securities rated in any category
by Standard & Poor's ("S&P") or Moody's and securities which are unrated by any
rating agency. See "Explanations of Risk Factors" and the Appendix in the
Statement of Additional Information for a description of the S&P and Moody's
ratings. The Fund and its Investment Manager, may, from time to time, use
various methods of selecting securities for the Fund's portfolio, and may also
employ and rely on independent or affiliated sources of information and ideas in
connection with management of the Fund's portfolio.

The average maturity of debt securities in the Fund's portfolio will fluctuate
depending upon TGBM's judgment as to future interest rate changes. Debt
securities in which the Fund may also invest include various corporate debt
obligations, structured investments, commercial paper, certificates of deposit,
bankers' acceptances, and repurchase agreements with respect to these
securities. The Investment Manager intends to manage the Fund's exposure to
various currencies, and may from time to time make use of forward currency
exchange contracts or other techniques for hedging purposes.

The Fund may invest in medium and lower quality debt securities that are rated
between BBB and as low as D by S&P, and between Baa and as low as C by Moody's
or, if unrated, are of equivalent investment quality as determined by the
Investment Manager. The Fund may, from time to time, purchase defaulted debt
securities if, in the opinion of the Investment Manager, the issuer may resume
interest payments in the near future or other advantageous developments appear
likely in the future. The Fund will not invest more than 10% of its total assets
in defaulted debt securities, which may be illiquid. Bonds rated BB or lower,
commonly referred to as "junk bonds," are predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation and may be in default. See "Risk Considerations" for
this Fund, and "Explanations of Risk Factors," below.

The Fund's portfolio turnover rate may generally exceed 100% per year, and was
154.23% in 1997. The Fund's higher turnover rates are generally due to bond
maturities, and the rebalancing of the portfolio to keep interest rate risk and
country allocations at desired levels. Higher portfolio turnover rates generally
increase transaction costs, which are Fund expenses. See "Explanations of
Securities and Investment Techniques," below.

OTHER INVESTMENT POLICIES. The Fund may also buy and sell financial futures
contracts, bond index futures contracts, and foreign currency futures contracts.
The Fund may purchase and sell any of these futures contracts for hedging
purposes only and not for speculation. It may engage in such transactions only
if the total contract value of the futures contracts does not exceed 20% of the
Fund's total assets. In addition, the Fund may invest in forward foreign
currency exchange contracts, options on foreign currencies, depositary receipts,
"when-issued" securities and collateralized mortgage obligations, lend its
portfolio securities, and borrow up to 30% of the value of its total assets for
investment purposes. These investment techniques are discussed under
"Explanations of Securities and Investment Techniques." Certain types of
investments and investment techniques are described in greater detail under
"Explanations of Securities and Investment Techniques" in this Prospectus and in
the SAI.

RISK CONSIDERATIONS

TEMPLETON BOND FUND

The Fund carries the risks common to all bond investments, plus special risks
because it may invest without limit in foreign debt obligations, and may invest
in lower-rated debt obligations. Bonds, and other debt obligations, are affected
by changes in interest rates and the creditworthiness of their issuers.

TB-1

PAGE

entities. Investments in foreign developing markets involve heightened risks
related to the smaller size and lesser liquidity of these markets. INVESTORS
SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN
SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. SEE
"EXPLANATIONS OF RISK FACTORS."

Asset Composition Table. Because the Fund invested more than 5% of its assets
in lower rated bonds during its most recent fiscal year, the table below shows
the percentage of the Fund's assets invested in debt securities rated in each of
the specific rating categories shown and those that are not rated by the rating
agency but deemed by the Investment Manager to be of comparable credit quality.
The information was prepared based on a 12 month dollar weighted average of the
portfolio composition in the fiscal year ended December 31, 1997. A credit
rating by a rating agency evaluates only the safety of principal and interest of
debt obligations, and does not consider the market value risk associated with an
investment in such an obligation. See the Appendix for a description of each
rating category. The ratings shown may not be the same as ratings at the time of
purchase.

<TABLE>
<CAPTION>
S&P CATEGORY % OF FUND
- -----------------------------------------
<S> <C>
AAA 76.9%
AA+ 2.1%*
AA 0.4%
A+ 4.6%
BB+ 0.1%
BB 8.9%*
BB- 4.0%
B+ 3.0%*
</TABLE>

*Figures include securities, which are unrated by S&P, as follows:

PORTFOLIO MANAGEMENT

TEMPLETON BOND FUND

The Investment Manager for the Templeton Bond Fund is Templeton Investment
Counsel, Inc. ("TICI") 500 East Broward Boulevard, Fort Lauderdale, Florida
33394-3091. TICI manages the Fund's assets and makes its investment decisions.
For the fiscal year ended December 31, 1997, the Templeton Bond Fund paid 0.50%
and 0.68% of the average daily net assets of its Class 1 shares in management
fees and total operating expenses (including management fees), respectively. See
"Management of the Trust" for more information about fees.

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.

THOMAS LATTA
Vice President
Templeton Global Bond Managers, a division of TICI

NEIL S. DEVLIN
Chief Investment Officer and Executive Vice President
Templeton Global Bond Managers, a division of TICI

TB-2

PAGE

EXPENSE SUMMARY

TEMPLETON BOND FUND -- CLASS 1

This table is designed to help you understand the costs of investing in Class 1
shares of the Fund. It is based on the historical expenses of the Class 1 shares
for the fiscal year ended December 31, 1997. The Fund's actual expenses may
vary.

A. SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge (as a percentage of Offering Price)
Paid at purchase............................................ 0.00%
Paid at redemption.......................................... 0.00%
</TABLE>

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<TABLE>
<S> <C>
Management Fees............................................. 0.50%
Other Expenses.............................................. 0.18%
----
TOTAL FUND OPERATING EXPENSES............................... 0.68%
</TABLE>

C. EXAMPLE

<TABLE>

<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -----------------------------------------------
<S> <C> <C> <C>
$7 $22 $38 $85
</TABLE>

TB-3

PAGE

FINANCIAL HIGHLIGHTS

TEMPLETON BOND FUND -- CLASS 1

This table summarizes the financial history of Templeton Bond Fund -- Class 1.
The information has been audited by McGladrey & Pullen, LLP, the Trust's
independent auditors. Their audit report for each of the last five fiscal years,
appears in the financial statements in the Trust's Annual Report for the fiscal
year ended December 31, 1997. The Trust's annual report also includes more
information about the Fund's performance. For a free copy, please call
1-800-774-5001.

<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>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the year)
NET ASSET VALUE, BEGINNING OF
YEAR......................... $ 11.63 $ 11.88 $ 10.86 $ 12.15 $ 10.91 $ 10.99 $10.35 $10.32 $10.19 $10.00
- ------------------------------------------------------------------------------------------------------------------------------
Income from Investment
Operations:
Net investment
income..................... .80 .85 .80 .71 .60 .58 .61 .60 .83 .20
Net realized and unrealized
gain (loss)................ (.53) .14 .76 (1.28) .65 .03 1.02 05 (.07) (.01)
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS............... .27 .99 1.56 (.57) 1.25 .61 1.63 .65 .76 .19
- ------------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income........ (.84) (1.24) (.54) (.55) (.005) (.57) (.64) (.62) (.63) --
Net realized gains........... -- -- -- (.17) (.005) (.12) (.35) -- -- --
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
TOTAL DISTRIBUTIONS........ (.84) (1.24) (.54) (.72) (.01) (.69) (.99) (.62) (.63) --
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR... $ 11.06 $ 11.63 $ 11.88 $ 10.86 $ 12.15 $ 10.91 $10.99 $10.35 $10.32 $10.19
==============================================================================================================================
TOTAL RETURN+.................. 2.51% 9.45% 14.92% (4.88)% 11.46% 5.53% 15.86% 6.33% 7.65% 1.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's)...................... $31,826 $34,046 $32,910 $29,343 $29,347 $15,674 $8,142 $4,076 $2,349 $ 254
Ratios to Average Net Assets:
Expenses..................... .68% .68% .78% .90% .83% 1.00% 1.06% 1.56% 3.67% 15.44%**
Expenses, net of
reimbursement.............. 68% .68% .78% .90% .83% 1.00% 1.00% 1.00% 1.00% 1.50%**
Net investment income.......... 6.90% 7.35% 7.14% 6.80% 6.50% 6.93% 7.63% 7.65% 8.12% 5.94%**
Portfolio turnover rate........ 154.23% 141.19% 188.11% 203.91% 170.33% 147.77% 551.45% 107.58% 48.87% --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Period from August 31, 1988 (commencement of operations) to December 31,
1988.
** Annualized.
+ Total return does not include deductions at the Fund or contract level for
cost of insurance charges, premium load, administrative charges, mortality
and expense risk charges or other charges that may be incurred under the
variable annuity contract for which the Fund serves as an underlying
investment vehicle. Inclusion of such charges would reduce the total return
figures for all periods shown. Total return is not annualized.

TB-4

PAGE

INVESTMENT OBJECTIVE AND POLICIES

TEMPLETON DEVELOPING MARKETS FUND

The investment objective of the Templeton Developing Markets Fund is long-term
capital appreciation. There can be no assurance that the Fund will achieve its
investment objective.

PORTFOLIO INVESTMENTS. The Fund seeks to achieve this objective by investing
primarily (normally at least 65% of assets) in equity securities of issuers in
countries having developing markets. "Equity securities," as used in this
Prospectus, refers to common stock, preferred stock, warrants or rights to
subscribe to or purchase such securities and Depositary Receipts. The Fund
considers countries having developing markets to be all countries that are
generally considered to be developing or emerging countries by the International
Bank for Reconstruction and Development (more commonly referred to as the World
Bank) or the International Finance Corporation, as well as countries that are
classified by the United Nations or otherwise regarded by their authorities as
developing or emerging. Under current listings, developing markets countries
include all countries EXCEPT: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Iceland, Ireland, Italy, Japan, Luxembourg, the
Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United
Kingdom, and the United States. In addition, as used in this Prospectus,
developing market equity securities means (i) equity securities of companies the
principal securities trading market for which is a developing market country, as
defined above, (ii) equity securities, traded in any market, of companies that
derive 50% or more of their total revenue from either goods or services produced
in such developing market countries or sales made in such developing market
countries or (iii) equity securities of companies organized under the laws of,
and with a principal office in, a developing market country.

PORTFOLIO SELECTION. The Fund and its investment manager, Templeton Asset
Management Ltd. (the "Investment Manager"), may, from time to time, use various
methods of selecting securities for the Fund's portfolio, and may also employ
and rely on independent or affiliated sources of information and ideas in
connection with management of the Fund's portfolio. Determinations as to
eligibility will be made by the Investment Manager based on publicly available
information and inquiries made to the companies. (See "Explanations of Risk
Factors" for a discussion of the nature of information publicly available for
non-U.S. companies.) The Fund will at all times, except during defensive
periods, maintain investments in at least three countries having developing
markets. Consistent with its policy of investing primarily in developing
markets, the Fund may purchase securities in any foreign country, developed or
developing. As a non-fundamental policy, however, the Fund will limit its
investments in securities of Russian issuers to 5% of its assets.

The Fund seeks to benefit from economic and other developments in developing
markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having developing markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
countries, particularly the emerging market countries which may be in the
process of developing more market-oriented economies, may experience relatively
high rates of economic growth. Other countries, although having relatively
mature developing markets, may also be in a position to benefit from local or
international developments encouraging greater market orientation and
diminishing governmental intervention in economic affairs.

OTHER INVESTMENTS. For capital appreciation, the Fund may invest up to 35% of
its total assets in debt securities (defined as bonds, notes, debentures,
commercial paper, certificates of deposit, time deposits, bankers' acceptances
and structured investments). Certain debt securities can provide the potential
for capital appreciation based on various factors such as changes in interest
rates, economic and market conditions, improvement in an issuer's ability to
repay principal and pay interest, and ratings upgrades. Additionally,
convertible bonds offer the potential for capital appreciation through the
conversion feature, which enables the holder of the bond to benefit from
increases in the market price of the securities into which they are convertible.
The Fund may invest in debt securities which are rated at least C by Moody's or
C by Standard & Poor's ("S&P") or unrated debt securities deemed to be of
comparable quality by the Investment Manager. As a fundamental policy (which may
not be changed without shareholder approval) the Fund will not invest more than
10% of its total assets in defaulted debt securities, which may be illiquid. As
an operating policy, however, which may be changed without shareholder approval,
the Fund will not invest more than 5% of its total assets in lower-rated debt
securities. Lower-rated debt securities include securities rated lower than BBB
by S&P or Baa by Moody's, unrated securities of equivalent investment quality as
determined by the Investment Manager, and defaulted debt securities. Bonds rated
BB or lower, commonly referred to as "junk bonds," are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and may be in default. See
"Explanations of Risk Factors," and the Appendix, below.

TD-1

PAGE

OTHER INVESTMENT POLICIES. When the Investment Manager believes that market
conditions warrant, the Fund may adopt a temporary defensive position and may
invest without limit in money market securities denominated in U.S. dollars or
in the currency of any foreign country. See "Explanations of Securities and
Investment Techniques." The Portfolio may invest up to 10% of its assets in
securities of closed end investment companies to facilitate foreign investment.
The Fund may also lend its portfolio securities; borrow up to one-third of the
value of its total assets for investment purposes (i.e., "leverage" its
portfolio); purchase convertible securities and warrants; invest in restricted
or illiquid securities; enter into transactions in options on securities,
securities indices and foreign currencies; enter into forward foreign currency
contracts; and enter into futures contracts and related options with respect to
securities, securities indices and foreign currencies. The value of the
underlying securities on which futures contacts will be written at any one time
will not exceed 25% of the total assets of the Fund. When deemed appropriate by
the Investment Manager, the Fund may invest cash balances in repurchase
agreements and other money market investments to maintain liquidity in an amount
to meet expenses or for day-to-day operating purposes. These investment
techniques are described below and under the heading "Investment Objective and
Policies" in the SAI.

RISK CONSIDERATIONS

TEMPLETON DEVELOPING MARKETS FUND

The Fund carries the risks common to all stock investments, plus special risks
because it invests primarily in foreign developing markets securities. Stocks,
and other equity securities representing an ownership interest in a corporation,
have historically outperformed other asset classes over the long term, but tend
to fluctuate more dramatically over the shorter term.

Foreign securities are subject to special and additional risks related to
currency fluctuations, market volatility and economic, social and political
uncertainty. Investments in developing or emerging markets are subject to even
greater risks and volatility because of the smaller size and lesser liquidity of
those markets. While short-term volatility can be disconcerting, declines of as
much as 40% to 50% are not unusual in emerging markets. In fact, the Hong Kong
market has increased 1268% in the last 15 years but has suffered five declines
of more than 20% during that time. Many smaller Asian markets suffered severe
declines in 1997, including several which fell over 70%.

AN INVESTMENT IN THE FUND MAY BE CONSIDERED SPECULATIVE AND MAY NOT BE
APPROPRIATE FOR SHORT-TERM INVESTORS. INVESTORS SHOULD CONSIDER CAREFULLY THE
SUBSTANTIAL AND HEIGHTENED RISKS INVOLVED IN INVESTING IN FOREIGN DEVELOPING
MARKETS SECURITIES. For more details about these and other risks, please see
"Explanations of Securities and Investment Techniques" and "Explanations of Risk
Factors," below.

PORTFOLIO MANAGEMENT

TEMPLETON DEVELOPING MARKETS FUND

The Investment Manager for the Developing Markets Fund is Templeton Asset
Management Ltd. ("Templeton Singapore"), 7 Temasek Boulevard, # 38-03, Suntec
Tower One, Singapore, 038987. The Investment Manager manages the Fund's assets
and makes its investment decisions. For the fiscal year ended December 31, 1997,
the Fund paid 1.25% and 1.58% of the average daily net assets of its Class 1
shares in management fees and total operating expenses (including management
fees), respectively. The fee paid by the Fund is higher than the advisory fees
paid by most other U.S. investment companies primarily because investing in
equity securities in developing markets, which are not widely followed by
professional analysts, requires the Investment Manager to invest additional time
and incur added expense in developing specialized resources, including research
facilities. See "Management of the Trust" for more information about fees.

The following persons are primarily responsible for the day-to-day management of
the Developing Markets Fund's portfolio.

J. MARK MOBIUS, PH.D.
Managing Director and Portfolio Manager
Templeton Asset Management Ltd.

Dr. Mobius holds a Doctor of Philosophy degree in Economics and Political
Science from the Massachusetts Institute of Technology. He earned his Bachelor's
and Master's degrees from Boston University. He is a member of several
industry-related associations. Dr. Mobius joined the Franklin Templeton Group in
1987 and has managed the Fund from inception.

TD-2

PAGE

H. ALLAN LAM
Portfolio Manager and Analyst
Templeton Asset Management Ltd.

Mr. Lam holds a Bachelor of Arts degree in Accounting from Rutgers University.
He has had extensive auditing experience with Deloitte Touche & Tohmatsu and
KPMG Peat Marwick. He joined the Franklin Templeton Group in 1987 and has
managed the Fund from inception.

TOM WU
Director
Templeton Asset Management Ltd.

Mr. Wu holds a Master of Business Administration degree from the University of
Oregon. He earned a Bachelor of Social Science Degree in Economics from the
University of Hong Kong. He joined the Franklin Templeton Group in 1987, and has
managed the Fund from inception.

DENNIS LIM
Vice President
Templeton Asset Management Ltd.

Mr. Lim holds a Master of Science degree in Management (Finance Analysis), from
the University of Wisconsin-Milwaukee, (Beta Gamma Sigma, Delta Chapter of
Wisconsin). He earned a Bachelor of Science degree in building engineering from
the National University of Singapore. He joined the Franklin Templeton Group in
1990, and has managed the Fund from inception.

EDDIE CHOW
Investment Analyst
Templeton Asset Management Ltd.

Mr. Chow holds a Master of Business Administration degree from the University of
Wisconsin-Milwaukee. Prior to joining the Franklin Templeton Group, in 1994, he
worked for many years in the finance and banking industry. He has managed the
Fund from inception.

TEK-KHOAN ONG
Portfolio Manager
Templeton Asset Management Ltd.

Mr. Ong holds a Masters of Business Administration degree from the Wharton
School, University of Pennsylvania, a Masters of Science degree in Computing
Science and a Bachelor of Science degree in Civil Engineering, both from
Imperial College, University of London, UK. Prior to joining the Franklin
Templeton Group, in 1993, he worked for the Monetary Authority of Singapore
(Singapore's central bank) for five years. He has managed the Fund from
inception.

TD-3

PAGE

EXPENSE SUMMARY

TEMPLETON DEVELOPING MARKETS FUND -- CLASS 1

A. SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge (as a percentage of Offering Price)
Paid at purchase............................................ 0.00%
Paid at redemption.......................................... 0.00%
</TABLE>

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<TABLE>
<S> <C>
Management Fees............................................. 1.25%
Other Expenses.............................................. 0.33%
----
TOTAL FUND OPERATING EXPENSES............................... 1.58%
</TABLE>

C. EXAMPLE

ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -----------------------------------------------
<S> <C> <C> <C>
$16 $50 $86 $188
</TABLE>

TD-4

PAGE

FINANCIAL HIGHLIGHTS

TEMPLETON DEVELOPING MARKETS FUND -- CLASS 1

This table summarizes the financial history of Templeton Developing Markets
Fund -- Class 1. The information has been audited by McGladrey & Pullen, LLP,
the Trust's independent auditors. Their audit report covering the periods shown
below appears in the financial statements in the Trust's Annual Report for the
fiscal year ended December 31, 1997. The Trust's annual report also includes
more information about the Fund's performance. For a free copy, please call
1-800-774-5001.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1997 1996*
----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE -- CLASS 1
(for a share outstanding throughout the year)
NET ASSET VALUE, BEGINNING OF YEAR.......................... $ 9.43 $ 10.00
- ---------------------------------------------------------------------------------
Income from investment operations:
Net investment income..................................... .09 .05
Net realized and unrealized loss.......................... (2.82) (.62)
-------- -------
TOTAL FROM INVESTMENT OPERATIONS........................ (2.73) (.57)
- ---------------------------------------------------------------------------------
Less distributions from:
Net investment income..................................... (.04) --
Net realized gains........................................ (.03) --
-------- -------
TOTAL DISTRIBUTIONS..................................... (.07) --
- ---------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................................ $ 6.63 $ 9.43
=================================================================================
TOTAL RETURN+............................................... (29.22)% (5.70)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $163,459 $72,245
Ratios to average net assets:
Expenses.................................................. 1.58% 1.70%**
Expenses, excluding waiver and payments by affiliate...... 1.58% 1.78%**
Net investment income..................................... 1.63% 1.52%**
Portfolio turnover rate..................................... 23.82% 9.95%
Average commission rate paid++.............................. $ .0018 $ .0020
- ---------------------------------------------------------------------------------
</TABLE>

* Period from March 4, 1996 (commencement of operations) to December 31, 1996.
** Annualized.
+ Total return does not include deductions at the Fund or contract level for
cost of insurance charges, premium load, administrative charges, mortality
and expense risk charges or other charges that may be incurred under the
variable annuity and variable life insurance contracts for which the Fund
serves as an underlying investment vehicle. Inclusion of such charges would
reduce the total return figures for all periods shown. Total return is not
annualized.
++ Relates to purchases and sales of equity securities.

TD-5

PAGE

INVESTMENT OBJECTIVE AND POLICIES

TEMPLETON INTERNATIONAL FUND

The Templeton International Fund's investment objective is long-term capital
growth through a flexible policy of investing in stocks and debt obligations of
companies and governments outside the United States. Any income realized will be
incidental. There can be no assurance that the Fund will achieve its investment
objective.

PORTFOLIO INVESTMENTS. In pursuit of its investment objective, the Fund will
invest at least 65% of its assets in securities of issuers in at least three
countries outside the United States. The Fund will invest predominantly in
equity securities issued by large-cap and mid-cap companies. Large-cap companies
are those which have market capitalizations of $5 billion or more; mid-cap
companies are those which have market capitalizations of $1 billion to $5
billion. It may also invest to a lesser degree in smaller capitalization
companies, which may be subject to different and greater risks. See
"Explanations of Risk Factors," below.

The Fund may purchase securities in any foreign country, developed or
developing. As a non-fundamental policy, however, the Fund will limit its
investments in securities of Russian issuers to 5% of its assets. The Fund and
its investment manager, Templeton Investment Counsel, Inc. ("TICI" or the
"Investment Manager"), may, from time to time, use various methods of selecting
securities for the Fund's portfolio, and may also employ and rely on independent
or affiliated sources of information and ideas in connection with management of
the Fund's portfolio.

OTHER INVESTMENTS. Although the Fund generally invests in equity securities,
including common stock and Depositary Receipts, it may also invest in preferred
stocks and certain debt securities such as convertible bonds. The Fund may
invest in medium and lower quality debt securities that are rated between BBB
and as low as D by Standard & Poor's ("S&P"), and between Baa and as low as C by
Moody's or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. As a fundamental policy (which may not be changed
without shareholder approval) the Fund will not invest more than 10% of its
total assets in defaulted debt securities, which may be illiquid. As an
operating policy, however, which may be changed without shareholder approval,
the Fund will not invest more than 5% of its total assets in lower-rated debt
securities. Lower-rated debt securities include securities rated lower than BBB
by S&P or Baa by Moody's, unrated securities of equivalent investment quality as
determined by the Investment Manager, and defaulted debt securities. Bonds rated
BB or lower, commonly referred to as "junk bonds," are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and may be in default. See
"Explanations of Risk Factors," and the Appendix, below.

RISK CONSIDERATIONS

TEMPLETON INTERNATIONAL FUND

The Fund carries the risks common to all stock investments, plus special risks
due to its substantial investments in foreign securities. Stocks, and other
equity securities representing an ownership interest in a corporation, have
historically outperformed other asset classes over the long term, but tend to
fluctuate more dramatically over the shorter term.

Investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
Investments in foreign developing markets including certain Eastern European
countries and Russia, involve heightened risks related to the smaller size and
lesser liquidity of these markets. INVESTORS SHOULD CONSIDER CAREFULLY THE
SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE
HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. The Portfolio may also invest
to a lesser degree in smaller capitalization companies, which are subject to
different and greater risks. SEE "EXPLANATIONS OF RISK FACTORS."

TI-1

PAGE

PORTFOLIO MANAGEMENT

TEMPLETON INTERNATIONAL FUND

The Investment Manager for the Templeton International Fund is Templeton
Investment Counsel, Inc. ("TICI") 500 East Broward Boulevard, Fort Lauderdale,
Florida 33394-3091. TICI manages the Fund's assets and makes its investment
decisions.

Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Fund will pay its Investment Manager a monthly fee equal on an annual basis to
0.75% of the Fund's average daily net assets up to $200 million, 0.675% of such
net assets up to $1.3 billion, and 0.60% of such net assets over $1.3 billion.
For the fiscal year ended December 31, 1997, the Fund paid 0.63% and 0.81% of
the average daily net assets of its Class 1 shares in management fees and total
operating expenses (including management fees), respectively. See "Management of
the Trust" for more information about fees.

The following persons are in charge of the day-to-day management of the Fund's
portfolio.

PETER NORI
Vice President
Templeton Investment Counsel, Inc.

GARY MOTYL
Executive Vice President and Director
Templeton Investment Counsel, Inc.

Mr. Motyl holds a Bachelor of Science degree in Finance from Lehigh University
and a Master of Business Administration degree from Pace University and is a
Chartered Financial Analyst. Mr. Motyl has been a security analyst and portfolio
manager with TICI since 1981. He has managed the Fund since 1995.

EDWARD RAMOS
Vice President
Templeton Investment Counsel, Inc.

Mr. Ramos holds a Bachelor of Science degree in Finance from Lehigh University
and a Master of Business Administration degree with emphases in Finance,
Accounting and International Business from The Columbia Graduate School of
Business. Prior to joining the Templeton organization in 1993, Mr. Ramos worked
as assistant to the chief investment officer of Prudential Equity Management
Association. He has managed the Fund since 1997.

TI-2

PAGE

EXPENSE SUMMARY

TEMPLETON INTERNATIONAL FUND -- CLASS 1

A. SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge (as a percentage of Offering Price)
Paid at purchase............................................ 0.00%
Paid at redemption.......................................... 0.00%
</TABLE>

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)*

<TABLE>
<S> <C>
Management Fees............................................. 0.69%
Other Expenses.............................................. 0.19%
----
TOTAL FUND OPERATING EXPENSES............................... 0.88%
</TABLE>

C. EXAMPLE

ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -----------------------------------------------
<S> <C> <C> <C>
$9 $28 $49 $108
</TABLE>

*Management Fees and Total Operating Expenses have been restated to reflect the
management fee schedule approved by shareholders and effective May 1, 1997.
Actual Management Fees and Total Fund Operating Expenses before May 1, 1997 were
lower. See the section "Management Fees" under "Portfolio Management".

TI-3

PAGE

FINANCIAL HIGHLIGHTS

TEMPLETON INTERNATIONAL FUND -- CLASS 1

This table summarizes the Templeton International Fund's financial history of
Templeton International Fund -- Class 1. The information has been audited by
McGladrey & Pullen, LLP, the Trust's independent auditors. Their audit report
for each of most recent five fiscal years, appears in the financial statements
in the Trust's Annual Report for the fiscal year ended December 31, 1997. The
Trust's annual report also includes more information about the Fund's
performance. For a free copy, please call 1-800-774-5001.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
----------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE -- CLASS 1
(for a share outstanding throughout the year)
NET ASSET VALUE, BEGINNING OF YEAR................ $ 18.40 $ 15.13 $ 13.22 $ 13.83 $ 9.39 $10.00
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income........................... .49 .43 .23 .12 .10 .06
Net realized and unrealized gain (loss)......... 2.01 3.15 1.83 (.42) 4.34 (.67)
-------- -------- -------- -------- ------- ------
TOTAL FROM INVESTMENT OPERATIONS.............. 2.50 3.58 2.06 (.30) 4.44 (.61)
- ---------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income........................... (.51) (.24) (.10) (.08) -- --
Net realized gains.............................. (.21) (.07) (.05) (.23) -- --
-------- -------- -------- -------- ------- ------
TOTAL DISTRIBUTIONS........................... (.72) (.31) (.15) (.31) -- --
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR...................... $ 20.18 $ 18.40 $ 15.13 $ 13.22 $ 13.83 $ 9.39
=====================================================================================================================
TOTAL RETURN+..................................... 13.95% 24.04% 15.78% (2.22)% 47.28% (6.10)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)................... $938,410 $682,984 $353,141 $150,090 $43,877 $7,050
Ratios to average net assets
Expenses........................................ .81% .65% .71% .83% .95% 1.40%**
Expenses, net of reimbursement.................. .81% .65% .71% .83% .95% 1.00%**
Net investment income........................... 2.70% 3.23% 2.36% 1.89% 1.62% 1.76%**
Portfolio turnover rate........................... 16.63% 9.46% 5.19% 6.32% 15.65% 4.50%
Average commission rate paid++.................... $ .0009 $ .0035 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

* Period from May 1, 1992 (commencement of operations) to December 31, 1992.
** Annualized.
+ Total return does not include deductions at the Fund or contract level for
cost of insurance charges, premium load, administrative charges, mortality
and expense risk charges or other charges that may be incurred under the
variable annuity and variable life insurance contracts for which the Fund
serves as an underlying investment vehicle. Inclusion of such charges would
reduce the total return figures for all periods shown. Total return is not
annualized.
++ Relates to purchases and sales of equity securities. Prior to fiscal year
1996 disclosure of average commission rate was not required.

TI-4

PAGE

INVESTMENT OBJECTIVE AND POLICIES

TEMPLETON MONEY MARKET FUND

The investment objective of the Fund is current income, stability of principal,
and liquidity, which it seeks to achieve by investing in money market
instruments with maturities not exceeding 397 days, consisting primarily of
short term U.S. Government securities, certificates of deposit, time deposits,
bankers' acceptances, commercial paper, and repurchase agreements with banks or
broker-dealers with respect to these securities. As a fundamental policy, the
Fund must invest at least 80% of its total assets in these securities. There can
be no assurance that the investment objective of the Fund will be attained. The
Fund intends to use its best efforts to maintain its net asset value at $1.00
per share, although there can be no assurance that this will be achieved.

Portfolio Investments. The Fund values all of its portfolio securities using
the amortized cost method, which involves valuing a security at cost on the date
of acquisition and thereafter assuming a constant accretion of discount or
amortization of premium. See "Purchase, Redemption and Pricing of Shares" in the
SAI for a description of certain conditions and procedures followed by the Fund
in connection with amortized cost valuation. Certain of those conditions and
procedures are summarized below.

In accordance with Rule 2a-7 under the Investment Company Act of 1940, the Fund
is required to (i) maintain a dollar-weighted average portfolio maturity of 90
days or less; (ii) purchase only instruments having remaining maturities of 397
days or less; and (iii) invest only in U.S. dollar denominated securities
determined in accordance with procedures established by the Board of Trustees to
present minimal credit risks and which are rated in one of the two highest
rating categories for debt obligations by at least two nationally recognized
statistical rating organizations (or one rating organization if the instrument
was rated by only one such organization, subject to ratification of the
investment by the Board of Trustees). If a security is unrated, it must be of
comparable quality as determined in accordance with procedures established by
the Board of Trustees, including approval or ratification of the security by the
Board except in the case of U.S. Government securities.

In addition, the Fund will not invest more than 5% of its total assets in the
securities (including the securities collateralizing a repurchase agreement) of,
or subject to puts issued by, a single issuer, except that (i) the Fund may
invest in U.S. Government securities or repurchase agreements that are fully
collateralized by U.S. Government securities without any such limitation, and
(ii) the limitation with respect to puts does not apply to unconditional puts if
no more than 10% of the Fund's total assets is invested in securities issued or
guaranteed by the issuer of the unconditional put. Investments in rated
securities not rated in the highest category by at least two rating
organizations (or one rating organization if the instrument was rated by only
one such organization), and unrated securities not determined by the Board of
Trustees to be comparable to those rated in the highest category, will be
limited to 5% of the Fund's total assets, with the investment in any one such
issuer being limited to no more than the greater of 1% of the Fund's total
assets or $1,000,000.

The Fund may invest in dollar-denominated obligations of foreign branches of
domestic banks ("Eurodollar obligations") and dollar-denominated obligations of
domestic branches of foreign banks ("Yankee obligations"). These investments may
involve risks that are different in some respects from investments in
obligations of domestic branches of domestic banks. Such investment risks may
include future political and economic developments, the possible imposition of
withholding taxes on interest income payable on the Eurodollar and Yankee
obligations held by the Fund, possible seizure or nationalization, and the
possible establishment of exchange controls or the adoption of other foreign
government laws and restrictions applicable to the payment of Eurodollar and
Yankee obligations which might adversely affect the payment of principal and
interest.

The Fund may invest in commercial paper issued by domestic corporations or
foreign corporations affiliated with domestic corporations, and rated Prime-1 or
Prime-2 by Moody's or A-1 or A-2 by S&P or, if not rated by Moody's or S&P,
issued by companies having an outstanding debt issue currently rated Aaa or Aa
by Moody's or AAA or AA by S&P.

Other Investment Policies. The Fund may also enter into repurchase agreements,
invest in short term corporate debt obligations, purchase securities on a
"when-issued" basis, lend its portfolio securities, and borrow up to 5% of its
total assets for temporary or emergency purposes. The Fund will not invest more
than 10% of its assets in time deposits maturing in more than seven days which
do not have secondary trading markets and which are subject to early withdrawal
penalties. See "Explanations of Securities and Investment Techniques." Certain
types of investments and investment techniques are described in greater detail
under "Explanations of Securities and Investment Techniques" in this Prospectus
and also in the SAI.

TM-1

PAGE

RISK CONSIDERATIONS

TEMPLETON MONEY MARKET FUND

The Fund carries the risks common to all debt investments. Short-term bonds, and
other debt obligations, are affected by changes in interest rates and the
creditworthiness of their issuers. In addition, the Fund may carry somewhat
greater risks because it may invest a portion of its assets in certain
dollar-denominated obligations of foreign banks and foreign branches of domestic
banks. See "Explanations of Risk Factors." Because the Fund limits its
investments to short-term, high quality securities, it will provide lower yields
than if the Fund purchased longer term securities or securities of lower quality
and greater credit risk.

The Fund will seek to maintain a $1.00 per share net asset value, but there is
no guarantee that it will do so.

PORTFOLIO MANAGEMENT

TEMPLETON MONEY MARKET FUND

The Investment Manager of the Fund is Templeton Global Bond Managers, a division
of Templeton Investment Counsel, Inc. ("TICI"). TICI is a Florida corporation
with offices at Broward Financial Centre, Fort Lauderdale, Florida 33394-3091.
TICI manages the Fund's assets and makes its investment decisions. For the
fiscal year ended December 31, 1997, the Fund paid 0.35% and 0.53% of its
average daily net assets in management fees and total operating expenses
(including management fees), respectively. See "Management of the Trust" for
more information about fees.

TM-2

PAGE

EXPENSE SUMMARY

TEMPLETON MONEY MARKET FUND

This table is designed to help you understand the costs of investing in shares
of the Fund. It is based on the historical expenses of the shares for the fiscal
year ended December 31, 1997. The Fund's actual expenses may vary.

A. SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<S> <C>
Maximum Sales Charge (as a percentage of Offering Price)
Paid at purchase............................................ 0.00%
Paid at redemption.......................................... 0.00%
</TABLE>

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<TABLE>
<S> <C>
Management Fees............................................. 0.35%
Other Expenses.............................................. 0.18%
----
TOTAL FUND OPERATING EXPENSES............................... 0.53%
</TABLE>

C. EXAMPLE

Assume the annual return on the Fund's shares is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown. These
are the projected expenses for each $1,000 that you invest in the Fund.

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -----------------------------------------------
<S> <C> <C> <C>
$5 $17 $30 $66
</TABLE>

TM-3

PAGE

FINANCIAL HIGHLIGHTS

TEMPLETON MONEY MARKET FUND

This table summarizes the financial history of Templeton Money Market Fund. The
information has been audited by McGladrey & Pullen, LLP, the Trust's independent
auditors. Their audit report for each of the most recent five fiscal years,
appears in the financial statements in the Trust's Annual Report for the fiscal
year ended December 31, 1997. The Trust's annual report also includes more
information about the Fund's performance. For a free copy, please call
1-800-774-5001.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1992
--------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
(for a share
outstanding
throughout the
year)
NET ASSET VALUE,
BEGINNING OF
YEAR............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $1.00
- ---------------------------------------------------------------------------------------------------------------------
Net investment
income........... .05 .05 .05 .03 .02 .03 .05 .07 .08 .02
Dividends from net
investment
income........... (.05) (.05) (.05) (.03) (.02) (.03) (.05) (.07) (.08) (.02)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $1.00
=====================================================================================================================
TOTAL RETURN+........ 4.88% 4.99% 5.35% 3.48% 2.41% 3.10% 5.59% 7.51% 8.13% 1.95%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
year (000's)....... $15,784 $14,086 $20,723 $33,090 $16,992 $21,454 $22,046 $17,982 $5,984 $ 679
Ratios to average net
assets:
Expenses........... .53% .55% .63% .71% .75% .69% .70% .84% 1.82% 12.95%**
Expenses, net of
reimbursement.... .53% .55% .63% .71% .75% .69% .70% .84% 1.00% 1.50%**
Net investment
income........... 4.97% 4.86% 5.29% 3.56% 2.38% 3.02% 5.28% 7.19% 7.79% 5.83%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

TM-4

PAGE

INVESTMENT OBJECTIVE AND POLICIES

TEMPLETON STOCK FUND

The Templeton Stock Fund's investment objective is capital growth. There can be
no assurance that the Fund will achieve its investment objective.

PORTFOLIO INVESTMENTS. The Fund invests primarily (normally at least 65% of its
assets) in common and preferred stocks issued by companies, large and small, in
various nations throughout the world. The Fund will invest predominantly in
equity securities issued by large-cap and mid-cap companies. Large-cap companies
are those which have market capitalizations of $5 billion or more; mid-cap
companies are those which have market capitalizations of $1 billion to $5
billion. It may also invest to a lesser degree in smaller capitalization
companies, which may be subject to different and greater risks. See
"Explanations of Risk Factors," below. The Fund may also invest in securities
convertible into common stocks rated in any category by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's") and
securities which are unrated by any rating agency. See the Appendix for a
description of the S&P and Moody's ratings. Current income will usually be a
less significant factor in selecting investments for the Fund.

As a global fund, the Fund may invest without limit in securities of the U.S. or
any other nation. As a non-fundamental policy, however, the Fund will limit its
investments in securities of Russian issuers to 5% of its assets. The Fund and
its investment manager, Templeton Investment Counsel, Inc. ("TICI" or the
"Investment Manager"), may, from time to time, use various methods of selecting
securities for the Fund's portfolio, and may also employ and rely on independent
or affiliated sources of information and ideas in connection with management of
the Fund's portfolio.

OTHER PORTFOLIO INVESTMENTS. Subject to its policy of investing 65% of its
total assets in equity securities (including Depositary Receipts), the Fund may
invest in debt obligations, including convertible debt obligations. These debt
obligations may include medium and lower quality debt securities that are rated
between BBB and as low as D by S&P, and between Baa and as low as C by Moody's
or, if unrated, are of equivalent investment quality as determined by the
Investment Manager. As a fundamental policy (which may not be changed without
shareholder approval) the Fund will not invest more than 10% of its total assets
in defaulted debt securities, which may be illiquid. As an operating policy,
however, which may be changed without shareholder approval, the Fund will not
invest more than 5% of its total assets in lower-rated debt securities.
Lower-rated debt securities include securities rated lower than BBB by S&P or
Baa by Moody's, unrated securities of equivalent investment quality as
determined by the Investment Manager, and defaulted debt securities. Bonds rated
BB or lower, commonly referred to as "junk bonds," are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and may be in default. See
"Explanations of Risk Factors," and the Appendix, below.

RISK CONSIDERATIONS

TEMPLETON STOCK FUND

Investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
Investments in foreign developing markets including certain Eastern European
countries and Russia, involve heightened risks related to the smaller size and
lesser liquidity of these markets. INVESTORS SHOULD CONSIDER CAREFULLY THE
SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE
HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. The Portfolio may also invest
to a lesser degree in

TS-1

PAGE

smaller capitalization companies, which are subject to different and greater
risks than investments in large or mid-cap companies. SEE "EXPLANATIONS OF RISK
FACTORS."

PORTFOLIO MANAGEMENT

TEMPLETON STOCK FUND

The Investment Manager for the Templeton Stock Fund is Templeton Investment
Counsel, Inc.,("TICI") 500 East Broward Boulevard, Fort Lauderdale, Florida
33394-3091. TICI manages each Fund's assets and makes its investment decisions.

Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Fund will pay its Investment Manager a monthly fee equal on an annual basis to
0.75% of the Fund's average daily net assets up to $200 million, 0.675% of such
net assets up to $1.3 billion, and 0.60% of such net assets over $1.3 billion.
For the fiscal year ended December 31, 1997, the Fund paid 0.62% and 0.81% of
the average daily net assets of its Class 1 shares in management fees and total
operating expenses (including management fees) respectively. See "Management of
the Trust" for more information about fees.

The following persons are in charge of the day-to-day management of the Fund's
portfolio.

MARK R. BEVERIDGE
Vice President
Templeton Investment Counsel Inc.

Mr. Beveridge is a Chartered Financial Analyst and holds a Bachelor of Business
Administration degree in Finance from the University of Miami. He has been with
the Franklin Templeton Group since 1985 and has managed the Fund since 1995.

WILLIAM T. HOWARD, JR.
Senior Vice President
Templeton Investment Counsel, Inc.

HOWARD J. LEONARD
Executive Vice President
Templeton Investment Counsel, Inc.

Mr. Leonard is a Chartered Financial Analyst and holds a Bachelor of Business
Administration degree in Finance and Economics from Temple University. He joined
the Franklin Templeton organization in 1989, and has managed the Fund since
1995.

TS-2

PAGE

EXPENSE SUMMARY

TEMPLETON STOCK FUND -- CLASS 1

A. SHAREHOLDER TRANSACTION EXPENSES

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)*

C. EXAMPLE

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -----------------------------------------------
<S> <C> <C> <C>
$9 $28 $49 $108
</TABLE>

TS-3

PAGE

FINANCIAL HIGHLIGHTS

TEMPLETON STOCK FUND -- CLASS 1

This table summarizes the financial history of Templeton Stock Fund -- Class 1.
The information has been audited by McGladrey & Pullen, LLP, the Trust's
independent auditors. Their audit report for each of the most recent five fiscal
years, appears in the financial statements in the Trust's Annual Report for the
fiscal year ended December 31, 1997. The Trust's annual report also includes
more information about the Fund's performance. For a free copy, please call
1-800-774-5001.

<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>
PER SHARE OPERATING
PERFORMANCE -- CLASS 1
(for a share outstanding
throughout the year)
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 22.88 $ 20.83 $ 16.94 $ 17.53 $ 13.33 $ 12.72 $ 10.29 $ 11.75 $ 10.25 $10.00
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income.. .47 .41 .40 .26 .23 .25 .27 .32 .18 .18
Net realized and
unrealized gain
(loss)............... 2.11 3.88 3.80 (.64) 4.23 .64 2.49 (1.57) 1.34 071
-------- -------- -------- -------- -------- -------- -------- ------- ------- ------
TOTAL FROM INVESTMENT
OPERATIONS......... 2.58 4.29 4.20 (.38) 4.46 .89 2.76 (1.25) 1.52 .25
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income.. (.40) (.40) (.27) (.21) (.25) (.28) (.33) (.19) (.02) --
Net realized gains..... (1.87) (1.84) (.04) -- (.01) -- -- (.02) -- --
-------- -------- -------- -------- -------- -------- -------- ------- ------- ------
TOTAL DISTRIBUTIONS...... (2.27) (2.24) (.31) (.21) (.26) (.28) (.33) (.21) (.02) --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR................... $ 23.19 $ 22.88 $ 20.83 $ 16.94 $ 17.53 $ 13.33 $ 12.72 $ 10.29 $ 11.75 $10.23
=================================================================================================================================
TOTAL RETURN+............ 11.88% 22.48% 25.24% (2.20)% 34.00% 7.12% 27.93% (10.23)% 14.85% 2.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's)................ $732,248 $644,366 $498,777 $378,849 $298,392 $166,219 $116,943 $74,264 $49,787 $3,037
Ratios to average net
assets:
Expenses............... .81% .65% .66% .73% .73% .75% .82% .85% 1.08% 4.39%**
Expenses, net of
reimbursement........ .81% .65% .66% .73% .73% .75% .82% .85% .99% 1.50%**
Net investment income.. 2.05% 2.06% 2.18% 1.81% 1.88% 2.36% 2.82% 3.78% 3.63% 5.55%**
Portfolio turnover rate.. 25.82% 23.40% 33.93% 5.10% 4.88% 8.10% 41.24% 17.94% 5.27% --
Average commission rate
paid++................. $ .0077 $ .0090 -- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

TS-4

PAGE

EXPLANATIONS OF SECURITIES AND INVESTMENT TECHNIQUES

THIS SECTION DESCRIBES IN MORE DETAIL CERTAIN TYPES OF SECURITIES AND INVESTMENT
TECHNIQUES WHICH MAY BE USED BY A FUND, ONLY IF THE FUND IS AUTHORIZED TO DO SO
IN ITS INDIVIDUAL FUND SECTION. IF THERE IS A CONFLICT BETWEEN THIS SECTION AND
THE INDIVIDUAL FUND SECTION WITH RESPECT TO INVESTMENTS, THE INDIVIDUAL FUND
SECTION CONTROLS AND SHOULD BE RELIED UPON.

All policies and percentage limitations are considered at the time of purchase
of an investment and refer to total assets, unless otherwise specified. A Fund
will not necessarily use the strategies described to the full extent permitted
unless the Managers believe that doing so will help a Fund reach its objectives,
and not all instruments or strategies will be used at all times.

In the event of a corporate restructuring or bankruptcy reorganization of an
issuer whose securities are owned by a Fund, the Fund may receive securities
different from those originally purchased, e.g., common stock that is not
dividend paying, bonds with a lower coupon or more junior status, convertible
securities or even conceivably real estate. The Fund is not obligated to sell
such securities immediately, if the Manager believes, based on its own analysis,
that the longer term outlook is favorable and there is the potential for a
higher total return by holding such investments.

Each Fund is also subject to investment restrictions that are described under
the heading "Investment Restrictions" in the SAI. The investment objective of
each Fund and investment restrictions so designated are "fundamental policies"
of each Fund, which means that they may not be changed without a majority vote
of Shareholders of the Fund. With the exception of a Fund's investment objective
and those restrictions specifically identified as fundamental, all investment
policies and practices described in this Prospectus and in the SAI are not
fundamental, meaning that the Trust's Board of Trustees may change them without
Shareholder approval.

BORROWING

Certain Funds may borrow money for investment or other purposes. Borrowings will
not exceed the percentage amounts listed in each Fund's investment policies,
above, and are limited by fundamental restrictions which may not be changed
without shareholder approval. See "Investment Restrictions," in the SAI.

Under federal securities laws, a Fund may borrow from banks only and is required
to maintain continuous asset coverage of 300% with respect to such borrowings
and to sell (within three days) sufficient portfolio holdings to restore such
coverage if it should decline to less than 300% due to market fluctuations or
otherwise, even if disadvantageous from an investment standpoint.

Leveraging by means of borrowing will exaggerate the effect of any increase or
decrease in the value of portfolio securities on a Fund's net asset value, and
money borrowed will be subject to interest and other costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the income received from the securities purchased with
borrowed funds.

CONVERTIBLE SECURITIES

A convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security provides
a fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Similar to a common
stock, the value of a convertible security tends to increase as the market value
of the underlying stock rises, and it tends to decrease as the market value of
the underlying stock declines. Because its value can be influenced by both
interest rate and market movements, a convertible security is not as sensitive
to interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.

A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The convertible debt
obligations in which a Portfolio may invest are subject to the same rating
criteria and investment policies as that Portfolio's investments in debt
obligations. The issuer of a convertible security may be important in
determining the security's market value. This is because the

PAGE

holder of a convertible security will have recourse only to the issuer. In
addition, a convertible security may be subject to redemption by the issuer, but
only after a specified date and under circumstances established at the time the
security is issued.

However, unlike convertible debt obligations, convertible preferred stocks are
equity securities. As with common stocks, preferred stocks are subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for each Portfolio's financial reporting, credit
rating, and investment limitation purposes.

Enhanced or synthetic convertible securities are described in more detail in the
SAI.

DEBT SECURITIES

Debt securities may include many types of debt obligations of both domestic and
foreign issuers such as bonds, debentures, notes, commercial paper, structured
investments and obligations issued or guaranteed by governments or government
agencies or instrumentalities. The market value of debt securities generally
varies in response to changes in interest rates and the financial condition of
each issuer. During periods of declining interest rates, the value of debt
securities generally increases. Conversely, during periods of rising interest
rates, the value of such securities generally declines. These changes in market
value will be reflected in a Fund's net asset value.

Lower-rated debt obligations, commonly known as "junk bonds," are rated below
BBB by Moody's Investors Service, Inc. ("Moody's") or Baa by Standard & Poor's
Ratings Service ("S&P"), or in unrated debt obligations of similar quality as
determined by the Investment Manager. Bonds rated BB or below are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.

Issuers of bonds rated Ca may often be in default. Regardless of rating levels,
all debt securities considered for purchase (whether rated or unrated) will be
carefully analyzed by a Fund's Investment Manager to assess whether, at the time
of purchase, the planned investment offers potential returns which are
reasonable in light of the risks involved. Unrated debt securities are not
necessarily of lower quality than rated securities but they may not be
attractive to as many buyers. Many debt obligations of foreign issuers, and
especially developing markets issuers, are either (i) rated below investment
grade or (ii) not rated by U.S. rating agencies so that their selection depends
on the Investment Manager's individual analysis.

Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption
"Explanations of Risk Factors" and in the SAI. For a description of debt
securities ratings, see the Appendix.

BANK OBLIGATIONS. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange normally drawn by an importer or exporter to pay for specific
merchandise and which are "accepted" by a bank, meaning, in effect, that the
bank unconditionally agrees to pay the face value of the instrument on maturity.
For Funds permitted to invest in bank obligations, such obligations include
dollar-denominated certificates of deposit and bankers' acceptances of foreign
and domestic banks having total assets in excess of $1 billion, certificates of
deposit of federally insured savings and loan associations having total assets
in excess of $1 billion, or cash and time deposits with banks in the currency of
any major nation.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are fixed-income securities
collateralized by pools of mortgage loans created by commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers,
and other issuers in the United States. In effect, CMOs "pass-through" the
monthly payments made by individual borrowers on their mortgage loans. Timely
payment of interest and principal (but not the market value) of these pools is
supported by various forms of insurance or guarantees issued by U.S. Government
agencies, private issuers, and mortgage poolers; however, the obligation itself
is not guaranteed. If the collateral securing the obligations is insufficient to
make payment on the obligation, a holder could sustain a loss. In addition, a
Fund may buy CMOs without insurance or guarantees if, in the opinion of the
Investment Manager, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of a Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are

PAGE

decreasing, thereby decreasing the life of the pool. Reinvestment of prepayments
may be at a lower rate than that on the original CMO. As a result, the value of
CMOs decrease like other debt securities when interest rates rise, but when
interest rates decline, they may not increase as much as other debt securities,
due to the prepayment feature.

COMMERCIAL PAPER. Investments in commercial paper are generally limited to
obligations rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P or, if not
rated by Moody's or S&P, issued by companies having an outstanding debt issue
currently rated Aaa or Aa by Moody's or AAA or AA by S&P. Certain Funds may also
invest in lower rated commercial paper to the extent permitted by their policies
on lower rated debt obligations generally. See the Appendix for a description of
commercial paper ratings.

U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. Some
U.S. Government securities, such as Treasury bills and bonds, which are direct
obligations of the U.S. Treasury, and Government National Mortgage Association
("GNMA") certificates, the principal and interest of which the Treasury
guarantees, are supported by the full faith and credit of the Treasury; others,
such as those of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others are
supported only by the credit of the instrumentality. GNMA certificates are
securities representing part ownership of a pool of mortgage loans on which
interest and principal payments are guaranteed by the Treasury. Principal is
repaid monthly over the term of the loan. Expected payments may be delayed due
to the delays in registering newly traded certificates. The mortgage loans will
be subject to normal principal amortization and may be prepaid prior to
maturity. Reinvestment of prepayments may occur at higher or lower rates than
the original yield on the certificates.

DEPOSITARY RECEIPTS

If permitted by their investment policies, Funds which invest in foreign
securities may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically issued by an U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a United States corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.

In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of each
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.

DIVERSIFICATION

Each Fund is diversified under federal securities law. Accordingly, each Fund
may not, with respect to 75% of its total assets, purchase the securities of any
one issuer (other than the U.S. Government) if more than 5% of the value of the
Fund's assets would be invested in such issuer, or purchase more than 10% of any
class of securities of any one company, including more than 10% of its
outstanding voting securities (except for investments in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities). Each
Fund will also comply with diversification requirements under federal tax laws
related to regulated investment companies and variable contracts issued by
insurance companies. See "Federal Income Tax Status," below and "Investment
Objectives and Policies" in the SAI.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES

The relative performance of foreign currencies in which securities held by a
Fund which invests in foreign securities are denominated is an important factor
in the Fund's overall performance. The Investment Managers may manage a

PAGE

Fund's exposure to various currencies to take advantage of different yield,
risk, and return characteristics that different currencies, currency
denominations, and countries can provide for U.S. investors. With respect to
debt securities, certain Funds as indicated in the individual Fund section may
from time to time make extensive use of forward currency exchange contracts or
options on currencies for hedging purposes.

A Fund will normally conduct its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or sell
foreign currencies. A Fund will generally not enter into a forward contract with
a term of greater than one year. A forward contract is an obligation to purchase
or sell a specific currency for an agreed price at a future date which is
individually negotiated and privately traded by currency traders and their
customers.

Forward foreign currency exchange contracts ("forward contracts") are used to
attempt to minimize the risk to the Funds from adverse changes in the
relationship between the U.S. dollar and foreign currencies. A forward contract
may be used, for example, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency in order to "lock in" the
U.S. dollar price of the security or, when the Investment Manager believes that
the currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of a Fund's portfolio
securities denominated in such foreign currency. This latter investment practice
is generally referred to as "cross-hedging." A Fund has no specific limitation
on the percentage of assets it may commit to forward contracts, except that a
Fund will not enter into a forward contract if the amount of assets set aside to
cover the contract would impede portfolio management or the Fund's ability to
meet redemption requests. Put and call options on foreign currencies may be
purchased or written for the purpose of protecting against declines in the
dollar value of foreign portfolio securities and against increases in the U.S.
dollar cost of foreign securities to be acquired. There is no assurance that the
Investment Managers' hedging strategies will be successful.

FUTURES CONTRACTS

A financial futures contract is an agreement between two parties to buy or sell
a specified debt security at a set price on a future date. An index futures
contract is an agreement to take or make delivery of an amount of cash based on
the difference between the value of the index at the beginning and at the end of
the contract period. A futures contract on a foreign currency is an agreement to
buy or sell a specified amount of a currency for a set price on a future date.

When a Fund enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. A Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. In addition, a Fund must deposit in a
segregated account additional cash or liquid securities to ensure the futures
contracts are unleveraged. The value of assets held in the segregated account
must be equal to the daily market value of all outstanding futures contracts
less any amounts deposited as margin.

LOANS OF PORTFOLIO SECURITIES

If permitted by its investment policies, a Fund may lend to broker-dealers or
U.S. banks portfolio securities with an aggregate market value of up to
one-third of its total assets to generate income. Such loans must be secured by
collateral (consisting of any combination of cash, U.S. Government securities,
or irrevocable letters of credit) in an amount at least equal (on a daily
marked-to-market basis) to the current market value of the securities loaned. A
Fund may terminate the loans at any time and obtain the return of the securities
loaned within five business days. A Fund will continue to receive any interest
or dividends paid on the loaned securities and will continue to have voting
rights with respect to the securities. In the event that the borrower defaults
on its obligation to return borrowed securities, because of insolvency or
otherwise, a Fund could experience delays and costs in gaining access to the
collateral and could suffer a loss to the extent that the value of collateral
falls below the market value of the borrowed securities.

PORTFOLIO TURNOVER

Each Fund may purchase and sell securities without regard to the length of time
the security has been held, and the frequency of Portfolio transactions
(turnover rate) will vary from year to year, depending on market conditions.
Portfolio turnover could be greater in periods of unusual market movement and
volatility. The Managers will weigh the potential benefits of any short-term
trading against the higher transaction costs associated with a higher turnover

PAGE

rate. Unless otherwise indicated in the discussion for each Fund, it is
anticipated that each Fund's annual turnover rate generally will not exceed
100%.

Higher portfolio turnover rates generally increase transaction costs, which are
Portfolio expenses, but would not create capital gains for investors because of
the tax-deferred status of variable annuity and variable life insurance
investments. Portfolio turnover rates for recent years are shown in the
"Financial Highlights." More information is in the SAI.

REPURCHASE AND REVERSE REPURCHASE AGREEMENTS

When a Fund acquires a security from a bank or a registered broker-dealer, it
may simultaneously enter into a repurchase agreement, wherein the seller agrees
to repurchase the security at a specified time and price. The repurchase price
is in excess of the purchase price by an amount which reflects an agreed upon
rate of return, which is not tied to the coupon rate on the underlying security.
The term of such an agreement is generally quite short, possibly overnight or
for a few days, although it may extend over a number of months (up to one year)
from the date of delivery. Repurchase agreements will be fully collateralized.
However, if the seller should default on its obligation to repurchase the
underlying security, a Fund may experience delay or difficulty in exercising its
rights to realize upon the security and might incur a loss if the value of the
security should decline, as well as incur disposition costs in liquidating the
security.

Certain Funds authorized to do so may also enter into reverse repurchase
agreements, which may involve additional risks. See the SAI for details.

RESTRICTED SECURITIES

Restricted securities are securities subject to legal or contractual
restrictions on their resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when sale would
otherwise be desirable. No restricted securities and no securities for which
there is not a readily available market ("illiquid assets") will be acquired by
a Fund if such acquisition would cause the aggregate value of illiquid assets to
exceed limits prescribed by the SEC. These limits are currently 10% of net
assets for money market funds and 15% of net assets for other types of funds.
This restriction shall not apply, however, to restricted securities offered and
sold to "qualified institutional buyers" under Rule 144A of the Securities Act
of 1933 or to foreign securities offered or sold outside the United States where
the Investment Manager determines, based upon a continuing review of the trading
markets for each security, that the securities are liquid. Restricted securities
may be sold only in privately negotiated transactions or in a public offering
with respect to which a registration statement is in effect under the Securities
Act of 1933. Where registration is required, a Fund may be obligated to pay all
or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund 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 sell. Restricted securities
will be priced at fair value as determined by the management and approved in
good faith by the Board of Trustees.

TEMPORARY INVESTMENTS

In any period of market weakness or of uncertain market or economic conditions
or while awaiting suitable investment opportunities, each Fund (other than the
Money Market Fund) may establish a temporary defensive position. These Funds may
therefore invest up to 100% of their respective total assets in the following
money market securities, denominated in U.S. dollars or in the currency of any
foreign country, issued by entities organized in the United States or any
foreign country: short-term (less than twelve months to maturity) and
medium-term (not greater than five years to maturity) obligations issued or
guaranteed by the U.S. Government or the governments of foreign countries, their
agencies or instrumentalities; finance company and corporate commercial paper,
and other short-term corporate obligations, in each case rated Prime-1 by
Moody's or A or better by S&P or, if unrated, of comparable quality as
determined by the Investment Manager; obligations (including certificates of
deposit, time deposits and bankers' acceptances) of banks; and repurchase
agreements with banks and broker-dealers with respect to such securities.

TRADE CLAIMS

Trade claims are purchased from creditors of companies in financial difficulty.
For purchasers such as a Fund, trade claims offer the potential for profits
since they are often purchased at a significantly discounted value and,
consequently, may generate capital appreciation if the value of the claim
increases as the debtor's financial position improves. If the debtor is able to
pay the full obligation on the face of the claim as a result of a restructuring
or an improvement in the debtor's financial condition, trade claims offer the
potential for higher income due to the

PAGE

difference in the face value of the claim as compared to the discounted purchase
price. An investment in trade claims is speculative and carries a high degree of
risk. There can be no guarantee that the debt issuer will ever be able to
satisfy the obligation on the trade claim. Trade claims are not regulated by
federal securities laws or the SEC. Currently, trade claims are regulated
primarily by bankruptcy laws. Because trade claims are unsecured, holders may
have a lower priority in terms of payment than most other creditors in a
bankruptcy proceeding.

WARRANTS

A warrant is typically a long-term option issued by a corporation which gives
the holder the privilege of buying a specified number of shares of the
underlying common stock at a specified exercise price at any time on or before
an expiration date. Stock index warrants entitle the holder to receive, upon
exercise, an amount in cash determined by reference to fluctuations in the level
of a specified stock index. If a Fund does not exercise or dispose of a warrant
prior to its expiration, it will expire worthless.

WHEN-ISSUED SECURITIES

New issues of certain debt securities are often offered on a when-issued basis,
meaning that the payment obligation and the interest rate are fixed at the time
the buyer enters into the commitment, but delivery and payment for the
securities normally takes place after the date of the commitment to purchase.
The value of when-issued securities may vary prior to and after delivery
depending on market conditions and changes in interest rate levels. However, a
Fund will not accrue any income on these securities prior to delivery. A Fund
will maintain in a segregated account with their Custodian an amount of cash or
liquid securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.

EXPLANATION OF RISK FACTORS

Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Funds; nor can
there be any assurance that a Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Funds can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Funds' portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of each Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which a Fund is invested in equity
securities may also be reflected in declines in the price of the Shares of the
Fund. Changes in prevailing rates of interest in any of the countries in which a
Fund is invested in fixed income securities will likely affect the value of such
holdings and thus the value of the Funds' Shares. Increased rates of interest
which frequently accompany inflation and/or a growing economy are likely to have
a negative effect on the value of a Fund's Shares. In addition, changes in
currency valuations will affect the price of Shares of the Funds.

History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Managers will not always be
profitable or prove to have been correct. No single Fund is intended to be a
complete investment program.

FOREIGN SECURITIES

An investor should consider carefully the risks involved in investing in
securities issued by companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments. These risks are
often heightened for investments in developing markets, including certain
Eastern European countries. See "Investment Objectives and Policies -- Risk
Factors" in the SAI. There is the possibility of expropriation, nationalization
or confiscatory taxation, taxation of income earned in foreign nations
(including, for example, withholding taxes on interest and dividends) or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), foreign investment controls on daily stock movements, default
in foreign government securities, political or social instability, or diplomatic
developments which could affect investments in securities of issuers in foreign
nations. Also, some countries may withhold portions of interest and dividends at
the source. In addition, in many countries there is less publicly available
information about issuers than is available in reports about companies in the
United States. Foreign companies are not generally subject to uniform accounting
and auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to United States
companies. Further, the Funds may encounter difficulties or be unable to vote
proxies, exercise shareholder rights, pursue legal remedies, and obtain
judgments in foreign courts. These considerations generally are more of a
concern

PAGE

in developing countries, where the possibility of political instability
(including revolution) and dependence on foreign economic assistance may be
greater than in developed countries. Investments in companies domiciled in
developing countries therefore may be subject to potentially higher risks than
investments in developed countries.

Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of a Fund are uninvested and no return is earned
thereon. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to a Fund due to subsequent declines in
value of the portfolio security of, if a Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.

The relative performance of foreign currencies in which securities held by a
Fund are denominated is an important factor in each Fund's overall performance.
The Investment Managers intend to manage a Fund's exposure to various currencies
to take advantage of different yield, risk, and return characteristics that
different currencies, currency denominations, and countries can provide for U.S.
investors.

We are expecting a new common currency called the euro to be adopted by members
of the new European Economic and Monetary Union potentially as soon as January
1999, that we think could present attractive opportunities for investment. While
all indications are that it will be fully equivalent in stability and value to
the existing currencies underlying its composition, there can be no guarantees.

A Fund will usually effect currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign exchange market. However, some
price spread on currency exchange (to cover service charges) will be incurred
when a Fund converts assets from one currency to another.

In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. There is an increased risk, therefore, of uninsured
loss due to lost, stolen or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which a Fund may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. If permitted by its investment policies, a Fund may
invest in Eastern European countries, which involves special risks that are
described under "Investment Objectives and Policies -- Risk Factors" in the SAI.

Investments in developing or emerging markets are subject to even greater risks
and volatility because of the smaller size and lesser liquidity of those
markets. While short-term volatility can be disconcerting, declines of as much
as 40% to 50% are not unusual in emerging markets. In fact, the Hong Kong market
has increased 1268% in the last 15 years but has suffered five declines of more
than 20% during that time. Many smaller Asian markets suffered severe declines
in 1997, including several which fell over 70%.

Prior governmental approval of foreign investments may be required under certain
circumstances in some developing market countries, and the extent of foreign
investment in domestic companies may be subject to limitation in other
developing market countries. Foreign ownership limitations may also be imposed
by the charters of individual companies in developing market countries to
prevent, among other concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. A Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.

Further, the economies of developing or emerging market countries generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be adversely affected by trade barriers, exchange controls, managed
adjustment in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade. These economies also have
been and may continue to be adversely affected by economic conditions in the
countries with which they trade.

As a non-fundamental policy, if a Fund it permitted to invest in Russian
securities, it will limit such investments to 5% of its total assets. Russian
securities involve additional significant risks, including political and social
uncertainty (for example, regional conflicts and risk of war), currency exchange
rate volatility, pervasiveness of corruption and crime in the Russian economic
system, delays in settling portfolio transactions and risk of loss (including
risk of total loss) arising out of Russia's system of share registration and
custody. For more information on these risks and other risks associated with
Russian securities, please see "Investment Objectives and Policies -- Risk
Factors" in the SAI.

PAGE

Hong Kong reverted to the sovereignity of China on July 1, 1997. As with any
major political transfer of power, this could result in political, social,
economic, market or other developments in Hong Kong, China or other countries
that could affect the value of a Fund's investments.

CLOSED-END INVESTMENT COMPANIES

Some countries, such as South Korea, Chile and India, have authorized the
formation of closed-end investment companies to facilitate indirect foreign
investment in their capital markets. Subject to federal securities laws, a Fund
which is authorized to invest in developing markets securities, may invest in
securities of closed-end investment companies. Shares of certain closed-end
investment companies may at times be purchased or sold only at market prices
which represent a premium or a discount to their net asset values. If a Fund
acquires shares of closed-end investment companies, Shareholders would bear both
their proportionate share of expenses of the Fund (including management and
advisory fees) and, indirectly, the expenses of such closed-end investment
companies.

LOWER RATED DEBT OBLIGATIONS

High-risk, lower quality debt securities, commonly referred to as "junk bonds,"
are rated between BBB and as low as D by S&P, and between Baa and as low as C by
Moody's or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. A credit rating by a rating agency evaluates only the
safety of principal and interest of debt obligations, and does not consider the
market value risk associated with an investment in such an obligation. See
"Investment Objectives and Policies -- Debt Securities" in the SAI for
descriptions of debt securities rated lower than BBB by S&P and Baa by Moody's,
and see the Appendix below for descriptions of each rating category.

These lower rated debt securities are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
The market value of these securities tends to reflect individual developments
affecting the issuer to a greater extent than the market value of higher rated
obligations, which react primarily to fluctuations in the general level of
interest rates. Lower rated obligations tend to be more sensitive to economic
conditions.

A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. Reduced liquidity in the secondary market may have an adverse impact
on market price, and the Funds' ability to dispose of particular issues, when
necessary, to meet a Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced liquidity may also make it more difficult for a Fund to obtain market
quotations based on actual trades for purposes of valuing the Funds' portfolio.
In addition, a Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings. Investments may also be evaluated in the context of economic
and political conditions in the issuer's domicile, such as the inflation rate,
growth prospects, global trade patterns and government policies. In the event
the rating on an issue held in a Fund's portfolio is changed by the rating
service, such change will be considered by a Fund in its evaluation of the
overall investment merits of that security but will not necessarily result in an
automatic sale of the security.

ASSET COMPOSITION TABLE. If a Fund had a 12 month dollar weighted average of
more than 5% of its assets invested in debt obligations below investment grade
in the most recent fiscal year, an Asset Composition Table is included under the
individual Fund's "Risk Considerations," above.

SMALL CAPITALIZATION ISSUERS

A small capitalization or "small cap" company generally has a market
capitalization of $1 billion or less. Such companies may have relatively small
revenues and limited product lines. Smaller capitalization companies may lack
depth of management, they may be unable to internally generate funds necessary
for growth or potential development or to generate such funds through external
financing on favorable terms. Due to these and other factors, smaller companies
may suffer significant losses, as well as realize substantial growth.

FORWARD, OPTIONS AND FUTURES CONTRACTS

Successful use of forward contracts, options and futures contracts are subject
to special risk considerations and transaction costs. A liquid secondary market
for forward contracts, options and futures contracts may not be available when a
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in a
Fund's portfolio or the currencies in which they are denominated. Successful use
of forward contracts, options and futures contracts is further dependent on the
ability of a Fund's Investment Manager to correctly predict

PAGE

movements in the securities or foreign currency markets and no assurance can be
given that its judgment will be correct. Successful use of options on securities
or stock indices is subject to similar risk considerations. In addition, by
writing covered call options, a Fund gives up the opportunity, while the option
is in effect, to profit from any price increase in the underlying security above
the option exercise price.

There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.

PURCHASE OF SHARES

Class 1 shares of each Fund are offered on a continuous basis at their net asset
value only to separate accounts ("Separate Accounts") of insurance companies
("Insurance Companies") to serve as the underlying investment vehicle for both
variable annuity and variable life insurance contracts ("Contracts").
Individuals may not purchase these shares directly from each Fund. Please read
the prospectus of the Insurance Company Separate Account for more information on
the purchase of each Fund's Class 1 shares. Trust shares may be sold to and held
by Insurance Company separate accounts funding both variable annuity and
variable life insurance contracts issued by both affiliated and unaffiliated
Insurance Companies. Therefore, the Trust's Board of Trustees monitors events in
order to identify any material conflicts between variable annuity contract
owners and variable life contract owners and/or between Separate Accounts of
different Insurance Companies, as the case may be, and will determine what
action, if any, should be taken in the event of such a conflict. Although the
Trust does not currently foresee any disadvantages to contract owners, an
irreconcilable material conflict may conceivably arise between contract owners
of different separate accounts investing in the Funds due to differences in tax
treatment, the management of investments, or other considerations. If such a
conflict were to occur, one of the Separate Accounts might withdraw its
investment in a Fund. This might force the Fund to sell portfolio securities at
disadvantageous prices.

Initial and subsequent payments allocated to the Class 1 shares of a Fund may be
subject to limits applicable in the Contract purchased.

NET ASSET VALUE

The net asset value per share of each class of a Fund is determined as of the
close of the New York Stock Exchange ("NYSE"), normally 4:00 p.m., Eastern time.
The net asset value of all outstanding shares of each class of a Fund is
calculated on a pro rata basis. It is based on each class' proportionate
participation in a Fund, determined by the value of the shares of each class. To
calculate the net asset value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares of the class outstanding. The assets
in a Fund's portfolio are valued as described under "Purchase, Redemption and
Pricing of Shares" in the SAI.

REDEMPTION OF SHARES

The Trust will redeem all full and fractional shares presented for redemption on
any business day. Redemptions are effected at the per share net asset value next
determined after receipt of proper notice of the redemption. Redemption proceeds
normally will be paid to the Insurance Company within seven days following
receipt of instructions in proper form. The right of redemption may be suspended
by the Trust when the NYSE is closed (other than customary weekend and holiday
closings) or for any period during which trading thereon is restricted because
an emergency exists, as determined by the Securities and Exchange Commission,
making disposal of portfolio securities or valuation of net assets not
reasonably practicable, and whenever the Securities and Exchange Commission has
by order permitted such suspension or postponement for the protection of
shareholders.

The Trust will redeem shares of a Fund solely in cash up to the lesser of
$250,000 or 1% of its net assets during any 90-day period for any one
shareholder. In consideration of the best interests of the remaining
shareholders, the Trust reserves the right to pay any redemption price exceeding
this amount in whole or in part by a distribution in kind of securities held by
a Fund in lieu of cash. It is highly unlikely that shares would ever be redeemed
in kind. If shares are redeemed in kind, however, the redeeming shareholder
should expect to incur transaction costs upon the disposition of the securities
received in the distribution.

Please refer to the prospectus of your Insurance Company's Separate Account for
information on how to redeem shares of a Fund.

PAGE

EXCHANGES

Class 1 shares of a Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one
class or Fund and a purchase of shares of one or more of the other classes or
funds and are effected at the respective net asset value per share of the class
of each fund on the date of the exchange. Please refer to the prospectus of your
Insurance Company's Separate Account for more information concerning exchanges.

MANAGEMENT OF THE TRUST

THE BOARD

The Trust's Board of Trustees ("Board") oversees the management of the Trust and
elects its officers. The officers are responsible for each Fund's day-to-day
operations. The Board also monitors each Fund to ensure no material conflicts
exist among the classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.

INVESTMENT MANAGERS

Each Fund's Investment Manager also performs similar services for other funds.
Each Fund's Investment Manager is wholly owned by Franklin Resources, Inc.
("Resources"), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together the Investment Managers
and their affiliates manage over $220 billion in assets. The Templeton
organization has been investing globally since 1940. TICI and its affiliates
have offices in Argentina, Australia, Bahamas, Canada, France, Germany, Hong
Kong, India, Italy, Luxembourg, Poland, Russia, Scotland, Singapore, South
Africa, U.S., and Vietnam. Please see "Investment Management and Other Services"
and "Brokerage Allocation" in the SAI for information on securities transactions
and a summary of the Trust's Code of Ethics.

ADMINISTRATIVE SERVICES

Templeton Funds Annuity Company ("Administrator"), 700 Central Avenue, St.
Petersburg, Florida 33701, telephone (800) 774-5001, provides certain
administrative services and facilities for each Fund.

The Administrator receives a monthly fee equivalent on an annual basis to 0.15%
of the average daily net assets of the Trust, reduced to 0.135% of such assets
in excess of $200 million, to 0.10% of such assets in excess of $700 million,
and to 0.075% of such assets in excess of $1.2 billion. Each Fund in the Trust,
except those which had not commenced operations, paid the Administrator fees of
0.10% of its average daily net assets during the fiscal year ended December 31,
1997.

PORTFOLIO TRANSACTIONS

Each Investment Manager tries to obtain the best execution on all transactions.
If an Investment Manager believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services, and the sale of Fund shares as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "Brokerage Allocation" in the SAI for more information.

DISTRIBUTOR

The Trust's principal underwriter is Franklin Templeton Distributors, Inc., 100
Fountain Parkway, St. Petersburg, Florida 33716-1205, toll free telephone (800)
292-9293.

DIVIDENDS AND DISTRIBUTIONS

Each Fund, except the Money Market Fund, normally intends to pay annual
dividends representing substantially all of its net investment income and to
distribute annually any net realized capital gains. The Money Market Fund's net
investment income will be declared as a dividend each day immediately prior to
the determination of its net asset value, and paid monthly. Dividends and
capital gains are calculated and distributed the same way for each Fund and each
class of shares, except the Money Market Fund. The amount of any income
dividends per share will differ for

PAGE

each class, however, generally due to the difference in the applicable Rule
12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.

Any distributions made by a Fund will be automatically reinvested in additional
shares of the same class of the Fund, unless an election is made on behalf of a
shareholder to receive distributions in cash. Dividends or distributions by the
Funds will reduce the per share net asset value by the per share amount so paid.

FEDERAL INCOME TAX STATUS

Each Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). If the Funds so qualify,
they generally will not be subject to federal income taxes on amounts
distributed to shareholders. In order to qualify as a regulated investment
company, each Fund must, among other things, meet certain source of income
requirements. In addition, each Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of each Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).

Amounts not distributed by the Funds on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Funds.

Distributions of any net investment income and of any net realized short-term
capital gains in excess of net realized long-term capital losses are treated as
ordinary income for tax purposes in the hands of the shareholder (the Separate
Account). The excess of any net long-term capital gains over net short-term
capital losses will, to the extent distributed and designated by a Fund as a
capital gain dividend, be treated as long-term capital gains in the hands of the
Separate Account regardless of the length of time the Separate Account may have
held the shares. Any distributions that are not from a Fund's investment company
taxable income or net capital gain may be characterized as a return of capital
to shareholders or, in some cases, as capital gain. Reference is made to the
prospectus for the applicable Contract for information regarding the federal
income tax treatment of distributions to an owner of a Contract.

To comply with regulations under Section 817(h) of the Code a Fund is required
to diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For this purpose, in the case of U.S.
Government securities, each U.S. Government agency or instrumentality is treated
as a separate issuer. Any securities issued, guaranteed, or insured (to the
extent so guaranteed or insured) by the U.S. Government or an instrumentality of
the U.S. Government are treated as an U.S. Government security for this purpose.

The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contract owner's gross income. It is not
known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.

In the event that rules or regulations are adopted, there can be no assurance
that a Fund will be able to operate as currently described in the Prospectus, or
that the Trust will not have to change the Funds, investment objective or
investment policies. While a Fund's investment objective is fundamental and may
be changed only by a vote of a majority of its outstanding shares, the Trustees
have reserved the right to modify the investment policies of the Funds as
necessary to prevent any such prospective rules and regulations from causing the
contract owners to be considered the owners of the shares of the Fund underlying
the Separate Account.

PAGE

OTHER INFORMATION

THE TRUST'S ORGANIZATION

The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of ten separately managed funds. Each class of each Fund
in the Trust is sold only to Insurance Company Separate Accounts to serve as an
investment vehicle for variable annuity and variable life insurance contracts
and is generally offered through a form of prospectus containing the classes and
funds available to each contract. The Templeton Money Market Fund has a single
class of shares. The other nine funds ("Multiclass Funds") offer two classes of
shares, Class 1 and Class 2. All shares of the Multiclass Funds purchased before
May 1, 1997, when the Trust first issued class 2 shares, are considered Class 1
shares. Class 2 shares of the Multiclass Funds have a Rule 12b-1 distribution
plan and are subject to fees of 0.25% (0.15% in the case of the Bond Fund) per
year of Class 2's average daily net assets. Rule 12b-1 fees will affect
performance of Class 2 Shares. Shares of the Templeton Money Market Fund and
Class 1 Shares of the Multiclass Funds are not subject to Rule 12b-1 fees. The
Board may establish additional funds or classes in the future.

The capitalization of the Trust consists solely of an unlimited number of shares
of beneficial interest with a par value of $0.01 each. When issued, shares of
the Trust are fully paid, non-assessable by the Trust and freely transferable.

Unlike the stockholder of a corporation, shareholders could under certain
circumstances be held personally liable for the obligations of the Trust. The
Declaration of Trust, however, disclaims liability of the shareholders, Trustees
or officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust. The Declaration of Trust provides
for indemnification out of Trust property for all loss and expense of any
shareholder held personally liable for the obligations of the Trust. The risk of
a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations and thus should be considered remote.

Shareholders of the Trust are given certain voting rights. Shares of each class
of a Fund represent proportionate interests in the assets of a fund, and have
the same voting and other rights and preferences as any other class of the Fund
for matters that affect the Fund as a whole. For matters that only affect one
class, however, only shareholders of that class may vote. Each class will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by state law, or (3) required to be voted on separately
by federal securities law.

Each share of each class of a Fund will be given one vote, unless a different
allocation of voting rights is required under applicable law for a mutual fund
that is an investment medium for variable life insurance or annuity contracts.
The Separate Accounts, as shareholders of the Trust, are entitled to vote the
shares of the Trust at any regular and special meeting of the shareholders of
the Trust. However, the Separate Accounts will generally vote their shares in
accordance with instructions received from owners of the variable contracts. See
the Separate Account prospectus for more information regarding the pass-through
of these voting rights.

Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding shares or other
voting interests of the Trust. The Trust is required to assist in shareholders'
communications. In accordance with current laws, an Insurance Company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote shares or other
voting interests in the Separate Account in proportion to the voting
instructions received.

For more information on the Trust, a Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001.

PERFORMANCE INFORMATION

From time to time, each class of a Fund advertises its performance. Performance
information for a class of the Fund will generally not be advertised unless
accompanied by comparable performance information for a Separate Account to
which a Fund offers shares of that class.

PAGE

Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Net Asset Value of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by a Fund.
Quotations of yield or total return for a class of a Fund will not take into
account charges and deductions against any Separate Account to which the Funds'
shares are sold or charges and deductions against variable insurance contracts,
although comparable performance information for a Separate Account will take
such charges into account.

The investment results for each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a description
of the methods used to calculate performance for the Fund, see "Performance
Information" in the SAI.

YEAR 2000

Like other mutual funds, the Trust could be adversely affected if the computer
systems used by the Investment Managers and other service providers do not
properly process date-related information after January 1, 2000 ("Year 2000
Issue"). The Year 2000 Issue could affect portfolio and operational areas,
including the handling of securities trades, payments of interest and dividends,
securities pricing, shareholder account services, custody functions, and others.
While there can be no assurance that the Trust will not be adversely affected,
the Manager is taking steps that it believes are reasonably designated to
address the Year 2000 Issue, including seeking reasonable assurance from the
Trust's major service providers.

STATEMENTS AND REPORTS

The Trust's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.

PAGE

APPENDIX

DESCRIPTION OF BOND RATINGS

MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")

Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or 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 -- Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, 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 -- Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. 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.

Baa -- Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.

Ba -- Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.

B -- Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.

Caa -- Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.

Ca -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.

C -- Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.

Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.

STANDARD & POOR'S RATINGS SERVICE ("S&P")

AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.

AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.

A -- Bonds rated A have 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.

BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.

BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

PAGE

C -- Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.

D -- Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.

Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

DESCRIPTION OF COMMERCIAL PAPER RATINGS

MOODY'S

Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:

P-1 (Prime-1): Superior capacity for repayment.

P-2 (Prime-2): Strong capacity for repayment.

S&P

S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:

A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.

A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.

A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.

PAGE

LOGO
TEMPLETON VARIABLE PRODUCTS SERIES FUND

PROSPECTUS -- MAY 1, 1998
CLASS 2 SHARES

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

Each Fund, except the Templeton Money Market Fund, has two classes of shares:
Class 1 and Class 2. This prospectus offers only Class 2 shares of multiclass
Funds and is for use with Contacts that make Class 2 shares of these Funds
available. For more information about the Trust's classes, see "Other
Information -- Capitalization and Voting Rights," below.

PAGE

TABLE OF CONTENTS

FRANKLIN GROWTH INVESTMENTS FUND
Investment Objective and Policies......................... 2FG-1
Risk Considerations....................................... 2FG-1
Portfolio Management...................................... 2FG-2
Expense Summary........................................... 2FG-3
- -----------------------------------------------------------------------
FRANKLIN SMALL CAP INVESTMENTS FUND
Investment Objective and Policies......................... 2FS-1
Risk Considerations....................................... 2FS-2
Portfolio Management...................................... 2FS-2
Expense Summary........................................... 2FS-3
- -----------------------------------------------------------------------
MUTUAL DISCOVERY INVESTMENTS FUND
Investment Objective and Policies......................... 2MD-1
Risk Considerations....................................... 2MD-2
Portfolio Management...................................... 2MD-3
Expense Summary........................................... 2MD-5
- -----------------------------------------------------------------------
MUTUAL SHARES INVESTMENTS FUND
Investment Objective and Policies......................... 2MS-1
Risk Considerations....................................... 2MS-2
Portfolio Management...................................... 2MS-3
Expense Summary........................................... 2MS-5
- -----------------------------------------------------------------------
TEMPLETON ASSET ALLOCATION FUND
Investment Objective and Policies......................... 2TA-1
Risk Considerations....................................... 2TA-1
Portfolio Management...................................... 2TA-2
Expense Summary........................................... 2TA-3
Financial Highlights...................................... 2TA-4
- -----------------------------------------------------------------------
TEMPLETON BOND FUND
Investment Objective and Policies......................... 2TB-1
Risk Considerations....................................... 2TB-1
Portfolio Management...................................... 2TB-2
Expense Summary........................................... 2TB-3
- -----------------------------------------------------------------------
TEMPLETON DEVELOPING MARKETS FUND
Investment Objective and Policies......................... 2TD-1
Risk Considerations....................................... 2TD-2
Portfolio Management...................................... 2TD-2
Expense Summary........................................... 2TD-4
Financial Highlights...................................... 2TD-5
- -----------------------------------------------------------------------
</TABLE>

PAGE

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TEMPLETON INTERNATIONAL FUND
Investment Objective and Policies......................... 2TI-1
Risk Considerations....................................... 2TI-1
Portfolio Management...................................... 2TI-2
Expense Summary........................................... 2TI-3
Financial Highlights...................................... 2TI-4
- -----------------------------------------------------------------------
TEMPLETON STOCK FUND
Investment Objective and Policies......................... 2TS-1
Risk Considerations....................................... 2TS-1
Portfolio Management...................................... 2TS-2
Expense Summary........................................... 2TS-3
Financial Highlights...................................... 2TS-4
- -----------------------------------------------------------------------
EXPLANATIONS OF SECURITIES AND INVESTMENT TECHNIQUES........ 1
EXPLANATIONS OF RISK FACTORS................................ 6
PURCHASE OF SHARES.......................................... 9
NET ASSET VALUE............................................. 9
REDEMPTION OF SHARES........................................ 9
EXCHANGES................................................... 10
MANAGEMENT OF THE TRUST..................................... 10
DISTRIBUTION PLAN........................................... 10
DIVIDENDS AND DISTRIBUTIONS................................. 11
FEDERAL INCOME TAX STATUS................................... 11
OTHER INFORMATION........................................... 12
APPENDIX.................................................... 14
</TABLE>

PAGE

INVESTMENT OBJECTIVE AND POLICIES

FRANKLIN GROWTH INVESTMENTS FUND

OTHER INVESTMENTS. The Fund currently intends to invest no more than 5% of its
assets in debt obligations, including convertible debt obligations, rated Ba or
lower by Moody's or BB or lower by Standard & Poor's, or unrated securities
determined by the Manager to be of comparable quality. SEE "EXPLANATIONS OF RISK
FACTORS," "EXPLANATIONS OF SECURITIES AND INVESTMENT TECHNIQUES" AND THE
APPENDIX. The Fund may invest in convertible preferred stocks, which are equity
securities, generally carry a higher degree of market risk than debt
obligations, and often may be regarded as speculative in nature. SEE
"EXPLANATIONS OF SECURITIES AND INVESTMENT TECHNIQUES" Under the policies
discussed in "Explanations of Securities and Investment Techniques" and in the
SAI, the Fund may also borrow up to one-third of the value of its total assets
(though it does not currently expect any borrowing to exceed 5%); write covered
call options; purchase put options on securities; loan its portfolio securities;
enter into repurchase transactions; invest in restricted or illiquid securities;
and engage in other activities specifically identified for this Fund.

RISK CONSIDERATIONS

FRANKLIN GROWTH INVESTMENTS FUND

2FG-1

PAGE

PORTFOLIO MANAGEMENT

FRANKLIN GROWTH INVESTMENTS FUND

Franklin Advisers, Inc., 777 Mariners Island Blvd., San Mateo, California,
94404, is the Investment Manager. The Investment Manager manages the Fund's
assets and makes its investment decisions. For its services, the Investment
Manager receives a fee equivalent on an annual basis to 0.60% of the average
daily net assets of the Fund, reduced to 0.50% of such assets in excess of $200
million, to 0.40% of such assets in excess of $1.3 billion. See "Management of
the Trust" for more information about fees.

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.

CONRAD B. HERRMANN
Vice President and Portfolio Manager
Franklin Advisers, Inc.

KEVIN CARRINGTON
Portfolio Manager
Franklin Advisers, Inc.

VIVIAN J. PALMIERI
Vice President
Franklin Advisers, Inc.

Mr. Palmieri holds a Bachelor of Arts degree in Economics from Williams College.
He has been with the Franklin Templeton Group since 1965. Mr. Palmieri will
manage the Fund from inception.

2FG-2

PAGE

EXPENSE SUMMARY

FRANKLIN GROWTH INVESTMENTS FUND -- CLASS 2

This table is designed to help you understand the costs of investing in Class 2
shares of the Fund. It is based on the Fund's estimated expenses for the current
fiscal year. The Fund's actual expenses may vary.

A. SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge (as a percentage of Offering Price)
Paid at purchase............................................ 0.00%
Paid at redemption.......................................... 0.00%
</TABLE>

B. ANNUAL FUND OPERATING EXPENSES -- AFTER FEE WAIVER*
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

<TABLE>
<S> <C>
Management Fees............................................. 0.40%
Rule 12b-1 Fees............................................. 0.25%
Other Expenses.............................................. 0.60%
----
TOTAL FUND OPERATING EXPENSES............................... 1.25%
</TABLE>

C. EXAMPLE

Assume the annual return on the Fund's Class 2 shares is 5%, operating expenses
are as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest in the
Fund.

ONE YEAR THREE YEARS
- ----------------------
<S> <C>
$13 $40
</TABLE>

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.

*The Investment Manager has agreed in advance to waive management fees and make
certain payments to reduce Fund expenses as necessary so that Total Fund
Operating Expenses do not exceed 1.25% of the Fund's Class 2 net assets through
1998. The Investment Manager may end this arrangement at a later date. Estimated
Management Fees, Rule 12b-1 Fees, Other Expenses and Total Fund Operating
Expenses before any waivers would be 0.60%, 0.25%, 0.60%, and 1.45%,
respectively.

2FG-3

PAGE

INVESTMENT OBJECTIVE AND POLICIES

FRANKLIN SMALL CAP INVESTMENTS FUND

The investment objective of the Franklin Small Cap Investments Fund is long-term
capital growth. There can be no assurance that the Fund will achieve its
investment objective.

2FS-1

PAGE

RISK CONSIDERATIONS

FRANKLIN SMALL CAP INVESTMENTS FUND

The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar domestic securities. INVESTMENTS IN
FOREIGN SECURITIES, PARTICULARLY IN DEVELOPING MARKETS, INVOLVE SPECIAL AND
ADDITIONAL RISKS. SEE "EXPLANATIONS OF RISK FACTORS" BELOW AND IN THE SAI.

PORTFOLIO MANAGEMENT

FRANKLIN SMALL CAP INVESTMENTS FUND

Franklin Advisers, Inc., 777 Mariners Island Blvd., San Mateo, California,
94404, is the Investment Manager. The Investment Manager manages the Fund's
assets and makes its investment decisions. For its services, the Investment
Manager receives a fee equivalent on an annual basis to 0.75% of the average
daily net assets of the Fund, reduced to 0.65% of such assets in excess of $200
million, and to 0.55% of such assets in excess of $1.3 billion. See "Management
of the Trust" for more information about fees.

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.

EDWARD B. JAMIESON
Senior Vice President
Franklin Advisers, Inc.

MICHAEL MCCARTHY
Portfolio Manager
Franklin Advisers, Inc.

2FS-2

PAGE

EXPENSE SUMMARY

FRANKLIN SMALL CAP INVESTMENTS FUND -- CLASS 2

A. SHAREHOLDER TRANSACTION EXPENSES

B. ANNUAL FUND OPERATING EXPENSES -- AFTER FEE WAIVER*
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

Management Fees............................................. 0.40%
Rule 12b-1 Fees............................................. 0.25%
Other Expenses.............................................. 0.60%
----
TOTAL FUND OPERATING EXPENSES............................... 1.25%
</TABLE>

C. EXAMPLE

ONE YEAR THREE YEARS
- ----------------------
<S> <C>
$13 $40
</TABLE>

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.

*The Investment Manager has agreed in advance to waive management fees and make
certain payments to reduce Fund expenses as necessary so that Total Fund
Operating Expenses do not exceed 1.25% of the Fund's Class 2 net assets through
1998. The Investment Manager may end this arrangement at a later date. Estimated
Management Fees, Rule 12b-1 Fees, Other Expenses and Total Fund Operating
Expenses before any waivers would be 0.75%, 0.25%, 0.60% and 1.60%,
respectively.

2FS-3

PAGE

INVESTMENT OBJECTIVE AND POLICIES

MUTUAL DISCOVERY INVESTMENTS FUND

The investment objective of the Mutual Discovery Investments Fund is capital
appreciation. There can be no assurance that the Fund will achieve its
investment objective.

2MD-1

PAGE

RISK CONSIDERATIONS

MUTUAL DISCOVERY INVESTMENTS FUND

2MD-2

PAGE

PORTFOLIO MANAGEMENT

MUTUAL DISCOVERY INVESTMENTS FUND

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.

MICHAEL F. PRICE
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.

PETER LANGERMAN

Senior Vice President and Chief Operating Officer

Franklin Mutual Advisers, Inc.

JEFFREY ALTMAN
Senior Vice President
Franklin Mutual Advisers, Inc.

ROBERT FRIEDMAN
Senior Vice President
Franklin Mutual Advisers, Inc.

2MD-3

PAGE

RAYMOND GAREA
Senior Vice President
Franklin Mutual Advisers, Inc.

LAWRENCE SONDIKE
Senior Vice President
Franklin Mutual Advisers, Inc.

DAVID MARCUS
Senior Vice President
Franklin Mutual Advisers, Inc.

DAVID J. WINTERS
Senior Vice President
Franklin Mutual Advisers, Inc.

2MD-4

PAGE

EXPENSE SUMMARY

MUTUAL DISCOVERY INVESTMENTS FUND -- CLASS 2

A. SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<S> <C>
Maximum Sales Charge (as a percentage of Offering Price)
Paid at time of purchase.................................... 0.00%
Paid at redemption.......................................... 0.00%
</TABLE>

B. ANNUAL FUND OPERATING EXPENSES -- AFTER FEE WAIVER*
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

C. EXAMPLE

ONE YEAR THREE YEARS
- ----------------------
<S> <C>
$13 $40
</TABLE>

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.

*The Investment Manager has agreed in advance to waive management fees and make
certain payments to reduce Fund expenses as necessary so that Total Fund
Operating Expenses do not exceed 1.25% of the Fund's Class 2 net assets through
1998. The Investment Manager may end this arrangement at a later date. Estimated
Management Fees, Rule 12b-1 Fees, Other Expenses and Total Fund Operating
Expenses before any waivers would be 0.80%, 0.25%, 0.60% and 1.65%,
respectively.

2MD-5

PAGE

INVESTMENT OBJECTIVE AND POLICIES

MUTUAL SHARES INVESTMENTS FUND

2MS-1

PAGE

RISK CONSIDERATIONS

MUTUAL SHARES INVESTMENTS FUND

2MS-2

PAGE

PORTFOLIO MANAGEMENT

MUTUAL SHARES INVESTMENTS FUND

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.

MICHAEL F. PRICE
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.

PETER LANGERMAN

Senior Vice President and Chief Operating Officer

Franklin Mutual Advisers, Inc.

JEFFREY ALTMAN
Senior Vice President
Franklin Mutual Advisers, Inc.

ROBERT FRIEDMAN
Senior Vice President
Franklin Mutual Advisers, Inc.

RAYMOND GAREA
Senior Vice President
Franklin Mutual Advisers, Inc.

Mr. Garea has a Bachelor of Science degree in Engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, the predecessor of Franklin Mutual. Mr. Garea has also been a
Manager (Director) of MB Metroplis L.L.C. since 1994. He joined the Franklin
Templeton Group in November 1996 and will manage the Fund from inception.

2MS-3

PAGE

LAWRENCE SONDIKE
Senior Vice President
Franklin Mutual Advisers, Inc.

DAVID MARCUS
Senior Vice President
Franklin Mutual Advisers, Inc.

DAVID J. WINTERS
Senior Vice President
Franklin Mutual Advisers, Inc.

2MS-4

PAGE

EXPENSE SUMMARY

MUTUAL SHARES INVESTMENTS FUND -- CLASS 2

A. SHAREHOLDER TRANSACTION EXPENSES

B. ANNUAL FUND OPERATING EXPENSES -- AFTER FEE WAIVER*
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

C. EXAMPLE

ONE YEAR THREE YEARS
- ----------------------
<S> <C>
$13 $40
</TABLE>

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.

*The Investment Manager has agreed in advance to waive management fees and make
certain payments to reduce Fund expenses as necessary so that Total Fund
Operating Expenses do not exceed 1.25% of the Fund's Class 2 assets through
1998. The Investment Manager may end this arrangement at a later date. Estimated
Management Fees, Rule 12b-1 Fees, Other Expenses and Total Fund Operating
Expenses before any waivers would be 0.60%, 0.25%, 0.60% and 1.45%,
respectively.

2MS-5

PAGE

INVESTMENT OBJECTIVE AND POLICIES

TEMPLETON ASSET ALLOCATION FUND

There are no minimum or maximum percentages as to the amount of the Fund's
assets which may be invested in each of the market segments, or as to the amount
which may be invested in the U.S. or any other nation. Except as noted below and
under "Investment Restrictions" in the SAI, the Fund's Investment Manager has
complete flexibility in determining the amount and nature of stock, debt
securities or money market instruments in which the Fund may invest.

The Fund seeks investment opportunities in all types of securities issued by
companies or governments of any nation. As a non-fundamental policy, however,
the Fund will limit its investments in securities of Russian issuers to 5% of
its assets. It has the flexibility to invest in preferred stocks and certain
debt securities, rated or unrated, such as convertible bonds and bonds selling
at a discount. The Fund may invest in medium and lower quality debt securities
that are rated between BBB and as low as D by Standard & Poor's ("S&P"), and
between Baa and as low as C by Moody's or, if unrated, are of equivalent
investment quality as determined by the Investment Manager. The Fund may, from
time to time, purchase defaulted debt securities if, in the opinion of the
Investment Manager, the issuer may resume interest payments in the near future
or other advantageous developments appear likely in the future. As an operating
policy, which may be changed without shareholder approval, the Fund will not
invest more than 15% of its total assets in lower-rated debt securities.
Lower-rated debt securities include securities rated lower than BBB by S&P or
Baa by Moody's, unrated securities of equivalent investment quality as
determined by the Investment Manager, and defaulted debt securities. Consistent
with the overall 15% limit on lower-rated debt securities, the Fund will not
invest more than 10% of its total assets in defaulted debt securities, which may
be illiquid. Bonds rated BB or lower, commonly referred to as "junk bonds," are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and may be in
default. See "Risk Considerations" for this Fund, and "Explanations of Risk
Factors," below. See the Appendix concerning rating categories.

OTHER INVESTMENT POLICIES. The Fund may invest in collateralized mortgage
obligations and restricted securities, purchase securities on a "when-issued"
basis, lend its portfolio securities, and borrow up to 30% of the value of its
total assets for investment purposes. The Fund may purchase and sell financial
futures contracts, stock index futures contracts, and foreign currency futures
contracts for hedging purposes only and not for speculation. It may engage in
such transactions only if the total contract value of the futures contracts does
not exceed 20% of the Fund's total assets. The Fund may also invest in forward
foreign currency exchange contracts and options on foreign currencies. These and
other types of investments and investment techniques are described in greater
detail under "Explanations of Securities and Investment Techniques" in this
Prospectus and in the SAI.

RISK CONSIDERATIONS

TEMPLETON ASSET ALLOCATION FUND

The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
Investments in foreign developing markets involve heightened risks related to
the smaller size and lesser liquidity of these markets. INVESTORS SHOULD
CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN
SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. SEE
"EXPLANATIONS OF RISK FACTORS."

2TA-1

PAGE

PORTFOLIO MANAGEMENT

TEMPLETON ASSET ALLOCATION FUND

Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Asset Allocation Fund will pay its Investment Manager a monthly fee equal on an
annual basis to 0.65% of the Fund's average daily net assets up to $200 million,
0.585% of such net assets up to $1.3 billion, and 0.52% of such net assets over
$1.3 billion. For the fiscal year ended December 31, 1997, the Fund paid 0.56%
and 1.03% of the average daily net assets of its Class 2 in management fees and
total operating expenses (including management fees), respectively. See
"Management of the Trust" for more information about fees.

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.

THOMAS LATTA
Vice President
Templeton Global Bond Managers, a division of TICI

Mr. Latta received a Bachelor of Business Administration degree from the
University of Miami (Florida). Mr. Latta is a Chartered Financial Analyst, and a
member of the Association for Investment Management and Research and the
Institute of Chartered Financial Analysts. He joined the Franklin Templeton
Group in 1991, and has managed the fixed income portion of the Fund's portfolio
since 1993.

NEIL S. DEVLIN
Chief Investment Officer and Executive Vice President
Templeton Global Bond Managers, a division of TICI

Mr. Devlin holds a Bachelor of Arts degree in Economics and Philosophy from
Brandeis University and is a Chartered Financial Analyst. He joined the Franklin
Templeton Group in 1987, and has managed the fixed income portion of the Fund's
portfolio since 1995.

GARY CLEMONS
Senior Vice President
Templeton Investment Counsel Inc.

Mr. Clemons holds a Bachelor of Science degree from the University of Nevada at
Reno and a Master of Business Administration degree from the University of
Wisconsin at Madison. Mr. Clemons was a research analyst for Structured Asset
Management. He has been with the Franklin Templeton Group since 1990 and has
managed the equity portion of the Fund's portfolio since 1995.

PETER NORI
Vice President
Templeton Investment Counsel, Inc.

WILLIAM T. HOWARD, JR.
Senior Vice President
Templeton Investment Counsel, Inc.

2TA-2

PAGE

EXPENSE SUMMARY

TEMPLETON ASSET ALLOCATION FUND -- CLASS 2

This table is designed to help you understand the costs of investing in Class 2
shares of the Fund. Except as indicated below, it is based on the historical
expenses of the Class 2 shares for the fiscal year ended December 31, 1997. The
Fund's actual expenses may vary.

A. SHAREHOLDER TRANSACTION EXPENSES

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)*

Management Fees............................................. 0.60%
Rule 12b-1 Fees............................................. 0.25%
Other Expenses.............................................. 0.18%
----
TOTAL FUND OPERATING EXPENSES............................... 1.03%
</TABLE>

C. EXAMPLE

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -----------------------------------------------
<S> <C> <C> <C>

$11 $33 $57 $126
</TABLE>

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.

*Class 2 of the Fund has a distribution plan or "Rule 12b-1 plan" as described
under "Distribution Plan". Because Class 2 shares were not offered until May 1,
1997, figures (other than 12b-1 Fees") are estimates for 1998 based on the
historical expenses of the Fund's Class 1 shares for the fiscal year ended
December 31, 1997. Management Fees and Total Fund Operating Expenses have been
restated to reflect the management fee schedule approved by shareholders and
effective May 1, 1997. Actual Management Fees and Total Fund Operating Expenses
before May 1, 1997 were lower. See the section "Management Fees" under
"Portfolio Management".

2TA-3

PAGE

FINANCIAL HIGHLIGHTS

TEMPLETON ASSET ALLOCATION FUND -- CLASS 2

This table summarizes the financial history of Templeton Asset Allocation
Fund -- Class 2. The information has been audited by McGladrey & Pullen, LLP,
the Trust's independent auditors. Their audit report covering the period shown
below appears in the financial statements in the Trust's Annual Report for the
fiscal year ended December 31, 1997. The Trust's annual report also includes
more information about the Fund's performance. For a free copy, please call
1-800-774-5001.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997*
-----
<S> <C>
PER SHARE OPERATING PERFORMANCE -- CLASS 2
(for a share outstanding throughout the year)
NET ASSET VALUE, BEGINNING OF YEAR.......................... $20.40
- --------------------------------------------------------------------------
Income from investment operations:
Net investment income..................................... .16
Net realized and unrealized gain.......................... 1.76
------
TOTAL FROM INVESTMENT OPERATIONS........................ 1.92
- --------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................................ $22.32
==========================================================================
TOTAL RETURN+............................................... 9.41%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $9,665
Ratios to average net assets:
Expenses.................................................. 1.03%**
Net investment income..................................... 1.97%**
Portfolio turnover rate..................................... 45.27%
Average commission rate paid++.............................. $.0071
- --------------------------------------------------------------------------
</TABLE>

* For the period May 1, 1997 (effective date) to December 31, 1997.
** Annualized.
+ Total return does not include deductions at the Fund or contract level for
cost of insurance charges, premium load, administrative charges, mortality
and expense risk charges or other charges that may be incurred under the
variable annuity and variable life insurance contracts for which the Fund
serves as an underlying investment vehicle. Inclusion of such charges would
reduce the total return figures for all periods shown. Total return is not
annualized.
++ Relates to purchases and sales of equity securities.

2TA-4

PAGE

INVESTMENT OBJECTIVE AND POLICIES

TEMPLETON BOND FUND

RISK CONSIDERATIONS

TEMPLETON BOND FUND

2TB-1

PAGE

<TABLE>
<CAPTION>
S&P CATEGORY % OF FUND
- --------------------------------------------------------------------
<S> <C>
AAA 76.9%
AA+ 2.1%*
AA 0.4%
A+ 4.6%
BB+ 0.1%
BB 8.9%*
BB- 4.0%
B+ 3.0%*
</TABLE>

*Figures include securities, which are unrated by S&P, as follows:

PORTFOLIO MANAGEMENT

TEMPLETON BOND FUND

The Investment Manager for the Templeton Bond Fund is Templeton Investment
Counsel, Inc. ("TICI") 500 East Broward Boulevard, Fort Lauderdale, Florida
33394-3091. TICI manages the Fund's assets and makes its investment decisions.
For the fiscal year ended December 31, 1997, the Templeton Bond Fund paid 0.50%
and 0.68% of the average daily net assets in management fees and total operating
expenses (including management fees), respectively. The Fund had no Class 2
shares outstanding during 1997, so these figures do not reflect 12b-1 fees which
will be charged on Class 2 shares. See "Management of the Trust" for more
information about fees.

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio.

THOMAS LATTA
Vice President
Templeton Global Bond Managers, a division of TICI

NEIL S. DEVLIN
Chief Investment Officer and Executive Vice President
Templeton Global Bond Managers, a division of TICI

2TB-2

PAGE

EXPENSE SUMMARY

TEMPLETON BOND FUND -- CLASS 2

A. SHAREHOLDER TRANSACTION EXPENSES

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)*

Management Fees............................................. 0.50%
Rule 12b-1 Fees............................................. 0.15%
Other Expenses.............................................. 0.18%
----
TOTAL FUND OPERATING EXPENSES............................... 0.83%
</TABLE>

C. EXAMPLE

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -----------------------------------------------
<S> <C> <C> <C>

$8 $26 $46 $103
</TABLE>

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.

*Class 2 of the Fund has a distribution plan or "Rule 12b-1 plan" as described
under "Distribution Plan". Because Class 2 shares were not offered until May 1,
1998, figures (other than 12b-1 Fees") are estimates for 1998 based on the
historical expenses of the Fund's Class 1 shares for the fiscal year ended
December 31, 1997.

2TB-3

PAGE

INVESTMENT OBJECTIVE AND POLICIES

TEMPLETON DEVELOPING MARKETS FUND

The investment objective of the Templeton Developing Markets Fund is long-term
capital appreciation. There can be no assurance that the Fund will achieve its
investment objective.

Portfolio Investments. The Fund seeks to achieve this objective by investing
primarily (normally at least 65% of assets) in equity securities of issuers in
countries having developing markets. "Equity securities," as used in this
Prospectus, refers to common stock, preferred stock, warrants or rights to
subscribe to or purchase such securities and Depositary Receipts. The Fund
considers countries having developing markets to be all countries that are
generally considered to be developing or emerging countries by the International
Bank for Reconstruction and Development (more commonly referred to as the World
Bank) or the International Finance Corporation, as well as countries that are
classified by the United Nations or otherwise regarded by their authorities as
developing or emerging. Under current listings, developing markets countries
include all countries EXCEPT: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Iceland, Ireland, Italy, Japan, Luxembourg, the
Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United
Kingdom, and the United States. In addition, as used in this Prospectus,
developing market equity securities means (i) equity securities of companies the
principal securities trading market for which is a developing market country, as
defined above, (ii) equity securities, traded in any market, of companies that
derive 50% or more of their total revenue from either goods or services produced
in such developing market countries or sales made in such developing market
countries or (iii) equity securities of companies organized under the laws of,
and with a principal office in, a developing market country.

Portfolio Selection. The Fund and its investment manager, Templeton Asset
Management Ltd. (the "Investment Manager"), may, from time to time, use various
methods of selecting securities for the Fund's portfolio, and may also employ
and rely on independent or affiliated sources of information and ideas in
connection with management of the Fund's portfolio. Determinations as to
eligibility will be made by the Investment Manager based on publicly available
information and inquiries made to the companies. (See "Explanations of Risk
Factors" for a discussion of the nature of information publicly available for
non-U.S. companies.) The Fund will at all times, except during defensive
periods, maintain investments in at least three countries having developing
markets. Consistent with its policy of investing primarily in developing
markets, the Fund may purchase securities in any foreign country, developed or
developing. As a non-fundamental policy, however, the Fund will limit its
investments in securities of Russian issuers to 5% of its assets.

Other Investments. For capital appreciation, the Fund may invest up to 35% of
its total assets in debt securities (defined as bonds, notes, debentures,
commercial paper, certificates of deposit, time deposits, bankers' acceptances
and structured investments). Certain debt securities can provide the potential
for capital appreciation based on various factors such as changes in interest
rates, economic and market conditions, improvement in an issuer's ability to
repay principal and pay interest, and ratings upgrades. Additionally,
convertible bonds offer the potential for capital appreciation through the
conversion feature, which enables the holder of the bond to benefit from
increases in the market price of the securities into which they are convertible.
The Fund may invest in debt securities which are rated at least C by Moody's or
C by Standard & Poor's ("S&P") or unrated debt securities deemed to be of
comparable quality by the Investment Manager. As a fundamental policy (which may
not be changed without shareholder approval) the Fund will not invest more than
10% of its total assets in defaulted debt securities, which may be illiquid. As
an operating policy, however, which may be changed without shareholder approval,
the Fund will not invest more than 5% of its total assets in lower-rated debt
securities. Lower-rated debt securities include securities rated lower than BBB
by S&P or Baa by Moody's, unrated securities of equivalent investment quality as
determined by the Investment Manager, and defaulted debt securities. Bonds rated
BB or lower, commonly referred to as "junk bonds," are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and may be in default. See
"Explanations of Risk Factors," and the Appendix, below.

2TD-1

PAGE

Other Investment Policies. When the Investment Manager believes that market
conditions warrant, the Fund may adopt a temporary defensive position and may
invest without limit in money market securities denominated in U.S. dollars or
in the currency of any foreign country. See "Explanations of Securities and
Investment Techniques." The Portfolio may invest up to 10% of its assets in
securities of closed end investment companies to facilitate foreign investment.
The Fund may also lend its portfolio securities; borrow up to one-third of the
value of its total assets for investment purposes (i.e., "leverage" its
portfolio); purchase convertible securities and warrants; invest in restricted
or illiquid securities; enter into transactions in options on securities,
securities indices and foreign currencies; enter into forward foreign currency
contracts; and enter into futures contracts and related options with respect to
securities, securities indices and foreign currencies. The value of the
underlying securities on which futures contacts will be written at any one time
will not exceed 25% of the total assets of the Fund. When deemed appropriate by
the Investment Manager, the Fund may invest cash balances in repurchase
agreements and other money market investments to maintain liquidity in an amount
to meet expenses or for day-to-day operating purposes. These investment
techniques are described below and under the heading "Investment Objective and
Policies" in the SAI.

RISK CONSIDERATIONS

TEMPLETON DEVELOPING MARKETS FUND

PORTFOLIO MANAGEMENT

TEMPLETON DEVELOPING MARKETS FUND

The Investment Manager for the Developing Markets Fund is Templeton Asset
Management Ltd. ("Templeton Singapore"), 7 Temasek Boulevard, # 38-03, Suntec
Tower One, Singapore, 038987. The Investment Manager manages the Fund's assets
and makes its investment decisions. For the fiscal year ended December 31, 1997,
the Fund paid 1.25% and 1.77% of the daily net assets of its Class 2 shares in
management fees and total operating expenses (including management fees),
respectively. The fee paid by the Fund is higher than the advisory fees paid by
most other U.S. investment companies primarily because investing in equity
securities in developing markets, which are not widely followed by professional
analysts, requires the Investment Manager to invest additional time and incur
added expense in developing specialized resources, including research
facilities. See "Management of the Trust" for more information about fees.

The following persons are primarily responsible for the day-to-day management of
the Developing Markets Fund's portfolio.

J. MARK MOBIUS, PH.D.
Managing Director and Portfolio Manager
Templeton Asset Management Ltd.

2TD-2

PAGE

H. ALLAN LAM
Portfolio Manager
Templeton Asset Management Ltd.

TOM WU
Director
Templeton Asset Management Ltd.

Mr. Wu holds a Master of Business Administration degree from the University of
Oregon. He earned a Bachelor of Social Science Degree in economics from the
University of Hong Kong. He joined the Franklin Templeton Group in 1987, and has
managed the Fund from inception.

DENNIS LIM
Vice President
Templeton Asset Management Ltd.

EDDIE CHOW
Investment Analyst
Templeton Asset Management Ltd.

TEK-KHOAN ONG
Portfolio Manager
Templeton Asset Management Ltd.

Mr. Ong holds a Masters of Business Administration degree from the Wharton
School, University of Pennsylvania. He earned a Masters of Science degree in
computing science and a Bachelor of Science degree in Civil Engineering, both
from Imperial College, University of London, UK. Prior to joining the Franklin
Templeton Group, in 1993, he worked for the Monetary Authority of Singapore
(Singapore's central bank) for five years. He has managed the Fund from
inception.

2TD-3

PAGE

EXPENSE SUMMARY

TEMPLETON DEVELOPING MARKETS FUND -- CLASS 2

A. SHAREHOLDER TRANSACTION EXPENSES

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)*

Management Fees............................................. 1.25%
Rule 12b-1 Fees............................................. 0.25%
Other Expenses.............................................. 0.33%
----
TOTAL FUND OPERATING EXPENSES............................... 1.83%
</TABLE>

C. EXAMPLE

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -----------------------------------------------
<S> <C> <C> <C>

$19 $58 $99 $215
</TABLE>

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.

2TD-4

PAGE

FINANCIAL HIGHLIGHTS

TEMPLETON DEVELOPING MARKETS FUND -- CLASS 2

This table summarizes the financial history of Templeton Developing Markets
Fund -- Class 2. The information has been audited by McGladrey & Pullen, LLP,
the Trust's independent auditors. Their audit report covering the period shown
below, appears in the financial statements in the Trust's Annual Report for the
fiscal year ended December 31, 1997. The Trust's annual report also includes
more information about the Fund's performance. For a free copy, please call
1-800-774-5001.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997*
-----
<S> <C>
PER SHARE OPERATING PERFORMANCE -- CLASS 2
(for a share outstanding throughout the year)
NET ASSET VALUE, BEGINNING OF YEAR.......................... $ 9.85
- --------------------------------------------------------------------------
Income from investment operations:
Net investment income..................................... .04
Net realized and unrealized loss.......................... (3.27)
-------
TOTAL FROM INVESTMENT OPERATIONS........................ (3.23)
- --------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................................ $ 6.62
==========================================================================
TOTAL RETURN+............................................... (32.79)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $ 9,569
Ratios to average net assets:
Expenses.................................................. 1.77%**
Net investment income..................................... 1.48%**
Portfolio turnover rate..................................... 23.82%
Average commission rate paid++.............................. $ .0018
- --------------------------------------------------------------------------
</TABLE>

2TD-5

PAGE

INVESTMENT OBJECTIVE AND POLICIES

TEMPLETON INTERNATIONAL FUND

Portfolio Investments. In pursuit of its investment objective, the Fund will
invest at least 65% of its assets in securities of issuers in at least three
countries outside the United States. The Fund will invest predominantly in
equity securities issued by large-cap and mid-cap companies. Large-cap companies
are those which have market capitalizations of $5 billion or more; mid-cap
companies are those which have market capitalizations of $1 billion to $5
billion. It may also invest to a lesser degree in smaller capitalization
companies, which may be subject to different and greater risks. See
"Explanations of Risk Factors," below.

Other Investments. Although the Fund generally invests in equity securities,
including common stock and Depositary Receipts, it may also invest in preferred
stocks and certain debt securities such as convertible bonds. The Fund may
invest in medium and lower quality debt securities that are rated between BBB
and as low as D by Standard & Poor's ("S&P"), and between Baa and as low as C by
Moody's or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. As a fundamental policy (which may not be changed
without shareholder approval) the Fund will not invest more than 10% of its
total assets in defaulted debt securities, which may be illiquid. As an
operating policy, however, which may be changed without shareholder approval,
the Fund will not invest more than 5% of its total assets in lower-rated debt
securities. Lower-rated debt securities include securities rated lower than BBB
by S&P or Baa by Moody's, unrated securities of equivalent investment quality as
determined by the Investment Manager, and defaulted debt securities. Bonds rated
BB or lower, commonly referred to as "junk bonds," are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and may be in default. See
"Explanations of Risk Factors," and the Appendix, below.

RISK CONSIDERATIONS

TEMPLETON INTERNATIONAL FUND

Investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
Investments in foreign developing markets including certain Eastern European
countries and Russia, involve heightened risks related to the smaller size and
lesser liquidity of these markets. INVESTORS SHOULD CONSIDER CAREFULLY THE
SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE
HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. The Portfolio may also invest
to a lesser degree in smaller capitalization companies, which are subject to
different and greater risks. SEE "EXPLANATIONS OF RISK FACTORS."

2TI-1

PAGE

PORTFOLIO MANAGEMENT

TEMPLETON INTERNATIONAL FUND

Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Fund will pay its Investment Manager a monthly fee equal on an annual basis to
0.75% of the Fund's average daily net assets up to $200 million, 0.675% of such
net assets up to $1.3 billion, and 0.60% of such net assets over $1.3 billion.
For the fiscal year ended December 31, 1997, the Fund paid 0.63% and 1.13% of
the average daily net assets of its Class 2 shares in management fees and total
operating expenses (including management fees), respectively. See "Management of
the Trust" for more information about fees.

The following persons are in charge of the day-to-day management of the Fund's
portfolio.

PETER NORI
Vice President
Templeton Investment Counsel, Inc.

GARY MOTYL
Executive Vice President and Director
Templeton Investment Counsel, Inc.

EDWARD RAMOS
Vice President
Templeton Investment Counsel, Inc.

2TI-2

PAGE

EXPENSE SUMMARY

TEMPLETON INTERNATIONAL FUND -- CLASS 2

A. SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge (as a percentage of Offering Price)
Paid at purchase............................................ 0.00%
Paid at redemption.......................................... 0.00%
</TABLE>

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)*

<TABLE>
<S> <C>
Management Fees............................................. 0.69%
Rule 12b-1 Fees............................................. 0.25%
Other Expenses.............................................. 0.19%
----
TOTAL FUND OPERATING EXPENSES............................... 1.13%
</TABLE>

C. EXAMPLE

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -----------------------------------------------
<S> <C> <C> <C>

$12 $36 $62 $137
</TABLE>

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.

*Class 2 of the Fund has a distribution plan or "Rule 12b-1 plan" as described
under "Distribution Plan". Because Class 2 shares were not offered until May 1,
1997, figures (other than 12b-1 Fees") are estimates for 1998 based on the
historical expenses of the Fund's Class 1 shares for the fiscal year ended
December 31, 1997. Management Fees and Total Operating Expenses have been
restated to reflect the management fee schedule approved by shareholders and
effective May 1, 1997. Actual Management Fees and Total Fund Operating Expenses
before May 1, 1997 were lower. See the section "Management Fees" under
"Portfolio Management".

2TI-3

PAGE

FINANCIAL HIGHLIGHTS

TEMPLETON INTERNATIONAL FUND -- CLASS 2

This table summarizes the Templeton International Fund's financial history of
Templeton International Fund -- Class 2. The information has been audited by
McGladrey & Pullen, LLP, the Trust's independent auditors. Their audit report
covering the period shown below, appears in the financial statements in the
Trust's Annual Report for the fiscal year ended December 31, 1997. The Trust's
annual report also includes more information about the Fund's performance. For a
free copy, please call 1-800-774-5001.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997*
-----
<S> <C>
PER SHARE OPERATING PERFORMANCE -- CLASS 2
(for a share outstanding throughout the year)
NET ASSET VALUE, BEGINNING OF YEAR.......................... $ 18.40
- --------------------------------------------------------------------------
Income from investment operations:
Net investment income..................................... .07
Net realized and unrealized gain.......................... 1.67
-------
TOTAL FROM INVESTMENT OPERATIONS........................ 1.74
- --------------------------------------------------------------------------
Net asset value, end of year................................ $ 20.14
==========================================================================
TOTAL RETURN+............................................... 9.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $17,606
Ratios to average net assets:
Expenses.................................................. 1.13%**
Net investment income..................................... 1.14%**
Portfolio turnover rate..................................... 16.63%
Average commission rate paid++.............................. $ .0009
- --------------------------------------------------------------------------
</TABLE>

2TI-4

PAGE

INVESTMENT OBJECTIVE AND POLICIES

TEMPLETON STOCK FUND

The Templeton Stock Fund's investment objective is capital growth. There can be
no assurance that the Fund will achieve its investment objective.

Portfolio Investments. The Fund invests primarily (normally at least 65% of its
assets) in common and preferred stocks issued by companies, large and small, in
various nations throughout the world. The Fund will invest predominantly in
equity securities issued by large-cap and mid-cap companies. Large-cap companies
are those which have market capitalizations of $5 billion or more; mid-cap
companies are those which have market capitalizations of $1 billion to $5
billion. It may also invest to a lesser degree in smaller capitalization
companies, which may be subject to different and greater risks. See
"Explanations of Risk Factors," below. The Fund may also invest in securities
convertible into common stocks rated in any category by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's") and
securities which are unrated by any rating agency. See the Appendix for a
description of the S&P and Moody's ratings. Current income will usually be a
less significant factor in selecting investments for the Fund.

Other Portfolio Investments. Subject to its policy of investing 65% of its
total assets in equity securities (including Depositary Receipts), the Fund may
invest in debt obligations, including convertible debt obligations. These debt
obligations may include medium and lower quality debt securities that are rated
between BBB and as low as D by S&P, and between Baa and as low as C by Moody's
or, if unrated, are of equivalent investment quality as determined by the
Investment Manager. As a fundamental policy (which may not be changed without
shareholder approval) the Fund will not invest more than 10% of its total assets
in defaulted debt securities, which may be illiquid. As an operating policy,
however, which may be changed without shareholder approval, the Fund will not
invest more than 5% of its total assets in lower-rated debt securities.
Lower-rated debt securities include securities rated lower than BBB by S&P or
Baa by Moody's, unrated securities of equivalent investment quality as
determined by the Investment Manager, and defaulted debt securities. Bonds rated
BB or lower, commonly referred to as "junk bonds," are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and may be in default. See
"Explanations of Risk Factors," and the Appendix, below.

RISK CONSIDERATIONS

TEMPLETON STOCK FUND

Investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
Investments in foreign developing markets including certain Eastern European
countries and Russia, involve heightened risks related to the smaller size and
lesser liquidity of these markets. INVESTORS SHOULD CONSIDER CAREFULLY THE
SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE
HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. The Portfolio may also invest
to a lesser degree in

2TS-1

PAGE

smaller capitalization companies, which are subject to different and greater
risks than investments in large or mid-cap companies. SEE "EXPLANATIONS OF RISK
FACTORS."

PORTFOLIO MANAGEMENT

TEMPLETON STOCK FUND

Effective May 1, 1997 a new investment management agreement, approved by
shareholders at a special meeting held on February 10, 1997, provides that the
Fund will pay its Investment Manager a monthly fee equal on an annual basis to
0.75% of the Fund's average daily net assets up to $200 million, 0.675% of such
net assets up to $1.3 billion, and 0.60% of such net assets over $1.3 billion.
For the fiscal year ended December 31, 1997, the Fund paid 0.62% and 1.14% of
the average daily net assets of its Class 2 shares in management fees and total
operating expenses (including management fees) respectively. See "Management of
the Trust" for more information about fees.

The following persons are in charge of the day-to-day management of the Fund's
portfolio.

MARK R. BEVERIDGE
Vice President
Templeton Investment Counsel Inc.

WILLIAM T. HOWARD, JR.
Senior Vice President
Templeton Investment Counsel, Inc.

Mr. Howard holds a Master of Business Administration degree from Emory
University and a Bachelor of Arts degree from Rhodes College. He is a Chartered
Financial Analyst and a member of the Financial Analyst Society. Before joining
the Templeton Group in 1993, Mr. Howard was the international portfolio manager
and analyst with the State of Tennessee Consolidated Retirement System. He has
managed the Fund since 1996.

HOWARD J. LEONARD
Executive Vice President
Templeton Investment Counsel, Inc.

2TS-2

PAGE

EXPENSE SUMMARY

TEMPLETON STOCK FUND -- CLASS 2

A. SHAREHOLDER TRANSACTION EXPENSES

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)*

<TABLE>
<S> <C>
Management.................................................. 0.69%
Rule 12b-1 Fees............................................. 0.25%
Other Expenses.............................................. 0.19%
----
TOTAL FUND OPERATING EXPENSES............................... 1.13%
</TABLE>

C. EXAMPLE

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -----------------------------------------------
<S> <C> <C> <C>

$12 $36 $62 $137
</TABLE>

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of Class 2 Shares and are not directly charged
to your account. As noted above, these expenses do not include Contract
expenses.

*Class 2 of the Fund has a distribution plan or "Rule 12b-1 plan" as described
under "Distribution Plan". Because Class 2 shares were not offered until May 1,
1997, figures (other than "12b-1 Fees") are estimates for 1998 based on the
historical expenses of the Fund's Class 1 shares for the fiscal year ended
December 31, 1997. Management Fees and Total Operating Expenses have been
restated to reflect the management fee schedule approved by shareholders and
effective May 1, 1997. Actual Management Fees and Total Fund Operating Expenses
before May 1, 1997 were lower. See the section "Management Fees" under
"Portfolio Management".

2TS-3

PAGE

FINANCIAL HIGHLIGHTS

TEMPLETON STOCK FUND -- CLASS 2

This table summarizes the financial history of Templeton Stock Fund -- Class 2.
The information has been audited by McGladrey & Pullen, LLP, the Trust's
independent auditors. Their audit report covering the period shown below,
appears in the financial statements in the Trust's Annual Report for the fiscal
year ended December 31, 1997. The Trust's annual report also includes more
information about the Fund's performance. For a free copy, please call
1-800-774-5001.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997*
-----
<S> <C>
PER SHARE OPERATING PERFORMANCE -- CLASS 2
(for a share outstanding throughout the year)
NET ASSET VALUE, BEGINNING OF YEAR.......................... $ 21.62
- --------------------------------------------------------------------------
Income from investment operations:
Net investment income..................................... .06
Net realized and unrealized gain.......................... 1.47
--------
TOTAL FROM INVESTMENT OPERATIONS........................ 1.53
- --------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................................ $ 23.15
==========================================================================
TOTAL RETURN+............................................... 7.08%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $ 16,414
Ratios to average net assets:
Expenses.................................................. 1.14%**
Net investment income..................................... .75%**
Portfolio turnover rate..................................... 25.82%
Average commission rate paid++.............................. $ .0077
- --------------------------------------------------------------------------
</TABLE>

* For the period May 1, 1997 (effective date) to December 31, 1997.
** Annualized.
+ Total return does not include deductions at the Fund or contract level for
cost of insurance charges, premium load, administrative charges, mortality
and expense risk charges or other charges that may be incurred under variable
annuity and variable life insurance contracts for which the Fund serves as an
underlying investment vehicle. Inclusion of such charges would reduce the
total return figures for all periods shown. Total return is not annualized.
++ Relates to purchases and sales of equity securities.

2TS-4

PAGE

EXPLANATIONS OF SECURITIES AND INVESTMENT TECHNIQUES

BORROWING

CONVERTIBLE SECURITIES

PAGE

Enhanced or synthetic convertible securities are described in more detail in the
SAI.

DEBT SECURITIES

Bank Obligations. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange normally drawn by an importer or exporter to pay for specific
merchandise and which are "accepted" by a bank, meaning, in effect, that the
bank unconditionally agrees to pay the face value of the instrument on maturity.
For Funds permitted to invest in bank obligations, such obligations include
dollar-denominated certificates of deposit and bankers' acceptances of foreign
and domestic banks having total assets in excess of $1 billion, certificates of
deposit of federally insured savings and loan associations having total assets
in excess of $1 billion, or cash and time deposits with banks in the currency of
any major nation.

Collateralized Mortgage Obligations ("CMOs"). CMOs are fixed-income securities
collateralized by pools of mortgage loans created by commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers,
and other issuers in the United States. In effect, CMOs "pass-through" the
monthly payments made by individual borrowers on their mortgage loans. Timely
payment of interest and principal (but not the market value) of these pools is
supported by various forms of insurance or guarantees issued by U.S. Government
agencies, private issuers, and mortgage poolers; however, the obligation itself
is not guaranteed. If the collateral securing the obligations is insufficient to
make payment on the obligation, a holder could sustain a loss. In addition, a
Fund may buy CMOs without insurance or guarantees if, in the opinion of the
Investment Manager, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of a Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are

PAGE

Commercial Paper. Investments in commercial paper are generally limited to
obligations rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P or, if not
rated by Moody's or S&P, issued by companies having an outstanding debt issue
currently rated Aaa or Aa by Moody's or AAA or AA by S&P. Certain Funds may also
invest in lower rated commercial paper to the extent permitted by their policies
on lower rated debt obligations generally. See the Appendix for a description of
commercial paper ratings.

U.S. Government Securities. U.S. Government securities are obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. Some
U.S. Government securities, such as Treasury bills and bonds, which are direct
obligations of the U.S. Treasury, and Government National Mortgage Association
("GNMA") certificates, the principal and interest of which the Treasury
guarantees, are supported by the full faith and credit of the Treasury; others,
such as those of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others are
supported only by the credit of the instrumentality. GNMA certificates are
securities representing part ownership of a pool of mortgage loans on which
interest and principal payments are guaranteed by the Treasury. Principal is
repaid monthly over the term of the loan. Expected payments may be delayed due
to the delays in registering newly traded certificates. The mortgage loans will
be subject to normal principal amortization and may be prepaid prior to
maturity. Reinvestment of prepayments may occur at higher or lower rates than
the original yield on the certificates.

DEPOSITARY RECEIPTS

DIVERSIFICATION

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES

PAGE

FUTURES CONTRACTS

LOANS OF PORTFOLIO SECURITIES

PORTFOLIO TURNOVER

PAGE

rate. Unless otherwise indicated in the discussion for each Fund, it is
anticipated that each Fund's annual turnover rate generally will not exceed
100%.

REPURCHASE AND REVERSE REPURCHASE AGREEMENTS

Certain Funds authorized to do so may also enter into reverse repurchase
agreements, which may involve additional risks. See the SAI for details.

RESTRICTED SECURITIES

TEMPORARY INVESTMENTS

In any period of market weakness or of uncertain market or economic conditions
or while awaiting suitable investment opportunities, each Fund may establish a
temporary defensive position. These Funds may therefore invest up to 100% of
their respective total assets in the following money market securities,
denominated in U.S. dollars or in the currency of any foreign country, issued by
entities organized in the United States or any foreign country: short-term (less
than twelve months to maturity) and medium-term (not greater than five years to
maturity) obligations issued or guaranteed by the U.S. Government or the
governments of foreign countries, their agencies or instrumentalities; finance
company and corporate commercial paper, and other short-term corporate
obligations, in each case rated Prime-1 by Moody's or A or better by S&P or, if
unrated, of comparable quality as determined by the Investment Manager;
obligations (including certificates of deposit, time deposits and bankers'
acceptances) of banks; and repurchase agreements with banks and broker-dealers
with respect to such securities.

TRADE CLAIMS

PAGE

is speculative and carries a high degree of risk. There can be no guarantee that
the debt issuer will ever be able to satisfy the obligation on the trade claim.
Trade claims are not regulated by federal securities laws or the SEC. Currently,
trade claims are regulated primarily by bankruptcy laws. Because trade claims
are unsecured, holders may have a lower priority in terms of payment than most
other creditors in a bankruptcy proceeding.

WARRANTS

WHEN-ISSUED SECURITIES

EXPLANATION OF RISK FACTORS

FOREIGN SECURITIES

PAGE

foreign economic assistance may be greater than in developed countries.
Investments in companies domiciled in developing countries therefore may be
subject to potentially higher risks than investments in developed countries.

As a non-fundamental policy, if a Fund it permitted to invest in Russian
securities, it will limit such to 5% of its total assets. Russian securities
involve additional significant risks, including political and social uncertainty
(for example, regional conflicts and risk of war), currency exchange rate
volatility, pervasiveness of corruption and crime in the Russian economic
system, delays in settling portfolio transactions and risk of loss (including
risk of total loss) arising out of Russia's system of share registration and
custody. For more information on these risks and other risks associated with
Russian securities, please see "Investment Objectives and Policies -- Risk
Factors" in the SAI.

PAGE

Hong Kong reverted to the sovereignty of China on July 1, 1997. As with any
major political transfer of power, this could result in political, social,
economic, market or other developments in Hong Kong, China or other countries
that could affect the value of a Fund's investments.

CLOSED-END INVESTMENT COMPANIES

LOWER RATED DEBT OBLIGATIONS

Asset Composition Table. If a Fund had a 12 month dollar weighted average of
more than 5% of its assets invested in debt obligations below investment grade
in the most recent fiscal year, an Asset Composition Table is included under the
individual Fund's "Risk Considerations," above.

SMALL CAPITALIZATION ISSUERS

FORWARD, OPTIONS AND FUTURES CONTRACTS

PAGE

PURCHASE OF SHARES

Class 2 shares of each Fund are offered on a continuous basis at their net asset
value only to separate accounts ("Separate Accounts") of insurance companies
("Insurance Companies") to serve as the underlying investment vehicle for both
variable annuity and variable life insurance contracts ("Contracts").
Individuals may not purchase these shares directly from each Fund. Please read
the prospectus of the Insurance Company Separate Account for more information on
the purchase of each Fund's Class 2 shares.

Trust shares may be sold to and held by Insurance Company separate accounts
funding both variable annuity and variable life insurance contracts issued by
both affiliated and unaffiliated Insurance Companies. Therefore, the Trust's
Board of Trustees monitors events in order to identify any material conflicts
between variable annuity contract owners and variable life contract owners
and/or between Separate Accounts of different Insurance Companies, as the case
may be, and will determine what action, if any, should be taken in the event of
such a conflict. Although the Trust does not currently foresee any disadvantages
to contract owners, an irreconcilable material conflict may conceivably arise
between contract owners of different separate accounts investing in the Funds
due to differences in tax treatment, the management of investments, or other
considerations. If such a conflict were to occur, one of the Separate Accounts
might withdraw its investment in a Fund. This might force the Fund to sell
portfolio securities at disadvantageous prices.

Initial and subsequent payments allocated to the Class 2 shares of a Fund may be
subject to limits applicable in the Contract purchased.

NET ASSET VALUE

REDEMPTION OF SHARES

Please refer to the prospectus of your Insurance Company's Separate Account for
information on how to redeem shares of a Fund.

PAGE

EXCHANGES

Class 2 shares of a Fund may be exchanged for shares of other funds or classes
available as investment options under the Contracts subject to the terms of the
Contract prospectus. Exchanges are treated as a redemption of shares of one
class or Fund and a purchase of shares of one or more of the other classes or
funds and are effected at the respective net asset value per share of the class
of each fund on the date of the exchange. Please refer to the prospectus of your
Insurance Company's Separate Account for more information concerning exchanges.

MANAGEMENT OF THE TRUST

THE BOARD

INVESTMENT MANAGERS

ADMINISTRATIVE SERVICES

Templeton Funds Annuity Company ("Administrator"), 700 Central Avenue, St.
Petersburg, Florida 33701, telephone (800) 774-5001, provides certain
administrative services and facilities for each Fund.

PORTFOLIO TRANSACTIONS

DISTRIBUTOR

The Trust's principal underwriter is Franklin Templeton Distributors, Inc., 100
Fountain Parkway, St. Petersburg, Florida 33716-1205, toll free telephone (800)
292-9293.

DISTRIBUTION PLAN

Class 2 of each Fund has a distribution plan or "Rule 12b-1 Plan," under which
it may pay Distributors, the Insurance Companies or others for activities
primarily intended to sell Class 2 shares or Contracts offering the Class 2
shares. Payments made under a Plan may be used for, among other things, the
printing of prospectuses and reports used for sales purposes, preparing and
distributing sales literature and related expenses, advertisements, education of
contract owners or dealers and their representatives, and other distribution
related expenses including a prorated portion of Distributors' or the Insurance
Companies' overhead expenses attributable to the distribution of these

PAGE

Contracts. Payments made under a Plan may also be used to pay Insurance
Companies, dealers or others for, among other things, services fees as defined
under NASD rules, furnishing personal services or such other enhanced services
as a Fund or a Contract may require, or maintaining customer accounts and
records. Payments under each Fund's Class 2 Rule 12b-1 Plan may not exceed 0.25%
(0.15% for the Bond Fund) per year of Class 2's average daily net assets. Please
see the SAI for additional information.

DIVIDENDS AND DISTRIBUTIONS

Each Fund normally intends to pay annual dividends on its Class 2 shares
representing substantially all of its net investment income and to distribute
annually any net realized capital gains. Dividends and capital gains are
calculated and distributed the same way for each Fund and each class of shares,
except for the Money Market Fund. The amount of any income dividends per share
will differ for each class, however, generally due to the difference in the
applicable Rule 12b-1 fees. Class 1 shares are not subject to Rule 12b-1 fees.

FEDERAL INCOME TAX STATUS

Generally, all securities of the same issuer are treated as a single investment.
For this purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
securities issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. Government or an instrumentality of the U.S. Government are
treated as an U.S. Government security for this purpose.

PAGE

OTHER INFORMATION

THE TRUST'S ORGANIZATION

Each share of each class of a Fund will be given one vote, unless a different
allocation of voting rights is required under applicable law for a mutual fund
that is an investment medium for variable life insurance or annuity contracts.
The Separate Accounts, as shareholders of the Trust, are entitled to vote the
Shares of the Trust at any regular and special meeting of the shareholders of
the Trust. However, the Separate Accounts will generally vote their shares in
accordance with instructions received from owners of the variable contracts. See
the Separate Account prospectus for more information regarding the pass-through
of these voting rights.

PAGE

PERFORMANCE INFORMATION

YEAR 2000

STATEMENTS AND REPORTS

PAGE

APPENDIX

DESCRIPTION OF BOND RATINGS

MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")

Caa -- Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.

Ca -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.

C -- Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.

STANDARD & POOR'S RATINGS SERVICE ("S&P")

AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.

A -- Bonds rated A have 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.

PAGE

D -- Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.

Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

DESCRIPTION OF COMMERCIAL PAPER RATINGS

MOODY'S

P-1 (Prime-1): Superior capacity for repayment.

P-2 (Prime-2): Strong capacity for repayment.

S&P

A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.

A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.

PAGE

TEMPLETON VARIABLE
PRODUCTS SERIES FUND

STATEMENT OF
ADDITIONAL INFORMATION [FRANKLIN TEMPLETON LOGO]
500 EAST BROWARD BOULEVARD

MAY 1, 1998 FORT LAUDERDALE, FLORIDA 33394-3091
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
Introduction............................ 1
Investment Objectives and Policies...... 2
Investment Restrictions................. 13
Officers and Trustees................... 15
Investment Management and Other
Services.............................. 20
Brokerage Allocation.................... 22
Summary of Code of Ethics............... 24
Purchase, Redemption and Pricing of
Shares................................ 24
Redemptions in Kind..................... 26
Class 2 Distribution Plan............... 26
Tax Status.............................. 26
Description of Shares................... 29
Performance Information................. 29
Financial Statements.................... 31
</TABLE>

INTRODUCTION Templeton Variable Products Series Fund (the "Trust") was organized
as a Massachusetts business trust on February 25, 1988 and is registered under
the Investment Company Act of 1940 (the "1940 Act") as an open-end management
investment company. The Trust currently has ten diversified series of Shares:
Templeton Money Market ("Money Market") Fund, Templeton Bond ("Bond") Fund,
Templeton Stock ("Stock") Fund, Templeton Asset Allocation ("Asset Allocation")
Fund, Templeton Developing Markets ("Developing Markets") Fund, Franklin Growth
Investments ("Growth") Fund, Mutual Discovery Investments ("Mutual Discovery")
Fund, Mutual Shares Investments ("Mutual Shares") Fund, Franklin Small Cap
Investments Fund ("Small Cap") and Templeton International ("International")
Fund (collectively, the "Funds"). Each Fund, except the Money Market Fund, has
two classes of shares, Class 1 and Class 2. All shares of the Funds are sold
only to insurance company separate accounts to serve as the investment vehicle
for certain variable annuity and variable life insurance contracts. Not all of
the Funds or Classes are available as an investment vehicle for all contracts.
Please refer to the contract prospectus for information concerning the
availability of each class of each Fund.

THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") IS NOT A PROSPECTUS. IT
CONTAINS INFORMATION IN ADDITION TO, AND IN MORE DETAIL THAN SET FORTH IN, THE
PROSPECTUSES. THIS SAI IS INTENDED TO PROVIDE THE PROSPECTIVE INVESTOR WITH
ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE TRUST AND
THE FUNDS AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE FUND AND
CLASS IN WHICH YOU MAY BE INTERESTED.

MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
- ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
- ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.

PAGE

INVESTMENT OBJECTIVES AND POLICIES
- ---------------------------------------------------------

INVESTMENT POLICIES. The investment objective and policies of each Fund are
described in each Fund's Prospectus under the heading "Investment Objective and
Policies."

CONVERTIBLE SECURITIES. Certain Funds may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Similar to a common
stock, the value of a convertible security tends to increase as the market value
of the underlying stock rises, and it tends to decrease as the market value of
the underlying stock declines. Because its value can be influenced by both
interest rate and market movements, a convertible security is not as sensitive
to interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.

The convertible debt obligations in which the Funds may invest are subject to
the same rating criteria and investment policies as the Funds' investments in
debt obligations. The issuer of a convertible security may be important in
determining the security's market value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only after
a specified date and under circumstances established at the time the security is
issued.

Unlike convertible debt obligations, however, convertible preferred stocks are
equity securities. As with common stocks, preferred stocks are subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for the Funds' financial reporting, credit rating,
and investment limitation purposes.

DEBT SECURITIES. Each Fund may invest in debt securities to the extent provided
in the Fund's prospectus. The market value of debt securities generally varies
in response to changes in interest rates and the financial condition of each
issuer. During periods of declining interest rates, the value of debt securities
generally increases. Conversely, during periods of rising interest rates, the
value of such securities generally declines. These changes in market value will
be reflected in a Fund's net asset value.

Bonds rated Ba or lower by Moody's Investors Service, Inc. ("Moody's") or BB or
lower by Standard & Poor's Ratings Service ("S&P") are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and may be in default. Bonds which
are rated C by Moody's are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing. Bonds rated C by S&P are obligations on which no interest
is being paid. For a full description of each debt securities rating, see the
Appendix.

Although they may offer higher yields than do higher rated securities, low rated
and unrated debt securities generally involve greater volatility of price and
risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated debt securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets for
particular securities may diminish a Fund's ability to sell the securities at
fair value either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the

PAGE

creditworthiness of the issuer. Reduced secondary market liquidity for certain
low rated or unrated debt securities may also make it more difficult for a Fund
to obtain accurate market quotations for the purposes of valuing a Fund's
portfolio. Market quotations are generally available on many low rated or
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.

Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of a Fund to achieve its investment
objective may, to the extent of investment in low rated debt securities, be more
dependent upon such credit worthiness analysis than would be the case if the
Fund were investing in higher rated securities.

Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, a Fund may incur additional expenses to seek
recovery.

DEPOSITARY RECEIPTS. Certain Funds may purchase sponsored or unsponsored
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
Global Depositary Receipts ("GDRs") (collectively, "Depositary Receipts"). ADRs
are typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by United States ("U.S.") banks or trust companies, and evidence
ownership of underlying securities issued by either a foreign or a U.S.
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the U.S. Depositary Receipts may
not necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.

In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Funds' investment policies, the Funds' investments in Depositary Receipts will
be deemed to be investments in the underlying securities.

DIVERSIFICATION. Each Fund intends to diversify its investments to meet the
requirements under Section 5 of the 1940 Act, under Section 851 of the Code
relating to regulated investment companies, and under Section 817 of the Code
relating to the treatment of variable contracts issued by insurance companies.

As diversified funds under the 1940 Act, each Fund may not, with respect to 75%
of its total assets, purchase the securities of any one issuer (except U.S.
Government Securities) if more than 5% of the value of the Fund's assets would
be invested in such issuer, or purchase more than 10% of any class of securities
of any one company, including more than 10% of its outstanding voting securities
(except for investments in obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities).

In order to comply with the diversification requirements under section 851 of
the Code, each Fund will limit its investments so that, at the close of each
quarter of the taxable year, (i) not more than 25% of the market value of each
Fund's total assets will be invested in the securities of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities of
a single issuer and each Fund will not own more than 10% of the outstanding
voting securities

PAGE

of a single issuer. A Fund's investments in U.S. Government Securities are not
subject to these limitations.

In order to comply with the Code's diversification requirements under Section
817, each Fund will diversify its investments such that (i) no more than 55% of
the Fund's assets is represented by any one investment; (ii) no more than 70% of
the Fund's assets is represented by any two investments; (iii) no more than 80%
of the Fund's assets is represented by any three investments; and (iv) no more
than 90% of the Fund's assets is represented by any four investments. In the
case of Funds investing in obligations of U.S. government agencies or
instrumentalities, each agency or instrumentality is treated as a separate
issuer for purposes of the above rules.

FOREIGN SECURITIES -- GENERAL. An investor should consider carefully the risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. These risks are often heightened for investments in developing
markets, including certain Eastern European countries. There is the possibility
of expropriation, nationalization or confiscatory taxation, taxation of income
earned in foreign nations (including, for example, withholding taxes on interest
and dividends) or other taxes imposed with respect to investments in foreign
nations, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), foreign investment controls on daily
stock movements, default in foreign government securities, political or social
instability or diplomatic developments which could affect investments in
securities of issuers in foreign nations. In addition, in many countries there
is less publicly available information about issuers than is available in
reports about companies in the U.S. Foreign companies are not generally subject
to uniform accounting and auditing and financial reporting standards, and
auditing practices and requirements may not be comparable to those applicable to
U.S. companies. Further, the Fund may encounter difficulties or be unable to
vote proxies, exercise shareholder rights, pursue legal remedies, and obtain
judgments in foreign courts. Also, some countries may withhold portions of
interest and dividends at the source. These considerations generally are more of
a concern in developing countries, where the possibility of political
instability (including revolution) and dependence on foreign economic assistance
may be greater than in developed countries. Investments in companies domiciled
in developing countries therefore may be subject to potentially higher risks
than investments in developed countries. Brokerage commissions, custodial
services and other costs relating to investment in foreign countries are
generally more expensive than in the U.S.

Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.

In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. There is an increased risk, therefore, of uninsured loss due to
lost, stolen or counterfeit stock certificates. In addition, the foreign
securities markets of any of the countries in which the Fund may invest may also
be smaller, less liquid, and subject to greater price volatility than those in
the U.S. The Fund may invest in Eastern European countries, which involves
special risks that are described under "Investment Objectives and
Policies -- Risk Factors" in the SAI.

Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries.

Foreign ownership limitations also may be imposed by the charters of individual
companies in developing countries to prevent, among other concerns, violation of
foreign investment limitations.

Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.

Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may con-

PAGE

tinue to be adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade. These economies also have
been and may continue to be adversely affected by economic conditions in the
countries with which they trade.

FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign
currency exchange rate risks, certain Funds may enter into forward foreign
currency exchange contracts, purchase put or call options on foreign currencies,
or enter into foreign currency futures contracts, as described below. The Funds
may also conduct their foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market.

A Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. A Fund may enter into a forward contract,
for example, when it enters into a contract for the purchase or sale of a
security denominated in a foreign currency in order to "lock in" the U.S. dollar
price of the security. In addition, for example, when a Fund believes that a
foreign currency may suffer a substantial decline against the U.S. dollar, it
may enter into a forward contract to sell an amount of that foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency, or when a Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that foreign currency for a fixed dollar amount.
This second investment practice is generally referred to as "cross-hedging."
Because in connection with a Fund's forward foreign currency transactions an
amount of the Fund's assets equal to the amount of the purchase will be held
aside or segregated to be used to pay for the commitment, a Fund will always
have cash or liquid securities available sufficient to cover any commitments
under these contracts or to limit any potential risk. The segregated account
will be marked-to-market on a daily basis. While these contracts are not
presently regulated by the Commodity Futures Trading Commission ("CFTC"), the
CFTC may in the future assert authority to regulate forward contracts. In such
event, a Fund's ability to utilize forward contracts in the manner set forth
above may be restricted. Forward contracts may limit potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for a Fund than if it had not engaged in such contracts.

As is the case with other kinds of options, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received, and a Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against fluctuation
in exchange rates, although, in the event of rate movements adverse to a Fund's
position, the Fund may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written or purchased by a
Fund will be traded on U.S. and foreign exchanges or over-the-counter.

A Fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures") only to hedge
against anticipated future changes in exchange rates which otherwise might
adversely affect the value of the Fund's portfolio securities or adversely
affect the prices of securities that a Fund intends to purchase at a later date.
The successful use of foreign currency futures will usually depend on the
ability of a Fund's Investment Manager to forecast currency exchange rate
movements correctly. Should exchange rates move in an unexpected manner, a Fund
may not achieve the anticipated benefits of foreign currency futures or may
realize losses.

FUTURES CONTRACTS. Certain Funds may purchase and sell futures contracts. These
may include contracts for future delivery of debt securities (such as U.S.
treasury bonds, notes and bills, commercial paper and certificates of deposit)
or currencies, and financial futures contracts on interest rates, financial
indices or stock indices. (See also "Foreign Currency Hedging Transactions," and
"Stock Index Futures Contracts").

As long as required by regulatory authorities, these Funds will limit their use
of futures contracts to hedging transactions in order to avoid being a commodity
pool. For example, they might use futures contracts to hedge against anticipated
changes in interest rates that might adversely affect either the value of the
Funds' securities or the price of the

PAGE

securities which the Funds intend to purchase. The Funds' hedging may include
sales of futures contracts as an offset against the effect of expected increases
in interest rates and purchases of futures contracts as an offset against the
effect of expected declines in interest rates. Although other techniques could
be used to reduce the Funds' exposure to interest rate fluctuations, they may be
able to hedge their exposure more effectively and perhaps at a lower cost by
using futures contracts.

At the time a Fund purchases or sells a futures contract, it is required to
deposit with its custodian (or broker, if legally permitted) a specified amount
of cash or liquid securities ("initial margin"). The margin required for a
futures contract is set by the exchange or board of trade on which the contract
is traded and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith deposit on the
futures contract which is returned to the Fund upon termination of the contract,
assuming all contractual obligations have been satisfied. The Funds expect to
earn interest income on initial margin deposits. A futures contract held by a
Fund is valued daily at the official settlement price of the exchange on which
it is traded. Each day the Funds pay or receive cash, called "variation margin,"
equal to the daily change in value of the futures contract. This process is
known as "marking-to-market." Variation margin does not represent a borrowing or
loan by a Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In computing
daily net asset value, a Fund will mark-to-market its open futures positions. In
addition, the Fund must deposit in a segregated account additional cash or
liquid securities to ensure the futures contracts are unleveraged. The value of
assets held in the segregated account must be equal to the daily market value of
all outstanding futures contracts less any amounts deposited as margin.

Although some financial futures contracts call for making or taking delivery of
the underlying securities, in most cases these obligations are closed out before
the settlement date. The closing of a contractual obligation is accomplished by
purchasing or selling an identical off setting futures contract. Other financial
futures contracts by their terms call for cash settlements.

ILLIQUID SECURITIES. Generally an "illiquid security" is any security that
cannot be disposed of promptly and in the ordinary course of business at
approximately the amount at which the Fund has valued the instrument. Subject to
this limitation, the Board has authorized certain Funds to invest in restricted
securities where such investment is consistent with the Fund's investment
objective and has authorized such securities to be considered to be liquid to
the extent the Fund's Investment Manager determines that there is a liquid
institutional or other market for such securities for example, restricted
securities which may be freely transferred among qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended, and for
which a liquid institutional market has developed. The Board will review any
determination by the Fund's Investment Managers to treat a restricted security
as liquid on a regular basis, including the Investment Managers' assessment of
current trading activity and the availability of reliable price information. In
determining whether a restricted security is properly considered a liquid
security, the Funds' Investment Managers and the Board will take into account
the following factors: (i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security and the
number of other potential purchasers; (iii) dealer undertakings to make a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer). To the extent a Fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in the applicable Fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts.

OPTIONS ON SECURITIES OR INDICES. As indicated in the prospectus, certain Funds
may write covered call and put options and purchase call and put options on
securities or stock indices that are traded on U.S. and foreign exchanges and in
the over-the-counter markets.

An option on a security is a contract that gives the purchaser of the option, in
return for the premium paid, the right to buy a specified security (in the case
of a call option) or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during the term of the
option. An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.

A Fund may write a call or put option only if the option is "covered". A call
option on a security written by the Fund is "covered" if the Fund owns the

PAGE

underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option on a security is also "covered" if the Fund holds a call on the same
security and in the same principal amount as the call written where the exercise
price of the call held (1) is equal to or less than the exercise price of the
call written or (2) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash or liquid securities in a
segregated account with its custodian. A put option on a security written by the
Fund is "covered" if the Fund maintains cash or liquid securities with a value
equal to the exercise price in a segregated account with its custodian, or else
holds a put on the same security and in the same principal amount as the put
written where the exercise price of the put held is equal to or greater than the
exercise price of the put written.

Each Fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of its Investment Manager, are
expected to be similar to those of the index, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where a Fund covers a call option
on a stock index through ownership of securities, such securities may not match
the composition of the index. In that event, a Fund will not be fully covered
and could be subject to risk of loss in the event of adverse changes in the
value of the index. A Fund will cover put options on stock indices that it
writes by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded, and applicable laws and regulations.

A Fund will receive a premium from writing a put or call option, which increases
the Fund's gross income in the event the option expires unexercised or is closed
out at a profit. If the value of a security or an index on which the Fund has
written a call option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the portfolio securities being
hedged. If the value of the underlying security or index rises, however, the
Fund will realize a loss in its call option position, which will reduce the
benefit of any unrealized appreciation in the Fund's investments. By writing a
put option, the Fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase the Fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.

A Fund may also purchase put options to hedge its investments against a decline
in value. By purchasing a put option, the Fund will seek to offset a decline in
the value of the portfolio securities being hedged through appreciation of the
put option. If the value of the Fund's investments does not decline as
anticipated, or if the value of the option does not increase, the Fund's loss
will be limited to the premium paid for the option plus related transaction
costs. The success of this strategy will depend, in part, on the correlation
between the changes in value of the underlying security or index and the changes
in value of the Fund's security holdings being hedged.

A Fund may purchase call options on individual securities to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. Similarly, the Fund may purchase call options on a securities index to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options,
the Fund will bear the risk of losing all or a portion of the premium paid if
the value of the underlying security or index does not rise.

There can be no assurance that a liquid market will exist when the Fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although the Fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, the Fund may experience losses in some cases as a result of
such inability.

REVERSE REPURCHASE AGREEMENTS. Certain Funds may enter into reverse repurchase
agreements with banks and broker-dealers. Reverse repurchase agreements involve
sales by a Fund of portfolio assets concurrently with an agreement by the Fund

PAGE

to repurchase the same assets at a later date at a fixed price. During the
reverse repurchase agreement period, the Fund continues to receive dividend
payments on these securities.

When effecting reverse repurchase transactions, the Fund will establish a
segregated account with its custodian bank in which it will maintain cash or
liquid securities equal in value to its obligations with respect to reverse
repurchase agreements. Reverse repurchase agreements involve the risk that the
market value of the securities retained by a Fund may decline below the price of
the securities the Fund has sold but is obligated to repurchase under the
agreement. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, a Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. Reverse repurchase agreements are considered
borrowings by the Funds and as such are subject to the investment limitations
discussed under "Fundamental Investment Restrictions." These transactions may
increase the volatility of a Fund's income or net asset value. The Fund carries
the risk that any securities purchased with the proceeds of the transaction will
depreciate or not generate enough income to cover the Fund's obligations under
the reverse repurchase transaction. These transactions also increase the
interest and operating expenses of a fund.

SHORT SALES. Certain Funds may make short sales of securities as indicated in
the prospectus. A short sale is a transaction in which the Fund sells a security
it does not own in anticipation that the market price of that security will
decline. Each Fund expects to make short sales as a form of hedging to offset
potential declines in long positions in similar securities, to maintain
portfolio flexibility, and for profit.

When a Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.

The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed. The
Fund will also be required to deposit similar collateral with its custodian to
the extent, if any, necessary so that the value of both collateral deposits in
the aggregate is at all times equal to at least 100% of the current value of the
security sold short.

If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a gain. Any gain
will be decreased, and any loss increased, by the transaction costs described
above. Although the Fund's gain is limited to the price at which it sold the
security short, its potential loss is theoretically unlimited.

STOCK INDEX FUTURES CONTRACTS. Certain Funds may buy and sell index futures
contracts with respect to any stock index, and certain Funds may buy or sell
futures contracts with respect to any bond index, on a recognized stock exchange
or board of trade. These Funds may invest in index futures contracts for hedging
purposes only, and not for speculation. A Fund may engage in such transactions
only to an extent that the total contract value of the futures contracts do not
exceed 20% of the Fund's total assets at the time when such contracts are
entered into. Successful use of stock index futures is subject to the ability of
the Investment Managers to predict correctly movements in the direction of the
stock markets. No assurance can be given that the Investment Managers' judgment
in this respect will be correct.

A stock index futures contract is a contract to buy or sell units of a stock
index at a specified future date at a price agreed upon when the contract is
made. The value of a unit is the current value of the stock index. For example,
the Standard & Poor's Stock Index ("S&P 500 Index" or "Index") is composed of
500 selected common stocks, most of which are listed on the New York Stock
Exchange ("NYSE"). The S&P 500 Index assigns a relative weighing to the value of
one share of each of these 500 common stocks included in the Index, and the
Index fluctuates with changes in the market values of the shares of those common
stocks. In the case of the S&P 500 Index, contracts are to buy or sell 500
units. Thus, if the value of the Index were $150, one contract would be worth
$75,000 (500 units x $150). The stock index futures contract specifies that no
delivery of the actual stocks making up the index will take place. Instead,
settlement in cash must occur upon the termination of the contract, with the
settlement being the difference between the contract price and the actual level
of the stock index at

PAGE

the expiration of the contract. For example, if a Fund enters into a futures
contract to buy 500 units of the Index at a specified future date at a contract
price of $150 and the Index is at $154 on that future date, the Fund will gain
$2,000 (500 units x gain of $4 per unit). If a Fund enters into a futures
contract to sell 500 units of the stock index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on the future date, the
Fund will lose $2,000 (500 units x loss of $4 per unit).

During or in anticipation of a period of market appreciation, a Fund may enter
into a "long hedge" of common stock which it proposes to add to its portfolio by
purchasing stock index futures for the purpose of reducing the effective
purchase price of such common stock. To the extent that the securities which a
Fund proposes to purchase change in value in correlation with the stock index
contracted for, the purchase of futures contracts on that index would result in
gains to the Fund which could be offset against rising prices of such common
stock.

During or in anticipation of a period of market decline, A Fund may "hedge"
common stock in its portfolio by selling stock index futures for the purpose of
limiting the exposure of its portfolio to such decline. To the extent that a
Fund's portfolio of securities changes in value in correlation with a given
stock index, the sale of futures contracts on that index could substantially
reduce the risk to the portfolio of a market decline and, by so doing, provide
an alternative to the liquidation of securities positions in the portfolio with
resultant transaction costs.

STRUCTURED INVESTMENTS. Included among the issuers of debt securities in which
the Funds (except the Money Market Fund) may invest are entities organized and
operated solely for the purpose of restructuring the investment characteristics
of various securities. These entities are typically organized by investment
banking firms which receive fees in connection with establishing each entity and
arranging for the placement of its securities. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Investments") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Investments to
create securities with different investment characteristics such as varying
maturities, payment priorities or interest rate provisions; the extent of the
payments made with respect to Structured Investments is dependent on the extent
of the cash flow on the underlying instruments. Because Structured Investments
of the type in which such Funds anticipate investing typically involve no credit
enhancement, their credit risk will generally be equivalent to that of the
underlying instruments.

Certain Funds are permitted to invest in a class of Structured Investments that
is either subordinated or unsubordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments. Although a
Fund's purchase of subordinated Structured Investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the limitations
placed on the extent of a Fund's assets that may be used for borrowing
activities.

Certain issuers of Structured Investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a Fund's investment in these
Structured Investments may be limited by the restrictions contained in the 1940
Act. Structured Investments are typically sold in private placement
transactions, and there currently is not an active trading market for Structured
Investments. To the extent such investments are illiquid, they will be subject
to a Fund's restrictions on investments in illiquid securities.

RISK FACTORS

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

Each Fund, except the Money Market Fund, has the right to purchase securities in
any foreign country, developed or developing, if they are listed on an exchange,
as well as a limited right to purchase such securities if they are unlisted.
Investors should consider carefully the risks involved in securities of
companies and governments of foreign nations, which are in addition to the usual
risks inherent in domestic investments.

There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting, auditing and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to U.S. companies. Foreign markets have
substantially less volume than the NYSE, and securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. A

PAGE

Fund, therefore, may encounter difficulty in obtaining market quotations for
purposes of valuing its portfolio and calculating its net asset value. Although
the Funds (except the Money Market Fund) may invest up to 15% of their total
assets in unlisted securities or securities with a limited trading market, in
the opinion of management such securities do not present a significant liquidity
problem.

Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the U.S., are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the U.S.

Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Funds' investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.

In addition, many countries in which the Funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.

Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. In the event of
such expropriation, the Funds could lose a substantial portion of any
investments they have made in the affected countries.

Further, no accounting standards exist in Eastern European countries. Finally,
even though certain Eastern European currencies may be convertible into U.S.
dollars, the conversion rates may be artificial to the actual market values and
may be adverse to the Funds' Shareholders.

Certain Eastern European countries, which do not have market economies, are
characterized by an absence of developed legal structures governing private and
foreign investments and private property. Certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment of foreign persons in a particular company, or limit the investment
of foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals.

Authoritarian governments in certain Eastern European countries may require that
a governmental or quasi-governmental authority act as custodian of a Fund's
assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of a Fund's cash and securities, the Fund's
investment in such countries may be limited or may be required to be effected
through intermediaries. The risk of loss through governmental confiscation may
be increased in such countries.

Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include: (1)
delays in settling portfolio transactions and risk of loss arising out of
Russia's system of share registration and custody; (2) the risk that it may be
impossible or more difficult than in other countries to obtain and/or enforce a
judgment; (3) pervasiveness of corruption and crime in the Russian economic
system; (4) currency exchange rate volatility and the lack of available currency
hedging instruments; (5) higher rates of inflation, including the risk of social
unrest associated with periods of hyper-inflation; (6) controls on foreign
investment and local practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on a

PAGE

Fund's ability to exchange local currencies for U.S. dollars; (7) the risk that
the government of Russia or other executive or legislative bodies may decide not
to continue to support the economic reform program simple minded since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) possible
difficulty in identifying a purchaser of securities held by a Fund due to the
underdeveloped nature of the securities markets.

There is little historical data on Russian securities markets because they are
relatively new and a substantial proportion of securities transactions in Russia
are privately negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped state of the
banking and telecommunications systems, settlement, clearing and registration of
securities transactions are subject to significant risks. Ownership of shares
(except where shares are held through depositories that meet the requirements of
the 1940 Act) as defined according to entries in the company's share register
and normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for shareholders
and these services are carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not necessarily subject to
effective state supervision and it is possible for a Fund to lose its
registration through fraud, negligence or even mere oversight. While each Fund
will endeavor to ensure that its interest continues to be appropriately recorded
either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that a subsequent legal amendment or other fraudulent act may deprive a Fund of
its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for a Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. This practice may prevent a Fund from
investing in the securities of certain Russian companies deemed suitable by the
Investment Manager. Further, this also could cause a delay in the sale of
Russian companies securities by a Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the investment.

The Funds endeavor to buy and sell foreign currencies on as favorable a basis as
practicable. Some price spread on currency exchange (to cover service charges)
may be incurred, particularly when a Fund changes investment from one country to
another or when proceeds of the sale of Shares in U.S. dollars are used for the
purchase of securities in foreign countries. Also, some countries may adopt
policies which would prevent a Fund from transferring cash out of the country or
withhold portions of interest and dividends at the source, or impose other taxes
with respect to a Fund's investments in securities of issuers of that country.

There is the possibility of expropriation, nationalization or confiscatory
taxation, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments which
could affect investments in securities of issuers in those nations.

Each Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which a Fund may invest may also have fixed or
managed currencies that are free floating against the U.S. dollar. Further,
certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a Fund's securities are
denominated may have a detrimental impact on the Fund.

PAGE

Through each Fund's flexible policy, the Investment Managers endeavor to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where it places a Fund's investments. The exercise of this
flexible policy may include decisions to purchase securities with substantial
risk characteristics and other decisions such as changing the emphasis on
investments from one nation to another and from one type of security to another.
Some of these decisions may later prove profitable and others may not. No
assurance can be given that profits, if any, will exceed losses.

The Trustees consider at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of the Funds' assets maintained with custodians in foreign countries,
as well as the degree of risk from political acts of foreign governments to
which such assets may be exposed. The Trustees also consider the degree of risk
involved through the holding of portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other
Services -- Custodian"). However, in the absence of willful misfeasance, bad
faith or gross negligence on the part of the Investment Managers, or reckless
disregard of the obligations and duties under the Investment Management
Agreements, any losses resulting from the holding of a Fund's portfolio
securities in foreign countries and/or with securities depositories will be at
the risk of the Shareholders. No assurance can be given that the Trustees'
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not occur.

There are several risks associated with the use of futures contracts and stock
index futures contracts as hedging techniques. A purchase or sale of a futures
contract may result in losses in excess of the amount invested. There can be
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of correlation depends
on circumstances such as variations in speculative market demand for futures,
including technical influences in futures trading, and differences between the
financial instruments being hedged and the instruments underlying the standard
contracts available for trading in such respects as interest rate levels,
maturities, and creditworthiness of issuers. A decision as to whether, when, and
how to hedge involves the exercise of skill and judgment, and even a well
conceived hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.

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

There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures position, and it would remain obligated to meet
margin requirements until the position is closed. The Funds which are authorized
to engage in futures transactions intend to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, but there is no assurance that a liquid secondary market will exist for
any particular contract or at any particular time. In addition, many of the
futures contracts available may be relatively new instruments without a
significant trading history. As a result, there can be no assurance that an
active secondary market will develop or continue to exist.

Use of stock index futures for hedging may involve risks because of imperfect
correlations between movements in the prices of the stock index futures on the
one hand and movements in the prices of the securities being hedged or of the
underlying stock index on the other. Successful use of stock index futures by a
Fund for hedging purposes also depends upon the Investment Manager's ability to
predict correctly movements in the direction of the market, as to which no
assurance can be given.

The Funds may enter into a contract for the purchase or sale of a security
denominated in a foreign currency and may enter into a forward foreign currency
contract ("forward contract") in order to "lock in" the U.S. dollar price of the
security. In addition, when an Investment Manager believes that the currency of
a particular foreign country may suffer or enjoy a substantial movement against

PAGE

another currency, it may enter into a forward contract to sell or buy the amount
of the former foreign currency, approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency. The projection
of short-term currency market movements is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.

It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for the Funds to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency a Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency a Fund is obligated to
deliver.

If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline during the period between a Fund
entering into a forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the foreign currency,
the Fund will realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, a Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.

INVESTMENT RESTRICTIONS
- ---------------------------------------------------------

The Funds have imposed upon themselves certain investment restrictions which,
together with their investment objectives, are fundamental policies except as
otherwise indicated. No changes in a Fund's investment objectives, policies or
investment restrictions (except those which are not fundamental policies) can be
made without the approval of the Shareholders of that Fund. For this purpose,
the provisions of the 1940 Act require the affirmative vote of the lesser of
either (a) 67% or more of the Fund's Shares present at a Shareholders' meeting
at which the holders of more than 50% of the outstanding Shares are present or
represented by proxy or (b) more than 50% of the outstanding Shares of the Fund.

In accordance with these restrictions, a Fund WILL NOT:

1. Invest in real estate or mortgages on real estate, or purchase or sell
commodity contracts, except that (i) the Bond, Asset Allocation, Developing
Markets, Growth, Mutual Discovery, Mutual Shares and Small Cap Funds may
invest in marketable securities secured by real estate or interests therein,
such as CMOs, or issued by companies or investment trusts which invest in
real estate or interests therein; and (ii) the Bond, Asset Allocation,
Developing Markets, International, Growth, Mutual Discovery, Mutual Shares
and Small Cap Funds may purchase and sell foreign currency futures and
financial futures; and (iii) the Stock, Asset Allocation, Developing
Markets, International, Growth, Mutual Discovery, Mutual Shares and Small
Cap Funds may purchase and sell stock index futures contracts; and (iv)
Templeton Bond Fund may purchase and sell bond index futures contracts.

2. With respect to 75% of its total assets, invest more than 5% of the total
value of its assets in the securities of any one issuer, or purchase more
than 10% of any class of securities of any one company, including more than
10% of its outstanding voting securities (except for investments in
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities).

3. Act as an underwriter, or issue senior securities except as set forth in
Investment Restriction 5 below.

4. Lend money, except that all Funds may purchase publicly distributed bonds,
debentures, notes and other evidences of indebtedness and may buy from a
bank or broker-dealer U.S. Government obligations with a simultaneous
agreement by the seller to repurchase them at the original purchase price
plus accrued interest, and may lend their portfolio securities.

5. Borrow money for any purpose other than redeeming its Shares or purchasing
its Shares for cancellation, and then only as a temporary measure up to an
amount not exceeding 5% of the value of its total assets, except that the
Bond, Stock, Asset Allocation, and International Funds may borrow money in
amounts up to 30% of the value of its net assets. The Developing Markets,
Growth, Mutual Discovery, Mutual Shares and Small Cap Funds may borrow money
from banks in an amount up to 33 1/3% of

PAGE

the Fund's total assets (including the amount borrowed), but may not pledge,
mortgage or hypothecate its assets for any purpose, except to secure
borrowings and then only to an extent not greater than 15% of the Fund's
total assets. Arrangements with respect to margin for futures contracts,
forward contracts and related options are not deemed to be pledge of assets.

6. Invest more than 25% of its total assets in a single industry, except that
this limitation will not apply to investments in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or
repurchase agreements on such securities, and Templeton Money Market Fund
may invest in obligations issued by domestic banks (including certificates
of deposit, repurchase agreements, and bankers' acceptances) without regard
to this limitation.

As non-fundamental investment policies, which may be changed by the Board
without Shareholder approval, a Fund will not invest more than 15% of its total
assets in securities of foreign issuers which are not listed on a recognized
United States or foreign securities exchange, or more than 15% of its total
assets in (a) securities with a limited trading market, (b) securities subject
to legal or contractual restrictions as to resale, and (c) repurchase agreements
not terminable within seven days.

As a non-fundamental policy, the Growth, Small Cap, Mutual Discovery and Mutual
Shares Funds will not purchase or retain securities of any company in which
Trustees or officers of the Trust or of a Fund's Investment Manager,
individually owning more than 1/2 of 1% of these securities of such company, in
the aggregate own more than 5% of the securities of such company.

The Growth Investments Fund will not, as a non-fundamental policy, (i) invest
for purposes of control of an issuer, (ii) invest more than 5% in unseasoned
issuers, (iii) use margin accounts or (iv) invest more than 10% of its assets in
illiquid securities.

The Small Cap Investments Fund will not, as a non-fundamental policy, (i) invest
for purposes of control of an issuer, (ii) effect short sales or (iii) invest
more than 10% of its assets in illiquid securities.

The Mutual Discovery and Mutual Shares Investments Funds may make short sales,
but will not make a short sale if, after giving effect to such sale, the market
value of all securities sold short exceeds 5% of the value of the Fund's total
assets or the Fund's aggregate short sales of a particular class of securities
exceeds 25% of the outstanding securities of that class. These Funds may also
make short sales "against the box" without reference to such limitations. In
this type of short sale, at the time of the sale, the Funds own or have the
immediate and unconditional right to acquire at no additional cost the identical
security.

Whenever any investment policy or investment restriction states a maximum
percentage of a Fund's assets which may be invested in any security or other
property, it is intended that such maximum percentage limitation be determined
immediately after and as a result of the Fund's acquisition of such security or
property. The investment restrictions do not preclude a Fund from purchasing the
securities of any issuer pursuant to the exercise of subscription rights
distributed to a Fund by the issuer, unless such purchase would result in a
violation of investment restriction number 6, or the non-fundamental investment
policies discussed above.

PAGE

OFFICERS AND TRUSTEES
- --------------------------------------------------------------------------------

The Board of Trustees of the Trust (the "Board") has the responsibility for the
overall management of the Trust, including general supervision and review of its
investment activities. The Board, in turn, elects the officers of the Trust who
are responsible for administering the Trust's day-to-day operations. The
affiliations of the officers and Board members and their principal occupations
for the past five years are shown below. Members of the Board who are considered
"interested persons" of the Trust under the 1940 Act are indicated by an
asterisk (*).

<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Trust Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HARRIS J. ASHTON Trustee Director, RBC Holdings, Inc. (a bank holding company)
191 Clapboard Ridge and Bar-S Foods (a meat packing company); director or
Greenwich, CT 06830 trustee, as the case may be, of 50 of the investment
Age 65 companies in the Franklin Templeton Group of Funds; and
formerly President, Chief Executive Officer and Chairman
of the Board, General Host Corporation (nursery and
craft centers).
- ------------------------------------------------------------------------------------------------------------------
* NICHOLAS F. BRADY Trustee Chairman, Templeton Emerging Markets Investment Trust
The Bullitt House PLC, Templeton Latin America Investment Trust PLC, Darby
102 East Dover Street Overseas Investments, Ltd. And Darby Emerging markets
Easton, Maryland Investments LDC (investment firms) (1994-present);
Age 68 Chairman and Director, Templeton Central and Eastern
European Investment Company; Director, Templeton Global
Strategy Funds, Amerada Hess Corporation, Christiana
Companies, and the H.J. Heinz Company; director or
trustee as the case may be, of 21 of the investment
companies in the Franklin Templeton Group of Funds; and
formerly, Secretary of the United States Department of
Treasury (1988-1993) and Chairman of the Board, Dillon,
Read & Co., Inc. (investment banking) prior to 1988.
- ------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO Trustee Member of the law firm of Pitney, Hardin, Kipp & Szuch;
Park Avenue at Morris director or trustee, as the case may be, of 52 of the
County investment companies in the Franklin Templeton Group of
P.O. Box 1945 Funds; and formerly Director, General Host Corporation
Morristown, NJ 07962-1945 (nursery and craft centers).
Age 65
- ------------------------------------------------------------------------------------------------------------------
ANDREW H. HINES, JR. Trustee Consultant for the Triangle Consulting Group; Exec-
150 2nd Avenue N. utive-in-Residence of Eckerd College (1991-present);
St.Petersburg, FL 33701 director or trustee, as the case may be, of 22 of the
Age 75 investment companies in the Franklin Templeton Group of
Funds; and formerly, Director, Checkers Driving
Restaurant, Inc.; Chairman of the Board and Chief
Executive Officer, Florida Progress Corporation
(1982-1990) and director of various of its subsidiaries.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

PAGE

<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Trust Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
EDITH E. HOLIDAY Trustee Director (1993-present), Amerada Hess Corporation and
3239 38th Street, N.W. Hercules Incorporated; Director, Beverly Enterprises,
Washington, DC 20016 Inc. (1995-present) and H.J. Heinz Company
Age 46 (1994-present); director or trustee, as the case may be,
of 25 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, chairman
(1995-1997) and trustee (1993-1997), National Child
Research Center, assistant to the President of the
United States and Secretary of the Cabinet (1990-1993),
general counsel to the United States Treasury Department
(1989-1990) and counselor to the Secretary and Assistant
Secretary for Public Affairs and Public
Liaison -- United States Treasury Department
(1988-1989).
- ------------------------------------------------------------------------------------------------------------------
* CHARLES B. JOHNSON Vice President and President, Chief Executive Officer and Director,
777 Mariners Island Blvd. Trustee Franklin Resources, Inc.; Chairman of the Board and
San Mateo, CA 94404 Director, Franklin Advisers, Inc., Franklin Advisory
Age 65 Services, Inc., Franklin Investment Advisory Services,
Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and
Franklin Templeton Services, Inc. officer and/or
director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 51
of the investment companies in the Franklin Templeton
Group of Funds; and formerly, Director, General Host
Corporation (nursery and craft centers).
- ------------------------------------------------------------------------------------------------------------------
BETTY P. KRAHMER Trustee Director or Trustee of various civic associations;
2201 Kentmere Parkway director or trustee, as the case may be, of 21 of the
Wilmington, Delaware investment companies in the Franklin Templeton Group of
Age 68 Funds; and formerly, Economic Analyst, U.S. government.
- ------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN Trustee Chairman, White River Corporation (financial ser-
8212 Burning Tree Road vices); Director, Fund American Enterprises Holdings,
Bethesda, MD 20817 Inc., MCI Communications Corporation, CCC Information
Age 69 Services Group, Inc. (information services), MedImmune,
Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee,
as the case may be, of 50 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY,
Chairman, Hambrecht and Quist Group, Director, H & Q
Healthcare Investors and Lockheed Martin Corporation and
President, National Association of Securities Dealers,
Inc.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

PAGE

<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Trust Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FRED R. MILLSAPS Trustee Manager of personal investments (1978-present); director
2665 NE 37th Drive of various business and nonprofit organizations;
Fort Lauderdale, FL 33394 director or trustee, as the case may be, of 22 of the
Age 69 investment companies in the Franklin Templeton Group of
Funds; and formerly, Chairman and Chief Executive
Officer of Landmark Banking Corporation (1969-1978),
Financial Vice President of Florida Power and Light
(1965-1969) and Vice President of the Federal Reserve
Bank of Atlanta (1958-1965).
- ------------------------------------------------------------------------------------------------------------------
CHARLES E. JOHNSON President Senior Vice President and Director, Franklin Resources,
500 East Broward Blvd. Inc.; Senior Vice President, Franklin Templeton
Fort Lauderdale, FL Distributors, Inc.; President and Director, Templeton
33394-3091 Worldwide, Inc.; President, Chief Executive Officer,
Age 41 Chief Investment Officer and Director, Franklin
Institutional Services Corporation; Chairman and
Director, Templeton Investment Counsel, Inc.; Vice
President, Franklin Advisers, Inc.; officer and/or
director of some of the subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee,
as the case may be, of 35 of the investment companies in
the Franklin Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS Vice President Executive Vice President and Director, Franklin
777 Mariners Island Blvd. Resources, Inc.; Executive Vice President and Director,
San Mateo, CA 94404 Franklin Templeton Distributors, Inc. and Franklin
Age 53 Templeton Services, Inc.; Executive Vice President,
Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or
trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 54 of
the investment companies in the Franklin Templeton Group
of Funds.
- ------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN Vice President Senior Vice President and Chief Financial Officer,
777 Mariners Island Blvd. Franklin Resources, Inc.; Executive Vice President and
San Mateo, CA 94404 Director, Templeton Worldwide, Inc.; Executive Vice
Age 37 President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Senior Vice
President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.; Treasurer
and Chief Financial Officer, Franklin Investment
Advisory Services, Inc.; President, Franklin Templeton
Services, Inc.; Senior Vice President,
Franklin/Templeton Investor Services, Inc.; and officer
and/or director or trustee, as the case may be, of 56 of
the investment companies in the Franklin Templeton Group
of Funds.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

PAGE

<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Trust Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SAMUEL J. FORESTER, JR. Vice President Vice President of 10 of the investment companies in the
500 East Broward Blvd. Franklin Templeton Group of Funds; and formerly,
Fort Lauderdale, Florida President, Templeton Global Bond Managers, a division of
Age 49 Templeton Investment Counsel, Inc.; founder and partner
of Forester, Hairston Investment Management (1989-1990),
Managing Director (Mid-East Region), Merrill Lynch,
Pierce, Fenner & Smith Inc. (1987-1988) and Advisor for
Saudi Arabian Monetary Agency (1982-1987).
- ------------------------------------------------------------------------------------------------------------------
DEBORAH R. GATZEK Vice President Senior Vice President and General Counsel, Franklin
777 Mariners Island Blvd. Resources, Inc.; Senior Vice President, Franklin
San Mateo, CA 94404 Templeton Services, Inc. and Franklin Templeton
age 49 Distributors, Inc.; Vice President, Franklin Advisers,
Inc. and Franklin Advisory Services, Inc.; Vice Pres-
ident, Chief Legal Officer and Chief Operating Officer,
Franklin Investment Advisory Services, Inc.; and officer
of 54 of the investment companies in the Franklin
Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
MARK G. HOLOWESKO Vice President President and Chief Investment Officer, Templeton Global
Lyford Cay Advisors Limited; Executive Vice President and Director,
Nassau, Bahamas Templeton Worldwide, Inc.; officer of 21 of the
Age 38 investment companies in the Franklin Templeton Group of
Funds; and formerly, Investment Administrator with
RoyWest Trust Corporation (Bahamas) Limited (1984-1985).
- ------------------------------------------------------------------------------------------------------------------
RUPERT H. JOHNSON, JR. Vice President Executive Vice President and Director, Franklin
777 Mariners Island Blvd. Resources, Inc. and Franklin Templeton Distributors,
San Mateo, CA 94404 Inc.; President and Director, Franklin Advisers, Inc.;
Age 57 Senior Vice President and Director, Franklin Advisory
Services, Inc. and Franklin Investment Advisory
Services, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 54 of the investment
companies in the Franklin Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
JOHN R. KAY Vice President Vice President and Treasurer, Templeton Worldwide, Inc.;
500 East Broward Blvd. Assistant Vice President, Franklin Templeton
Fort Lauderdale, Florida Distributors, Inc.; officer of 25 of the investment
Age 57 companies in the Franklin Templeton Group of Funds; and
formerly, Vice President and Controller, Keystone Group,
Inc.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

PAGE

<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Trust Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ELIZABETH M. KNOBLOCK Vice President, General Counsel, Secretary and Senior Vice President,
500 East Broward Blvd. Compliance Templeton Investment Counsel, Inc.; Senior Vice
Fort Lauderdale, Florida President, Templeton Global Investors, Inc.; officer of
Age 43 21 of the investment companies in the Franklin Templeton
Group of Funds; and formerly, Vice President and
Associate General Counsel, Kidder Peabody & Co. Inc.
(1989-1990), Assistant General Counsel, Gruntal & Co.,
Inc. (1988), Vice President and Associate General
Counsel, Shearson and Lehman Hutton Inc. (1986-1988),
and Special Counsel of the Division of Investment
Management of the U.S. Securities and Exchange
Commission (1984-1986).
- ------------------------------------------------------------------------------------------------------------------
THOMAS LATTA Vice President Vice President, Templeton Global Bond Managers, a
500 East Broward Blvd. division of Templeton Investment Counsel, Inc., and
Fort Lauderdale, Florida formerly, Portfolio Manager at Forester & Hairston
Age 37 (1988-1990) and investment advisor at Merrill Lynch
Capital Markets (1981-1988).
- ------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN Secretary Senior Vice President, Templeton Worldwide, Inc.; Senior
500 East Broward Blvd. Vice President, Templeton Global Investors, Inc.;
Fort Lauderdale, Florida officer of 21 of the investment companies in the
Age 50 Franklin Templeton Group of Funds; and formerly, Deputy
Director of the Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman,
Counselor to the Chairman, Special Counsel and Attorney
Fellow, U.S. Securities and Exchange Commission
(1986-1995), Attorney, Roger & Wells, and Judicial
Clerk, U.S. District Court (District of Massachusetts).
- ------------------------------------------------------------------------------------------------------------------
JAMES R. BAIO Treasurer Certified Public Accountant; Treasurer, Franklin Mutual
500 East Broward Blvd. Advisers, Inc.; Senior Vice President, Templeton
Fort Lauderdale, FL Worldwide, Inc., Templeton Global Investors, Inc. and
33394-3091 Templeton Funds Trust Company; and officer of 22 of the
Age 43 investment companies in the Franklin Templeton Group of
Funds; and formerly, Senior Tax Manager for Ernst &
Young (certified public accountants) (1977-1989).
</TABLE>

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

* These are Trustees who are "interested persons" of the Trust as that term is
defined in the 1940 Act. Charles B. Johnson is an interested person due to his
ownership interest in Franklin Resources, Inc. Mr. Brady and Franklin Resources,
Inc. are limited partners of Darby Overseas Partners, L.P. ("Darby Overseas").
Mr. Brady established Darby Overseas in February 1994, and is Chairman and a
shareholder of the corporate general partner of Darby Overseas. In addition,
Darby Overseas and Templeton Global Advisors Limited are limited partners of
Darby Emerging Markets Fund, L.P. The remaining Trustees are not interested
persons ("Independent Trustees").

The preceding table also shows the Officers and Trustees who are affiliated with
the Trust's Principal Underwriter and Investment Managers.

Nonaffiliated trustees and Mr. Brady are paid an annual retainer and/or fees for
attendance at Board and Committee meetings, the amount of which is based on the
level of assets in each fund. Accordingly, the Trust currently pays the
independent Trustees and Mr. Brady an annual retainer of $6,000.00 and a fee of
$500.00 per meeting attended of the Board and its Committees. As shown above,
some of the nonaffiliated Trustees also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton Group
of Funds.

The following table shows the total fees paid to the nonaffiliated Trustees and
Mr. Brady by the Trust

PAGE

and by all investment companies in the Franklin Templeton Group of Funds:

<TABLE>
<CAPTION>
TOTAL FEES NUMBER OF BOARDS IN
TOTAL FEES RECEIVED FROM THE THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME THE TRUST* GROUP OF FUNDS* WHICH EACH SERVES**
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harris J. Ashton...................... $8,000 $344,642 50
Nicholas F. Brady..................... 8,000 119,675 21
S. Joseph Fortunato................... 8,000 361,562 52
Andrew H. Hines, Jr................... 9,984 144,175 22
Edith E. Holiday...................... 8,000 72,875 25
Betty P. Krahmer...................... 8,000 119,675 21
Gordon S. Macklin..................... 8,000 337,292 50
Fred R. Millsaps...................... 8,354 144,175 22
</TABLE>

* For the fiscal year ended December 31, 1997.
** We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 57 registered investment companies, with approximately 170 U.S. based
funds or series.

Nonaffiliated members of the Board and Mr. Brady are reimbursed for expenses
incurred in connection with attending board meetings, and paid pro rata by each
fund in the Franklin Templeton Group of Funds for which they serve as director
or trustee. No officer or Board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the Fund
or other funds in the Franklin Templeton Group of Funds. Certain officers or
Board members who are shareholders of Resources, Inc. may be deemed to receive
indirect remuneration by virtue of their participation, if any, in the fees paid
to its subsidiaries.

As of April 1, 1998, the officers and Trustees did not own of record or
beneficially any shares of the Trust. Many of the Board members own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of
Charles E. Johnson.

Principal Shareholders. Shares of the Fund are sold to and owned only by
insurance company separate accounts to serve as the investment vehicle for
variable annuity and life insurance contracts.

As of March 31, 1998, there were 10,893,216 Shares of Templeton Money Market
Fund outstanding; 2,952,641 Shares of Templeton Bond Fund outstanding;
33,946,400 Shares Class 1 of Templeton Stock Fund outstanding; 900,976 Shares of
Class 2 of Templeton Stock Fund outstanding; 34,195,771 Shares of Class 1 of
Templeton Asset Allocation Fund outstanding; 533,507 Shares of Class 2 of
Templeton Asset Allocation Fund outstanding; 49,213,960 Shares of Class 1 of
Templeton International Fund outstanding; 1,186,498 Shares of Class 2 of
Templeton International Fund outstanding; 28,648,740 Shares Class 1 of Templeton
Developing Markets Fund outstanding; 2,064,094 Shares Class 2 of Templeton
Developing Markets Fund outstanding. As of March 31, 1998, Phoenix Home Mutual
Life Insurance Company ("Phoenix Home Life") owned 100%, 51%, 43%, 20% and 12%,
respectively, of the outstanding Shares of Class 1 of Templeton Money Market
Fund, Templeton Bond Fund, Templeton Stock Fund, Templeton Asset Allocation
Fund, and Templeton International Fund, respectively. As of March 31, 1998, The
Travelers Insurance Company ("The Travelers") owned 56%, 48% and 35%,
respectively of the outstanding Shares of Class 1 of Templeton Stock Fund,
Templeton Bond Fund and Templeton Asset Allocation Fund, respectively. As of
March 31, 1998, the Variable Annuity Life Insurance Company ("VALIC") owned 78%
and 44% of the outstanding Shares of Class 1 of Templeton International Fund and
Templeton Asset Allocation Fund. As of March 31, 1998, IDS/American Express
("IDS/AMEX"), a Minnesota Corporation, on behalf of the Flexible Portfolio
Annuity, owned 90% of the outstanding Shares of Class 1 of Templeton Developing
Markets Fund. As of March 31, 1998, Hartford Insurance Group ("Hartford"), owned
5% of the outstanding Shares of Class 1 of Templeton Developing Markets Fund.
However, Phoenix Home Life, The Travelers, VALIC and IDS/AMEX will exercise
voting rights attributable to these Shares in accordance with voting
instructions received by owners of the contracts issued by Phoenix Home Life,
The Travelers, VALIC and IDS/AMEX. To this extent, Phoenix Home Life, The
Travelers, VALIC and IDS/AMEX do not exercise control over the Trust by virtue
of the voting rights from their ownership on Trust Shares. As of March 31, 1998,
Phoenix Home Mutual Life Insur-

PAGE

ance Company ("Phoenix Home Life") owned 100%, 88%, 69% and 52%, respectively,
of the outstanding Shares of Class 2 of Templeton Asset Allocation Fund,
Templeton Stock Fund, Templeton International Fund and Templeton Developing
Markets Fund, respectively. As of March 31, 1998, CUNA Mutual Life Insurance
("CUNA") owned 36% of the outstanding Shares of Class 2 of the Templeton
Developing Markets Fund. As of March 31, 1998, Union Central Life Insurance
("Union") owned 30% and 9% of the outstanding Shares of Class 1 of Templeton
International Fund and Templeton Stock Fund. As of March 31, 1998, Minnesota
Mutual Life Insurance Company ("MIMLIC") owned 10% of the outstanding Shares of
Class 2 of Templeton Developing Markets Fund. To the knowledge of management, as
of March 31, 1998, no other person owned of record or beneficially 5% or more of
the Shares of any of the Funds.

INVESTMENT MANAGEMENT AND
OTHER SERVICES
- ---------------------------------------------------------

Investment Managers and Services Provided. The Investment Manager of Money
Market Fund and Bond Fund is the Templeton Global Bond Managers division
("TGBM") of Templeton Investment Counsel, Inc. ("TICI"), a Florida corporation
with offices in Fort Lauderdale, Florida. The Investment Manager of Asset
Allocation Fund, Stock Fund, and International Fund is TICI. The Investment
Manager of Developing Markets Fund is Templeton Asset Management Ltd.
("Templeton Singapore"). The Investment Manager of Growth Fund and Small Cap
Fund is Franklin Advisers, Inc. ("Advisers"). The Investment Manager of Mutual
Discovery Fund and Mutual Shares Fund is Franklin Mutual Advisers, Inc. ("Mutual
Advisers"). The Investment Managers are indirect wholly owned subsidiaries of
Franklin Resources, Inc. ("Resources"), a publicly traded company whose shares
are listed on the NYSE.

The Investment Managers provide investment research and portfolio management
services, including the selection of securities for the Funds to buy, hold or
sell, and the selection of brokers through whom the Fund's portfolio
transactions are executed. Their activities are subject to the review and
supervision of the Board to whom they render periodic reports of the Funds'
investment activities. The Investment Managers are covered by fidelity insurance
on their officers, directors and employees for the protection of the Funds.

The Investment Managers also provide management services to numerous other
investment companies or funds and accounts pursuant to management agreements
with each fund or account. The Investment Managers may give advice and take
action with respect to any of the other funds and accounts they manage, or for
their own accounts, which may differ from the action taken by an Investment
Manager on behalf of a Fund. Similarly, with respect to a Fund, an Investment
Manager is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Investment Manager and
access persons, as defined by the 1940 Act, may purchase or sell for its or
their own account or for the accounts of any other fund or accounts.

The Investment Managers are not obligated to refrain from investing in
securities held by a Fund or other funds which they manage or administer. Of
course, any transactions for the accounts of the investment Managers and other
access persons will be made in compliance with the Trust's Code of Ethics as
described in the section "Brokerage Allocation -- Summary of Code of Ethics."
The Investment Management Agreements will continue in effect through February
1998 and from year to year thereafter subject to approval annually by the Board
or by vote of a majority of the outstanding Shares of each Fund (as defined in
the 1940 Act) and also, in either event, the approval of a majority of those
Trustees who are not parties to the Management Agreements or interested persons
of any such party in person at a meeting called for the purpose of voting on
such approval.

Management Fees. For its services, Money Market Fund pays its Investment Manager
a monthly fee equal on an annual basis to 0.35% of its average daily net assets
up to $200 million; reduced to 0.30% of such net assets from $200 million up to
$1.3 billion; and further reduced to 0.25% of such net assets in excess of $1.3
billion.

Bond Fund pays its Investment Manager a monthly fee equal on an annual basis to
0.50% of its average daily net assets up to $200 million; reduced to 0.45% of
such net assets from $200 million up to $1.3 billion; and further reduced to
0.40% of such net assets in excess of $1.3 billion.

Asset Allocation Fund pays its Investment Manager a monthly fee equal on an
annual basis to 0.65% of its average daily net assets up to $200 million;
reduced to 0.585% of such net assets from $200 million up to $1.3 billion; and
further reduced to 0.52% of such net assets in excess of $1.3 billion.

PAGE

Stock and International Funds pay their Investment Manager a monthly fee equal
on an annual basis to 0.75% of its average daily net assets up to $200 million;
reduced to 0.675% of such net assets from $200 million up to $1.3 billion; and
further reduced to 0.60% of such net assets in excess of $1.3 billion.

Developing Markets Fund pays its Investment Manager a monthly fee equal on an
annual basis to 1.25% of its average daily net assets.

The Growth Fund is obligated to pay Advisers a monthly fee, based upon the
Fund's average daily net assets, computed at the annual rate of 0.60% of average
daily net assets on the first $200 million of average daily net assets; 0.50% of
such assets in excess of $200 million up to $1.2 billion; and 0.40% of such
assets in excess of $1.2 billion.

The Small Cap Fund is obligated to pay Advisers a monthly fee, based on the
Fund's average daily net assets, computed at the annual rate of 0.75% of average
daily net assets on the first $200 million of average daily net assets; 0.65% of
such assets in excess of $200 million up to $1.2 billion of average daily net
assets; and 0.55% of such assets in excess of $1.2 billion.

The Mutual Discovery Fund and Mutual Shares Fund are obligated to pay Franklin
Mutual a monthly fee, based upon each Fund's average daily net assets, computed
at the annual rate of 0.80% and 0.60%, respectively of average daily net assets.

During the fiscal years ended December 31, 1997, 1996 and 1995, the Funds paid
the following investment management fees:

<TABLE>
<CAPTION>
FUND NAME 1997 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund.... $ 48,465 $ 55,132 $ 74,375
Bond Fund............ 164,371 162,273 156,062
Stock Fund........... 4,629,013 2,627,573 2,102,259
Asset Allocation
Fund............... 3,834,087 2,245,898 1,662,023
International Fund... 5,356,048 2,445,202 1,222,834
Developing Markets
Fund............... 1,859,449 293,918 NA
</TABLE>

The Investment Managers may determine in advance to limit the management fees or
to assume responsibility for the payment of certain operating expenses relating
to the operation of any Fund, which may have the effect of decreasing the total
expenses and increasing the total return of such Fund. Any such action is
voluntary and may be terminated by the Investment Managers at any time unless
otherwise indicated.

For the fiscal year ended December 31, 1996, management fees for the Developing
Markets Fund, before any advance waiver, totaled $313,283. Under an agreement by
the Investment Manager to limit its fees, the Fund paid management fees totaling
$293,918.

Fund Administrator. Templeton Funds Annuity Company ("TFAC") performs certain
administrative functions as Fund Administrator for the Trust. These include
preparing and maintaining books, records and tax and financial reports, and
monitoring compliance with regulatory requirements. TFAC is a wholly owned and
subsidiary of Resources.

For its services, the Fund Administrator receives a monthly fee equal on an
annual basis to 0.15% of the combined average daily net assets of the Trust (all
Funds); reduced to 0.135% of the Trust's aggregate net assets in excess of $200
million; further reduced to 0.10% annually of such net assets in excess of $700
million; and further reduced to 0.075% annually of such net assets in excess of
$1.2 billion. The fee is allocated among the Funds according to their respective
average daily net assets. During the fiscal years ended December 31, 1997, 1996,
and 1995, the Fund Administrator received fees of $2,426,200, $1,801,632 and
$1,380,760, respectively.

Custodian. The Chase Manhattan Bank, N.A. serves as Custodian of the Trust's
assets, which are maintained at the Custodian's principal office, MetroTech
Center, Brooklyn, New York, New York 11245 and at the offices of its branches
and agencies throughout the world. The Custodian has entered into agreements
with foreign sub-custodians approved by the Trustees pursuant to Rule 17f-5
under the 1940 Act. The Bank of New York, Mutual Funds Division, 90 Washington
Street, New York, New York 10286, acts as custodian of the securities and other
assets of the Growth and Small Cap Funds. The Custodians, their branches and
sub-custodians, generally domestically and frequently abroad, do not actually
hold certificates for the securities in their custody, but instead have book
records with domestic and foreign securities depositories, which in turn have
book records with the transfer agents of the issuers of the securities.
Compensation for the services of the Custodian is based on a schedule of charges
agreed on from time to time. The Custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.

Legal Counsel. Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C.
20006, is legal counsel for the Trust.

PAGE

Independent Auditors. McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New
York 10017 are the independent auditors for the Trust. During the fiscal year
ended December 31, 1997, their audit services consisted of rendering an opinion
on the financial statements of the Trust included in the Trust's Annual Report
to Shareholders for the fiscal year ended December 31, 1997, and review of the
Trust's filing with the SEC.

Reports to Shareholders. The Trust's fiscal year ends on December 31.
Shareholders are provided at least semiannually with reports showing the Funds'
portfolios and other information, including an annual report with financial
statements audited by independent accountants. Shareholders who would like to
receive an interim quarterly report may phone the Fund Information Department at
1-800/DIAL BEN.

BROKERAGE ALLOCATION
- ---------------------------------------------------------

The Investment Managers select brokers and dealers to execute the Funds'
portfolio transactions in accordance with criteria set forth in the management
agreements and any directions that the Board may give.

When placing a portfolio transaction, the Investment Managers seek to obtain
prompt execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by a Fund
is negotiated between the Investment Managers and the broker executing the
transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid are based to a large degree on the professional
opinions of the persons responsible for placement and review of the
transactions. These opinions are based on the experience of these individuals in
the securities industry and information available to them about the level of
commissions being paid by other institutional investors of comparable size. The
Investment Managers will ordinarily place orders to buy and sell over-the-
counter securities on a principal rather than agency basis with a principal
market maker unless, in the opinion of the Investment Managers, a better price
and execution can otherwise be obtained. Purchases of portfolio securities from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between the bid
and ask price.

The Investment Managers may pay certain brokers commissions that are higher than
those another broker may charge, if the Investment Managers determine in good
faith that the amount paid is reasonable in relation to the value of the
brokerage and research services they receive. This may be viewed in terms of
either the particular transaction or the Investment Managers' overall
responsibilities to client accounts over which they exercise investment
discretion. The services that brokers may provide to the Investment Managers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to the Investment
Managers in carrying out their investment advisory responsibilities. These
services may not always directly benefit a Fund. They must, however, be of value
to the Investment Managers in carrying out their overall responsibilities to
their clients.

Since most purchases by certain of the Portfolios are principal transactions at
net prices, these Portfolios incur little or no brokerage costs. The Portfolios
deal directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on their behalf, unless it is
determined that a better price or execution may be obtained by using the
services of a broker. Purchase of portfolio securities from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include a spread between the bid and ask prices. The
Portfolios seek to obtain prompt execution of orders at the most favorable net
price. Transaction may be directed to dealers in return for research and
statistical information, as well as for special services provided by the dealers
in the execution of orders.

It is not possible to place a dollar value on the special executions or on the
research services the Investment Managers receive from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits the Investment Managers to
supplement their own research and analysis activities and to receive the views
and information of individuals and research staffs of other securities firms. As
long as it is lawful and appropriate to do so, the Investment Managers and their
affiliates may use this research and data in their investment advisory
capacities with other clients. If a Fund's officers are satisfied that the best
execution is obtained, the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, may also be considered a factor in the
selection of

PAGE

broker-dealers to execute the Fund's portfolio transactions.

Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the Investment Managers will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.

If purchases or sales of securities of a Fund and one or more other investment
companies or clients supervised by the Investment Managers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by the Investment Managers, taking into account the respective sizes of the
funds and the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the security
so far as a Fund is concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to a Fund.

During the fiscal years ended December 31, 1997, 1996 and 1995, the Trust paid
brokerage commissions totaling $3,895,650, $2,594,403, and $1,525,000,
respectively.

The following table identifies each Fund which held securities of its regular
brokers or dealers during 1997, the names of each such broker or dealer, and the
value, if any, of such securities held by each Fund as of December 31, 1997.

<TABLE>
<CAPTION>
VALUE ON
FUND REGULAR BROKER OR DEALER 12/31/97
- ------------------------------------------------------------
<S> <C> <C>
Asset Allocation
Fund............... Credit Suisse Group $ 2,357,952
HSBC Holdings, PLC $ 5,777,571
Jardine Matheson $ 1,126,080
Holdings, Ltd.
Morgan Stanley, Dean $ 8,831,265
Witter Discover & Co.
Peregrine Investments $ 248,464
Holdings, Ltd.
Developing
Markets Fund....... HSBC Holdings, PLC $ 2,602,865
Jardine Matheson $ 44,120
Holdings, Ltd.
International
Fund............... Credit Suisse Group $ 1,546,198
HSBC Holdings, PLC $ 8,824,106
Jardine Matheson $ 2,924,687
Holdings, Ltd.
Peregrine Investments $ 853,142
Holdings Ltd.
Stock Fund........... Credit Suisse Group $ 6,184,791
Deutsche Bank, AG $ 8,950,750
HSBC Holdings, PLC $11,499,980
Jardine Matheson $ 2,679,382
Holdings, Ltd.
Morgan Stanley, Dean $ 7,328,045
Witter Discover & Co.
</TABLE>

Portfolio Turnover. It is anticipated that the rate of portfolio turnover as
defined above for Stock, Asset Allocation, International and Developing Markets
Funds will be less than 50%, and for the Bond, Mutual Discovery, Mutual Shares,
Small Cap and the Growth Funds less than 100%, under normal market conditions.
Portfolio turnover could be greater in periods of unusual market movement and
volatility. Bond Fund's portfolio turnover rates for the fiscal years ended
December 31, 1997 and 1996 were 154.23% and 141.19%, respectively. These rates
exceed the anticipated portfolio turnover rate for the Fund as a result of
changing interest rates and currency exposure considerations.

PAGE

Summary of Code of Ethics. Employees of Resources and/or its affiliates who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations and statements must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and, (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a
portfolio or other client.

PURCHASE, REDEMPTION AND
PRICING OF SHARES
- ---------------------------------------------------------

The Prospectus describes the manner in which a Fund's Shares may be purchased
and redeemed. See "How to Buy Shares of the Funds" and "How to Sell Shares of
the Funds." Net asset value per Share is calculated separately for each Fund.
Net Asset Value per Share is determined as of the close of the NYSE (normally
4:00 p.m., New York time) every Monday through Friday (exclusive of national
business holidays). The Trust's offices will be closed, and net asset value will
not be calculated, on those days on which the NYSE is closed. As of the date of
this SAI, the fund is informed that the NYSE observes the following holidays:
New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

Money Market Fund. The valuation of the Money Market Fund's portfolio
securities, including any securities held in a separate account maintained for
when-issued securities, is based on the amortized cost of the securities, which
does not take into account unrealized capital gains or losses. This method
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in calculation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument. During periods of declining
interest rates, the daily yield on shares of the Fund computed as described
above may tend to be higher than a like computation made by a fund with
identical investments but utilizing a method of valuation based upon market
prices and estimates of market prices for all of its portfolio instruments.
Thus, if the use of amortized cost by the Fund resulted in a lower aggregate
portfolio value on a particular day, a prospective investor in the Fund would be
able to obtain a somewhat higher yield than would result from an investment in a
fund utilizing only market values, and existing investors in the Fund would
receive less investment income. The opposite would be true in a period of rising
interest rates.

The Fund's use of amortized cost, which helps the Fund maintain its Net Asset
Value per share of $1, is permitted by a rule adopted by the SEC. Under this
rule, the Fund must adhere to certain conditions. The Fund must maintain a
dollar-weighted average portfolio maturity of 90 days or less and only buy
instruments having remaining maturities of 397 calendar days or less. The Fund
must also invest only in those U.S. dollar-denominated securities that the Board
determines present minimal credit risks and that are rated in one of the two
highest rating categories by nationally recognized rating services, or if
unrated are deemed comparable in quality, or are instruments issued by an issuer
that, with respect to an outstanding issue of short-term debt that is comparable
in priority and protection, has received a rating within the two highest rating
categories. Securities subject to floating or variable interest rates with
demand features that comply with applicable SEC rules may have stated maturities
in excess of one year.

The Board has established procedures designed to stabilize, to the extent
reasonably possible, the Fund's price per share at $1, as computed for the
purpose of sales and redemptions. These procedures include a review of the
Fund's holdings by the Board, at such intervals as it may deem appropriate, to
determine if the Fund's Net Asset Value calculated by using available market
quotations deviates from $1 per share based on amortized cost. The extent of any
deviation will be examined by the Board. If a deviation exceeds 1/2 of 1%, the
trustees will promptly consider what action, if any, will be initiated. If the
Board determines that a deviation exists that may result in material dilution or
other unfair results to investors or existing shareholders, it will take
corrective action that it regards as necessary and appropriate, which may
include selling portfolio instruments before maturity to real-

PAGE

ize capital gains or losses or to shorten average portfolio maturity,
withholding dividends, redeeming shares in kind, or establishing a Net Asset
Value per share by using available market quotations.

The Net Asset Value per share of each Fund except the Money Market Fund is
calculated as follows: the aggregate of all liabilities, including, without
limitation, the current market value of any outstanding options written by a
Fund, if any, accrued expenses and taxes and any necessary reserves, is deducted
from total gross value of all assets, and the difference is divided by the
number of shares of that Fund outstanding at the time. For the purpose of
determining the aggregate net assets of each Fund (except the Money Market
Fund), cash and receivables are valued at their realizable amounts, interest is
recorded as accrued, and dividends are recorded on the ex-dividend date.

Portfolio securities listed on a securities exchange or on the NASDAQ National
Market System for which market quotations are readily available are valued at
the last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices. Over-the-counter
portfolio securities are valued within the range of the most recent quoted bid
and ask prices. Portfolio securities that are traded both in the over-
the-counter market and on a stock exchange are valued according to the broadest
and most representative market as determined by the Investment Managers.
Portfolio securities underlying actively traded options are valued at their
market price as determined above. The current market value of any option held by
a Fund is its last sale price on the relevant exchange prior to the time when
the assets are valued. Lacking any sales that day or if the last sales price is
outside the bid and ask prices, the options are valued within the range of the
current closing bid and ask prices if such valuation is believed to fairly
reflect the contract's market value. If a Fund should have an open position to a
security, the valuation of the contract will be within the range of the bid and
ask prices.

The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the close of trading on the
NYSE, if that is earlier. The value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the foreign security is valued within the range of the most recent
quoted bid and ask prices. Occasionally events that affect the values of foreign
securities and foreign exchange rates may occur between the times at which they
are determined and the close of the exchange and will, therefore, not be
reflected in the computation of the net asset value of each Fund. If events
materially affecting the values of these foreign securities occur during this
period, the securities will be valued in accordance with procedures established
by the Board.

Generally, trading in corporate bonds, U.S. government securities and money
market Instruments is substantially completed each day at various times prior to
the close of the Exchange. The value of securities used in computing the net
asset value of each class is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the close of the NYSE that will not be reflected in the
computation of the net asset value of each class. If events materially affecting
the values of these securities occur during this period, then the securities
will be valued at their fair value as determined in good faith by the Board.

Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, a
Fund may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.

Redemptions in Kind. Redemption proceeds are normally paid in cash; however each
Fund may pay the redemption price in whole or in part by a distribution in kind
of securities from the portfolio of the Fund, in lieu of cash, in conformity
with rules of the SEC. In such circumstances, the securities distributed would
be valued at the price used to compute the Fund's Net Asset Value. If Shares are
redeemed in kind, the redeeming Shareholder might incur brokerage costs in
converting the assets into cash. Each Fund is obligated to redeem Shares solely
in cash up to the lesser of $250,000 or 1% of its net assets during any 90-day
period for any one Shareholder.

CLASS 2 DISTRIBUTION PLANS
- ---------------------------------------------------------

Each Fund, except the Money Market Fund, has two classes of shares, Class 1 and
Class 2. Each

PAGE

Class 2 of the Trust has adopted a distribution plan or "Rule 12b-1" Plan
("Plan") pursuant to rule 12b-1 of the 1940 Act. Under the Plans, each Fund
offering Class 2 shares, except the Bond Fund, may pay up to a maximum of 0.25%
per year of the average daily net assets attributable to their respective Class
2 shares. Under the Bond Fund's Class 2 Plan, the Fund may pay up to a maximum
of 0.15% per year of the average daily net assets attributable to its Class 2
shares. These fees may be used to compensate the Trust's distributor,
Franklin/Templeton Distributors, Inc. ("Distributors"), the Insurance Companies
or others for distribution and related services and as a servicing fee.

The terms and provisions of the Plans, including terms and provisions relating
to required reports, term, and approval, are consistent with Rule 12b-1. In no
event shall the aggregate asset-based sales charges, which include payments made
under each Plan, exceed the amount permitted to be paid under the rules of the
National Association of Securities Dealers, Inc.

Each Plan has been approved in accordance with the provisions of Rule 12b-1. The
Plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the Plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The Plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of a
management agreement with an Investment Manager, or by vote of a majority of the
outstanding shares of the class. Distributors, the Insurance Companies or others
may also terminate their respective distribution or service agreement at any
time upon written notice.

The Plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.

A Distributor is required to report in writing to the Board at least quarterly
on the amounts and purpose of any payment made under the Plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.

For the fiscal year ended December 31, 1997, the total amounts paid by each Fund
pursuant to the Plans, which were used by Distributors as payment to Insurance
Companies for providing administrative and other services, as defined in the
Plans, on each Fund's Class 2 shares, were as follows:

<TABLE>
<CAPTION>
FUND DOLLAR AMOUNT
- -----------------------------------------------
<S> <C>
Stock Fund -- Class 2................. $14,095
International Fund -- Class 2......... 13,723
Developing Markets Fund -- Class 2.... 10,514
Asset Allocation Fund -- Class 2...... 8,750
</TABLE>

TAX STATUS
- ---------------------------------------------------------

Money Market Fund intends to declare dividends daily and to pay dividends
monthly. All other Funds normally intend to pay an annual dividend representing
substantially all of their net investment income and to distribute annually any
net realized capital gains. By so doing and meeting certain diversification of
assets and other requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), and as described in the prospectus, each Fund intends to qualify
as a regulated investment company under the Code. The status of the Funds as
regulated investment companies does not involve government supervision or
management of their investment practices or policies. As a regulated investment
company, each Fund will be relieved of liability for U.S. federal income tax on
that portion of its net investment income and net realized capital gains which
it distributes to its Separate Account Shareholders.

Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are also subject to a nondeductible 4% excise tax
unless the exception described below applies. To avoid the tax if it otherwise
applies, a Fund must distribute during each calendar year, (i) at least 98% of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (ii) at least 98% of its capital gains in excess of its
capital losses for the twelve-month period ending on October 31 of the calendar
year (adjusted for certain ordinary losses), and (iii) all ordinary income and
capital gains for previous years that were not distributed during such years. To
avoid application of the excise tax, each Fund intends to make its

PAGE

distributions in accordance with the calendar year distribution requirement.

A distribution will be treated as paid on December 31 of the calendar if it is
declared by a Fund during October, November, or December of that year to
Shareholders of record on a date in such a month and paid by the Fund during
January of the following calendar year. Such distributions will be taxable to
Shareholders (a Separate Account) in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. The excise tax provisions described above will not
apply in a given calendar year to a Fund if all of its shareholders at all times
during the calendar year are segregated asset accounts of life insurance
companies where the shares are held in connection with variable contracts. (For
this purpose, any shares of a regulated investment company attributable to an
investment not exceeding $250,000 made in connection with the organization of
the company is not taken into account.) Accordingly, if this condition regarding
the ownership of Shares of each of the Funds is met, the excise tax will be in
applicable to that Fund even if the calendar year distribution requirement is
not met.

The Funds may invest in shares of foreign corporations which may be classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. If a Fund receives an "excess distribution" with respect
to PFIC stock, the Fund itself may be subject to tax on a portion of the excess
distribution, whether or not the corresponding income is distributed by the Fund
to Shareholders. In general, under the PFIC rules, an excess distribution is
treated as having been realized ratably over the period during which a Fund held
the PFIC shares. A Fund itself will be subject to tax on the portion, if any, of
an excess distribution that is so allocated to prior Fund taxable years and an
interest factor will be added to the tax, as if the tax had been payable in such
prior taxable years. Certain distributions from a PFIC as well as gain from the
sale of PFIC shares are treated as excess distributions. Excess distributions
are characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.

The Funds may be eligible to elect alternative tax treatment with respect to
PFIC shares.

Under an election that currently is available in some circumstances, a Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether distributions are
received from the PFIC in a given year. If this election were made, the special
rules, discussed above, relating to the taxation of excess distributions, would
not apply. In addition, another election may be available that would involve
marking to market the Fund's PFIC shares at the end of each taxable year (and on
certain other dates prescribed in the Code), with the result that unrealized
gains are treated as though they were realized. If this election were made, tax
at the Fund level under the PFIC rules would generally be eliminated, but the
Fund could, in limited circumstances, incur nondeductible interest charges. A
Fund's intention to qualify annually as a regulated investment company may limit
its elections with respect to PFIC shares.

Because the application of the PFIC rules may affect, among other things, the
character of gains, the amount of gain or loss and the timing of the recognition
of income with respect to PFIC shares, as well as subject a Fund itself to tax
on certain income from PFIC shares, the amount that must be distributed to
Shareholders, and which will be taxed to Shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not invest in PFIC shares.

Income received by a Fund from sources within a foreign country may be subject
to withholding taxes and other taxes imposed by that country. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.

Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time that Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debts securities denominated in a foreign currency and on
disposition of certain financial contracts and forward contracts, gains or
losses attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of disposition also
are treated as ordinary gain or loss. These gains or losses, referred to under
the Code as "Section 988" gains or losses, may increase or decrease the amount
of a Fund's net investment income to be distributed to its Shareholders as
ordinary income.

PAGE

Debt securities purchased by a Fund may be treated for federal income tax
purposes as having original issue discount.

Original issue discount essentially represents interest for federal income tax
purposes and can be defined generally as the excess of the stated redemption
price at maturity over the issue price. Original issue discount, whether or not
any income is actually received by a Fund, is treated for U.S. federal income
tax purposes as ordinary income earned by the Fund, and therefore is subject to
the distribution requirements of the Code. Generally, the amount of original
issue discount included in the income of a Fund each year is determined on the
basis of a constant yield to maturity which takes into account the compounding
of accrued but unpaid interest.

Some of the debt securities may be purchased by the Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semiannual compounding of interest.

Certain options, futures contracts and forward contracts in which the Stock,
Bond, Asset Allocation, Developing Markets and International Funds may invest
are "section 1256 contracts." Gains or losses on section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses ("60-40"), except for certain foreign currency gains and losses which
will be treated as ordinary in character. Also, section 1256 contracts held by a
Fund at the end of each taxable year (and, in some cases, for purposes of the 4%
excise tax, on October 31 of each year) are "marked-to-market" with the result
that unrealized gains or losses are treated as though they were realized.

The hedging transactions undertaken by certain of the Funds may result in
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses realized
by a Fund oppositions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Because only a
few regulations implementing the straddle rules have been promulgated, the tax
consequences to the Funds of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term capital gain realized
by the Funds which is taxed as ordinary income when distributed to Shareholders.

Each Fund may make one or more of the elections available under the Code which
are applicable to straddles. If the Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
elections made. The rules applicable under certain of the elections may operate
to accelerate the recognition of gains or losses from the affected straddle
positions.

Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
Shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.

The requirements under the Code relating to the qualification of a Fund as a
regulated investment company may limit the extent to which a Fund may engage in
futures and forward currency contracts.

Distributions of any net investment income and of any net realized short term
capital gains are treated as ordinary income for tax purposes in the hands of
the Separate Account Shareholder. The excess of any net long-term capital gains
over net short-term capital losses will, to the extent distributed and
designated by the distributing Fund as a capital gain dividend, be treated as
long-term capital gains in the hands of the Shareholder regardless of the length
of time a Separate Account may have held the Shares.

Reference is made to the prospectus for the applicable Contract for information
regarding the federal income tax treatment of distributions to owners of
contracts.

DESCRIPTION OF SHARES
- ---------------------------------------------------------

The Shares of each Fund have the same preferences, conversion and other rights,
voting powers, restrictions and limitations as to dividends, qualifications, and
terms and conditions of redemption, except as follows: all consideration
received from

PAGE

the sale of Shares of a Fund, together with all income, earnings, profits and
proceeds thereof, belongs to that Fund and is charged with liabilities in
respect to that Fund and of that Fund's part of general liabilities of the Trust
in the proportion that the total net assets of the Fund bear to the total net
assets of all Funds. In addition, Class 2 Shares of each Fund offering Class 2
Shares will bear the expense of the Class 2 Distribution plan as it applies to
each Fund. The net asset value of a Share of a class of a Fund is based on the
assets belonging to that Fund less the liabilities charged to that class of the
Fund, and dividends are paid on Shares of a class of a Fund only out of lawfully
available assets belonging to that class of the Fund. In the event of
liquidation or dissolution of the Trust, the Shareholders of each Fund will be
entitled, out of assets of the Fund available for distributions, to the assets
belonging to that particular Fund.

Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the Shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust, which, under the
terms of the Declaration of Trust, are binding only on the property of the
Trust, which, under the terms of the Declaration of Trust, are binding only on
the property of the Trust. The Declaration of the Trust provides for
indemnification out of Trust property for all loss and expense of any
Shareholder held personally liable for the obligations of the Trust. The risk of
a Shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations and, thus, should be considered remote.

PERFORMANCE INFORMATION
- ---------------------------------------------------------

Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation be accompanied by certain standardized
performance information computed as required by the SEC. On May 1, 1997, each
Fund (except the Money Fund) began offering Class 2 shares and renamed its
existing shares as Class 1 shares. Any Class 2 performance shown for the periods
prior to May 1, 1997 represents the historical results of Class 1 Shares.
Performance of Class 2 shares for the periods after May 1, 1997 reflects Class
2's higher annual fees and expenses resulting from its Rule 12b-1 plan.
Historical performance data for Class 2 will generally not be restated to
include 12b-1 fees, although the Trust may restate these figures consistent with
SEC rules. Regardless of the method used, past performance does not guarantee
future results, and is an indication of the return to Shareholders only for the
limited historical period used.

The Trust may, from time to time, include the yield of Templeton Money Market
Fund or the total return of all other Funds in advertisements or reports to
Shareholders or prospective investors. Performance information for the Funds
will not be advertised unless accompanied by legally required comparable
performance information for a separate account to which the Funds offer their
Shares.

CURRENT YIELD. Current yield shows the income per share earned by the Money
Market Fund. It is calculated by determining the net change, excluding capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return. The result is then annualized by multiplying the base period
return by (365/7). The Templeton Money Market Fund's current yield for the seven
day period ended December 31, 1997 was 5.27%.

Quotations of average annual total return for the Funds will be expressed in
terms of the average annual compounded rate of return for periods in excess of
one year or the total return for periods less than one year of a hypothetical
investment in the Funds over periods of one, five, or ten years (up to the life
of a Fund) calculated pursuant to the following formula:

PAGE

P (1+T)(n) = ERV

where:

<TABLE>
<S> <C> <C>
P = a hypothetical initial payment of
$1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of each period at the
end of each period
</TABLE>

All total return figures reflect the deduction of the maximum initial sales
charge and deduction of a proportional share of Fund expenses on an annual
basis, and assume that all dividends and distributions are reinvested when paid.
The following table shows the average annual total returns for each Fund,
excluding the Templeton Money Market Fund, for the indicated periods ended
December 31, 1997:

<TABLE>
<CAPTION>
SINCE INCEPTION
FUND 1-YEAR 3-YEAR 5-YEAR INCEPTION DATE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bond Fund -- Class 1......................... 2.51% 8.84% 6.45% 7.40% 08/24/88
Stock Fund -- Class 1........................ 11.88% 19.73% 17.60% 13.30% 08/24/88
Stock Fund -- Class 2........................ 11.69% 19.63% 17.55% 13.28% 08/24/88*
Asset Allocation Fund -- Class 1............. 15.52% 18.94% 15.55% 12.64% 08/24/88
Asset Allocation Fund -- Class 2............. 15.37% 18.88% 15.52% 12.63% 08/24/88*
International Fund -- Class 1................ 13.95% 17.84% 18.70% 15.04% 05/01/92
International Fund -- Class 2................ 13.73% 17.76% 18.66% 15.01% 05/01/92*
Developing Markets -- Class 1................ -29.22% -19.78% 03/04/96
Developing Markets -- Class 2................ -29.33% -19.85% 03/04/96*
</TABLE>

Because Class 2 shares were not offered until May 1, 1997, performance shown for
periods prior to that date represents the historical results of Class 1 shares.
Performance of Class 2 shares for periods after May 1, 1997 reflect Class 2's
higher annual fees and expenses resulting from its rule 12b-1 plan. Maximum
annual plan expenses are 0.25%, except for the Bond Fund which is 0.15%.

Performance information for a Fund may be compared, in reports and promotional
literature, to: (i) unmanaged indices so that investors may compare the Fund's
results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities market in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, Inc., a widely
used independent research firm which ranks mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in a Fund. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.

Quotations of yield or total return for a Fund will not take into account
charges and deductions against any separate account to which the Funds' Shares
are sold or charges and deductions against variable insurance contracts,
although comparable performance information for a separate account will take
such charges into account. Performance information for a Fund reflects only the
performance of a hypothetical investment in a Fund during the particular time
period on which the calculations are based. Performance information should be
considered in light of a Fund's investment objective and policies,
characteristics and quality of the portfolio and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future.

From time to time, each Fund and the Investment Managers may also refer to the
following information:

(1) The Investment Managers' and their affiliates' market share of
international equities managed in mutual funds prepared or published by
Strategic Insight or a similar statistical organization.

(2) The performance of U.S. equity and debt markets relative to foreign markets
prepared or published by Morgan Stanley Capital International(R) or a
similar financial organization.

(3) The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley Capital
International(R) or a similar financial organization.

(4) The geographic and industry distribution of the Fund's portfolio and the
Fund's top ten holdings.

PAGE

(5) The gross national product and populations, including age characteristics,
literacy rates, foreign investment improvements due to a liberalization of
securities laws and a reduction of foreign exchange controls, and improving
communication technology, of various countries as published by various
statistical organizations.

(6) To assist investors in understanding the different returns and risk
characteristics of various investments, the Fund may show historical
returns of various investments and published indices (e.g., Ibbotson
Associates, Inc. Charts and Morgan Stanley EAFE -- Index).

(7) The major industries located in various jurisdictions as published by the
Morgan Stanley Index.

(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.

(9) Allegorical stories illustrating the importance of persistent long-term
investing.

(10) The Fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or Morningstar,
Inc.

(11) A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued or
"bargain" securities and its diversification by industry, nation and type
of stocks or other securities.

(12) The number of Shareholders in the Fund or the aggregate number of
shareholders of the open-end investment companies in the Franklin Templeton
Group of Funds or the dollar amount of fund and private account assets
under management.

(13) Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.

(14) Quotations from the Templeton organization's founder, Sir John Templeton,**
advocating the virtues of diversification and long-term investing,
including the following:

- "Never follow the crowd. Superior performance is possible only if you
invest differently from the crowd."

- "Diversify by company, by industry and by country."

- "Always maintain a long-term perspective."

- "Invest for maximum total real return."

- "Invest -- don't trade or speculate."

- "Remain flexible and open-minded about types of investment."

- "Buy low."

- "When buying stocks, search for bargains among quality stocks."

- "Buy value, not market trends or the economic outlook."

- "Diversify. In stocks and bonds, as in much else, there is safety in
numbers."

- "Do your homework or hire wise experts to help you."

- "Aggressively monitor your investments."

- "Don't panic."

- "Learn from your mistakes."

- "Outperforming the market is a difficult task."

- "An investor who has all the answers doesn't even understand all the
questions."

- "There's no free lunch."

- "And now the last principle: Do not be fearful or negative too often."

FINANCIAL STATEMENTS
- ---------------------------------------------------------

The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended December 31, 1997, including the
auditors' report, are incorporated herein by reference.

** Sir John Templeton sold the Templeton organization to Resources in October
1992 and resigned from the Trust's Board on April 15, 1995. He is no longer
involved with the investment management process.

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
File Nos. 33-20313

FORM N-1A
PART C
Other Information

ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements:

The audited financial statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders dated December 31, 1997, as filed
with the SEC electronically on Form Type N-30D on March 10, 1998.

i. Financial Highlights

ii. Statements of Investments - December 31, 1997

iii. Statements of Assets and Liabilities - December 31, 1997

iv. Statements of Operations for the year ended December 31, 1997

v. Statements of Changes in Net Assets for the years ended December 31,
1997 and 1996

vi. Notes to Financial Statements

vii. Report of Independent Auditors

(b) Exhibits:

The following exhibits, where applicable, are herewith incorporated by reference
to the filings as noted with the exception of Exhibits 1, 2, 8(c), 10(a), 11(a)
18(a) and 27(a-k; which are attached.

(1) Copies of Declaration of Trust

(a) Form of Declaration of Trust
(b) Form of Amended Declaration of Trust
(c) Form of Amended Establishment and Disignation of Series of Shares
(d) Amended Establishment and Designation of Series of Shares

(2) Copies of the By-Laws or instruments corresponding thereto;

(3) Copies of any voting trust agreement with respect to more than five percent
of any class of equity securities of the Registrant;

Not Applicable

(4) Specimens or copies of each security issued by the Registrant, including
copies of all constituent instruments, defining the rights of the holders
of such securities, and copies of each security being registered;

Not Applicable

(5) Copies of all investment advisory contracts relating to the management of
the assets of the Registrant;

(a) Amended and Restated Investment Management Agreement for Templeton
Money Market Fund and Templeton Bond Fund
Filing: Registration Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 27, 1995

(b) Investment Management Agreement for Templeton Developing Markets Fund
Filing: Post-Effective Amendment No. 12 to Registration Statement of
Registrant on Form N-1A
File No. 33-20313
Filing Date: February 16, 1996

(c) Investment Management Agreement between Registrant, on behalf of the
Templeton Asset Allocation Fund, and Templeton Investment Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to Registration Statement of
Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997

(d) Investment Management Agreement between Registrant, on behalf of the
Templeton Stock Fund, and Templeton Investment Counsel, Inc. Filing:
Post-Effective Amendment No. 14 to Registration Statement of Registrant on
Form N-1A
File No. 33-20313
Filing Date: February 14, 1997

(e) Investment Management Agreement between Registrant, on behalf of the
Templeton International Fund, and Templeton Investment Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to Registration Statement of
Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997

(f) Investment Management Agreement between Registrant, on behalf of the
Franklin Growth Investments Fund, and Franklin Advisers, Inc. Filing:
Post-Effective Amendment No. 14 to Registration Statement of Registrant on
Form N-1A
File No. 33-20313
Filing Date: February 14, 1997

(g) Investment Management Agreement between Registrant, on behalf of the
Mutual Discovery Investments Fund, and Franklin Mutual Advisers, Inc.
Filing: Post-Effective Amendment No. 14 to Registration Statement of
Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997

(h) Investment Management Agreement between Registrant, on behalf of the
Mutual Shares Investments Fund, and Franklin Mutual Advisers, Inc. Filing:
Post-Effective Amendment No. 14 to Registration Statement of Registrant on
Form N-1A
File No. 33-20313
Filing Date: February 14, 1997

(i) Form of Management Agreement between Registrant on behalf of Franklin
Small Cap Investments Fund and Franklin Advisers, Inc. Filing:
Post-Effective Amendment No. 18 to Registration Statement of Registrant on
Form N-1A
File No. 33-20313
Filing Date: February 13, 1998

(6) copies of each underwriting or distribution contract between the Registrant
and a principal underwriter, and specimens or copies of all agreements between
principal underwriters and dealers;

(a) Amended and Restated Distribution Agreement
Filing: Post-Effective Amendment No.10 to Registration Statement of
Registrant on Form N-1A
File No. 33-20313
Filing Date: December 22, 1995

(7) copies of all bonus, profit sharing, pension or other similar contracts or
arrangements wholly or partly for the benefit of Trustees or officers of the
Registrant in their capacity as such; any such plan that is not set forth in a
formal document, furnish a reasonably detailed description thereof;

Not Applicable

(8) Copies of all custodian agreements and depository contracts under Section
17(f) of the Investment Company Act of 1940 (the "1940 Act"), with respect to
securities and similar investments of the Registrant, including the schedule of
remuneration;

(a) Amended and Restated Custodian Agreement
Filing: Post-Effective Amendment No. 13 to Registration Statement of
Registrant on Form N-1A
File No. 33-20313
Filing Date: April 12, 1996

(b) Master Custody Agreement between the Registrant and the Bank of New
York
Filing: Post-Effective Amendment No. 14 to Registration Statement of
Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997

(9) Copies of all other material contracts not made in the ordinary course of
business which are to be performed in whole or in part at or after the date of
filing the Registration Statement;

(a) Amended and Restated Business Management Agreement
Filing: Post-Effective Amendment No. 12 to Registration Statement of
Registrant on Form N-1A
File No. 33-20313
Filing Date: February 16, 1996

(10) an opinion and consent of counsel as to the legality of the securities
being registered, indicating whether they will when sold be legally issued,
fully paid and nonassessable;

(a) Opinion and consent of counsel dated August 26, 1998

(11) Copies of any other rulings and consents to the use thereof relied on in
the preparation of this registration statement and required by Section 7 of the
1933 Act;

(a) Consent of Independent Auditors

(12) All financial statements omitted from Item 23;

Not Applicable

(13) Copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the underwriter,
adviser, promoter or initial stockholders and written assurances from promoters
or initial stockholders that their purchases were made for investment purposes
without any present intention of redeeming or reselling;

(a) Letter concerning initial capital
Filing: Post-Effective Amendment No. 2 to Registration Statement of
Registrant on Form N-1A
File No. 33-20313
Filing Date: August 26, 1988

(14) copies of the model plan used in the establishment of any retirement plan
in conjunction with which Registrant offers its securities, any instructions
thereto and any other documents making up the model plan. Such form(s) should
disclose the costs and fees charged in connection therewith;

Not Applicable

(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1 under
the 1940 Act, which describes all material aspects of the financing of
distribution of Registrant's shares, and any agreements with any person relating
to implementation of such plan.

(a) Distribution Plan between the Registrant and Franklin Templeton
Distributors, Inc.
Filing: Post-Effective Amendment No. 14 to Registration Statement of
Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997

(16) Schedule for computation of each performance quotation provided in the
registration statement in response to Item 22 (which need not be audited).

(a) Schedule for computation of performance quotation
Filing: Post-Effective Amendment No. 9 to Registration Statement on
Registrant
File No. 33-20313
Filing Date: April 27,1995

(17) Power of Attorney

(a) Power of Attorney from Officers and Directors of the Registrant
executed December 12, 1996
Filing: Post-Effective Amendment No. 14 to Registration Statement of
Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997

(18) Copies of any plan entered into by registrant pursuant to Rule 18f-3 under
the 1940 Act.

(a) Form of Multiple Class Plan for all series of Registrant, except
Templeton Money Fund.

(27) Financial Data Schedule

a) Financial Data Schedule for Templeton Stock Fund - Class 1
b) Financial Data Schedule for Templeton Stock Fund - Class 2
c) Financial Data Schedule for Templeton Asset Allocation Fund - Class 1
d) Financial Data Schedule for Templeton Asset Allocation Fund - Class 2
e) Financial Data Schedule for Templeton International Fund - Class 1
f) Financial Data Schedule for Templeton International Fund - Class 2
g) Financial Data Schedule for Templeton Bond Fund - Class 1
h) Financial Data Schedule for Templeton Bond Fund - Class 2
i) Financial Data Schedule for Templeton Developing Markets Fund-Class 1
j) Financial Data Schedule for Templeton Developing Markets Fund - Class 2
k) Financial Data Schedule for Templeton Money Market Fund

ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

Not Applicable

ITEM 26 NUMBER OF HOLDERS OF SECURITIES

NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF MARCH 31, 1998

Templeton Stock Fund - Class 1 4
Templeton Stock Fund - Class 2 3
Templeton Asset Allocation Fund - Class 1 4
Templeton Asset Allocation Fund - Class 2 1
Templeton International Fund - Class 1 8
Templeton International Fund - Class 2 2
Templeton Bond Fund - Class 1 2
Templeton Bond Fund - Class 2 0
Templeton Developing Markets Fund - Class 1 4
Templeton Developing Markets Fund - Class 2 3
Templeton Money Market Fund 1
Franklin Growth Investments Fund - Class 1 -
Franklin Growth Investments Fund - Class 2 -
Franklin Small Cap Investments Fund - Class 1 -
Franklin Small Cap Investments Fund - Class 2 -
Mutual Discovery Investments Fund - Class 1 -
Mutual Discovery Investments Fund - Class 2 -
Mutual Shares Investment Fund - Class 1 -
Mutual Shares Investment Fund - Class 2 -

ITEM 27 INDEMNIFICATION

Reference is made to Article IV of the Registrant's Declaration of Trust, which
is incorporated herein by reference. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant by the Registrant pursuant to the
Declaration of Trust or otherwise, the Registrant is aware that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act, and, therefore, is unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the successful defense
of any act, suit or proceeding)is asserted by such trustees, officers or
controlling persons in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issues.

ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

The officers and directors of the Registrant's investment adviser also serve as
officers and/or directors or trustees for (1) Franklin Resources, Inc.
("Resources"), the corporate parent of all the Registrant's Investment Managers,
and/or (2) other investment companies in the Franklin Group of Funds.

(a) Templeton Asset Management Ltd., formerly known as Templeton Investment
Management (Singapore) Pte Ltd.

Templeton Asset Management ("Templeton Singapore"), an indirect, wholly owned
subsidiary of Resources, serves as investment manager to Templeton Developing
Markets Fund. For information please see Part B and Schedules A and D of Form
ADV of Templeton Singapore (SEC File 801-46997), incorporated herein by
reference, which set forth the officers and directors of Templeton Singapore and
information as to any business, profession, vocation of employment of a
substantial nature engaged in by those officers and directors during the past
two years.

(b) Templeton Investment Counsel, Inc.

Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Resources, serves as adviser to all Funds in the Trust except the
Templeton Developing Markets, Mutual Discovery Investments, Mutual Shares
Investments, and Franklin Growth Investments Funds and in that capacity
furnishes portfolio management services and investment research. For additional
information please see Part B and Schedules A and D of Form ADV of TICI (SEC
File 801-15125), incorporated herein by reference, which set forth the officers
and directors of TICI and information as to any business, profession, vocation
of employment of a substantial nature engaged in by those officers and directors
during the past two years.

Franklin Mutual Advisers, Inc. ("Mutual Advisers"), a direct, wholly owned
subsidiary of Resources, will serve as investment manager to the Mutual
Discovery Investments Fund and the Mutual Series Investments Fund. For
information please see Part B and Schedules A and D of Form ADV of Mutual
Advisers (SEC File 801-53068), incorporated herein by reference, which set forth
the officers and directors of Mutual Advisers and information as to any
business, profession, vocation of employment of a substantial nature engaged in
by those officers and directors during the past two years.

(d) Franklin Advisers, Inc.

Franklin Advisers, Inc. ("Advisers"), a direct wholly owned subsidiary of
Resources, will serve as Investment Manager to the Franklin Growth Investments
Fund and Franklin Small Cap Investments Fund. For additional information, please
see Part B and Schedules A and D of Form ADV of Advisers (SEC File 801-26292),
incorporated herein by reference, which sets forth the officers and directors of
Advisers and information as to any business, profession, vocation or employment
of a substantial nature engaged in by those officers and directors during the
past two years.

ITEM 29 PRINCIPAL UNDERWRITERS

a) Franklin Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:

Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust

Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.

(b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889).

ITEM 30 LOCATION OF ACCOUNTS AND RECORDS

The accounts, books, and other documents required to be maintained by Registrant
pursuant to Section 31(a) of the Investment Company Act of 1940 and rules
promulgated thereunder are in the possession of Templeton Funds Annuity Company,
100 Fountain Parkway, St. Petersburg, Florida 33716-1205, and Registrant, 500 E.
Broward Blvd., Fort Lauderdale, Florida 33394-3091.

ITEM 31 MANAGEMENT SERVICES

There are no management-related service contracts not discussed in Part A or
Part B.

ITEM 32 UNDERTAKINGS

(a)The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A by including the required information in the Fund's
annual report and to furnish each person to whom a prospectus is delivered a
copy of the annual report upon request and without charge.

PAGE

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the xxth day
of April, 1998.

TEMPLETON VARIABLE PRODUCTS SERIES FUND

By: /s/Charles E. Johnson*
Charles E. Johnson, President

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

Charles E. Johnson* Principal Executive Officer and Trustee
Charles E. Johnson Dated: April 29,1998

Fred R. Millsaps* Trustee
Fred R. Millsaps Dated: April 29, 1998

/s/Edith E. Holiday Trustee
Edith E. Holiday

Betty P. Krahmer* Trustee
Betty P. Krahmer Dated: April 29, 1998

Charles B. Johnson* Trustee
Charles B. Johnson Dated: April 29, 1998

Harris J. Ashton* Trustee
Harris J. Ashton Dated: Apri 29, 1998

S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: April 29, 1998

Andrew H. Hines, Jr.* Trustee
Andrew H. Hines, Jr. Dated: April 29, 1998

Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: April 29, 1998

Nicholas F. Brady* Trustee
Nicholas F. Brady Dated: April 29, 1998

James R. Baio* Principal Financial Officer
James R. Baio Dated: April 29, 1998

*By
/s/Karen L. Skidmore, Attorney-in-Fact
(Pursuant to Powers of Attorney listed in item 24(b) (17))

TEMPLETON VARIABLE PRODUCTS SERIES FUND
REGISTRATION STATEMENT
EXHIBITS INDEX

EXHIBIT NO. DESCRIPTION LOCATION
<S> <C> <C>

EX-99.B1(a) Form of Declaration of Trust Attached
EX-99.B1(b) Form of Amended Declaration of Trust Attached
EX-99.B1(c) Form of Amended Establishment and Disignation
of Series of Shares Attached
EX-99.B1(d) Amended Establishment and Designation
of Series of Shares Attached
EX-99.B2 By-Laws Attached
EX-99.B5(a) Amended and Restated Investment Management *
Agreement for Templeton Money Market Fund
and Templeton Bond Fund
EX-99.B5(b) Investment Management Agreement for Templeton *
Developing Markets Fund
EX-99.B5(c) Investment Management Agreement between Registrant, *
on behalf of the Templeton Asset Allocation Fund,
and Templeton Investment Counsel, Inc.
EX-99.B5(d) Investment Management Agreement Between *
Registrant, on behalf of the Templeton Stock
Fund, and Templeton Investment Counsel, Inc.
EX-99.B5(e) Investment Management Agreement between Registrant, *
on behalf of the Templeton International Fund,
and Templeton Investment Counsel, Inc.
EX-99.B5(f) Investment Management Agreement between Registrant, *
on behalf of the Franklin Growth Investments Fund,
and Franklin Advisers, Inc.
EX-99.B5(g) Investment Management Agreement between Registrant, *
on behalf of the Mutual Discovery Investments Fund,
and Franklin Mutual Advisers, Inc.
EX-99.B5(h) Investment Management Agreement between Registrant, *
on behalf of the Mutual Shares Investments Fund,
and Franklin Mutual Advisers, Inc.
EX-99.B5(i) Form of Management Agreement between Registrant, *
on behalf of Franklin Small Cap Investments Fund,
and Franklin Advisers, Inc.
EX-99.B8(a) Amended and Restated Custodian Agreement *
EX-99.B8(b) Master Custody Agreement Between the Registrant *
and the Bank of New York
EX-99.B9(a) Amended and Restated Business Management Agreement *
EX-99.B10(a) Opinion and Consent of Counsel dated August 26, 1988 Attached
EX-99.B11(a) Consent of Independent Auditors Attached
EX-99.B13(a) Letter concerning initial capital *
EX-99.B15(a) Distribution Plan between the Registrant and
Franklin Templeton Distributors, Inc.
EX-99.B16(a) Scheduled for computation of performance quotation *
EX-99.B17(a) Power of Attorney from Officers and Directors of *
the Registrant Executed on December 12, 1996
EX-99.B18(a) Form of Multiple Class Plan for all series of Attached
the Trust, except Templeton Money Fund
EX-99.B27(a) Financial Data Schedule for Templeton Attached
Stock Fund - Class 1
EX-99.B27(b) Financial Data Schedule for Templeton Attached
Stock Fund - Class 2
EX-99.B27(c) Financial Data Schedule for Templeton Asset Attached
Allocation Fund - Class 1
EX-99.B27(d) Financial Data Schedule for Templeton Asset Attached
Allocation Fund - Class 2
EX-99.B27(e) Financial Data Schedule for Templeton Attached
International Fund - Class 1
EX-99.B27(f) Financial Data Schedule for Templeton Attached
International Fund - Class 2
EX-99.B27(g) Financial Data Schedule for Templeton Attached
Bond Fund - Class 1
EX-99.B27(h) Financial Data Schedule for Templeton Attached
Bond Fund - Class 2
EX-99.B27(i) Financial Data Schedule for Templeton Attached
Developing Markets Fund - Class 1
EX-99.B27(j) Financial Data Schedule for Templeton Attached
Developing Markets Fund - Class 2

EX-99.B27(k) Financial Data Schedule for Templeton Attached
Money Market Fund
</TABLE>

*Incorporated by Reference

TEMPLETON VARIABLE PRODUCTS SERIES FUND

DECLARATION OF TRUST
DATED FEBRUARY 25, 1988

TABLE OF CONTENTS

PAGE

ARTICLE I.......................................................1
Section1.1. Name......................................1
Section1.2. Definitions...............................2

ARTICLE II......................................................4
Section 2.1. General Powers...........................4
Section 2.2. Investments..............................5
Section 2.3. Legal Title..............................7
Section 2.4. Issuance and Repurchase of Securities....7
Section 2.5. Delegation; Committees...................8
Section 2.6. Collection and Payment...................8
Section 2.7. Expenses.................................8
Section 2.8. Manner of Acting; By-laws................8
Section 2.9. Miscellaneous Powers.....................9
Section 2.10. Principal Transactions..................10
Section 2.11. Number of Trustees......................10
Section 2.12. Election and Term.......................11
Section 2.13. Resignation and Removal.................11
Section 2.14. Vacancies...............................12
Section 2.15. Delegation of Power to Other Trustees...13

ARTICLE III.....................................................13
Section 3.1. Underwriting Contract....................13
Section 3.2. Advisory, Management or Administrative
Contracts................................13
Section 3.3. Other Service Contracts..................14
Section3.4. Affiliations of Trustees or Officers, Etc.14
Section 3.5. Compliance with 1940 Act.................15

ARTICLE IV......................................................15
Section 4.1. No Personal Liability of Shareholders,
Trustees, Etc............................15
Section 4.2. Non-Liability of Trustees, Etc...........17
Section 4.3. Mandatory Indemnification................17
Section 4.4. No Bond Required of Trustees.............20

Section 4.5. No Duty of Investigation; Notice in
Trust Instruments, Etc...................20
Section 4.6. Reliance on Experts, Etc.................21

ARTICLE V.......................................................22
Section 5.1. Beneficial Interest......................22
Section 5.2. Rights of Shareholders...................22
Section 5.3. Trust Only...............................22
Section 5.4. Issuance of Shares.......................23
Section 5.5. Register of Shares.......................23
Section 5.6. Transfer of Shares.......................24
Section 5.7. Notices..................................25
Section 5.8. Treasury Shares..........................25
Section 5.9. Voting Powers............................25
Section 5.10. Meetings of Shareholders................26
Section 5.11. Series Designation......................26
Section 5.12. Power of Trustees to Change Provisions
Relating to Shares......................29

ARTICLE VI......................................................31
Section 6.1. Redemption of Shares.....................31
Section 6.2. Price....................................32
Section 6.3. Payment..................................32
Section 6.4. Effect of Suspension of Determination
of Net Asset Value.......................32
Section 6.5. Repurchase by Agreement..................33
Section 6.6. Redemption of Shareholder's Interest.....33
Section 6.7. Redemption of Shares in Order to
Qualify as Regulated Investment Company;
Disclosure of Holding....................33
Section 6.8. Reductions in Number of Outstanding
Shares Pursuant to Net Asset Value
Formula..................................34
Section 6.9. Suspension of Right of Redemption........34

ARTICLE VII.....................................................35
Section 7.1. Net Asset Value..........................35
Section 7.2. Distributions to Shareholders............36
Section 7.3. Determination of Net Income..............37
Section 7.4. Allocation Between Principal and Income..38
Section 7.5. Power to Modify Foregoing Procedures.....39

ARTICLE VIII....................................................39
Section 8.1. Duration.................................39
Section 8.2. Termination of Trust or Series of the
Trust....................................39
Section 8.3. Amendment Procedure......................41
Section 8.4. Merger, Consolidation and Sale of Assets.42
Section 8.5. Incorporation............................43

ARTICLE IX......................................................43

ARTICLE X.......................................................44
Section 10.1. Filing..................................44
Section 10.2. Governing Law...........................44
Section 10.3. Counterparts............................44
Section 10.4. Reliance by Third Parties...............45
Section 10.5. Provisions in Conflict with Law or
Regulations.............................45
Section 10.6. Name Reservation........................46

DECLARATION OF TRUST

TEMPLETON VARIABLE PRODUCTS SERIES FUND

Dated February 25, 1988

DECLARATION OF TRUST made February 25, 1988 by Eric G. Woodbury
(together with all other persons from time to time duly elected, qualified and
serving as Trustees in accordance with the provisions of Article II hereof, the
"Trustees");

WHEREAS, the Trustees desire to establish a trust for the investment
and reinvestment of funds contributed thereto; and

WHEREAS, the Trustees desire that the beneficial interest in the trust
assets be divided into transferable shares of beneficial interest, as
hereinafter provided;

NOW, THEREFORE, the Trustees declare that all money and property
contributed to the trust established hereunder shall be held and managed in
trust for the benefit of the holders, from time to time, of the shares of
beneficial interest issued hereunder and subject to the provisions hereof.

ARTICLE I

NAME AND DEFINITIONS

SECTION1.1. NAME. The name of the trust created hereby, until and
unless changed by the Trustees as provided in Section 8.3(a) hereof, is
"Templeton Variable Products Series Fund."

SECTION1.2. DEFINITIONS. Wherever they are used herein, the following
terms have the following respective meanings:

(a) "BY-LAWS" means the By-laws referred to in Section 2.8
hereof, as from time to time amended.

(b) The terms "COMMISSION" and "INTERESTED PERSON," have the
meanings given them in the 1940 Act. Except as otherwise defined by the Trustees
in conjunction with the establishment of any series of Shares, the term "VOTE OF
A MAJORITY OF THE SHARES OUTSTANDING AND ENTITLED TO VOTE" shall have the same
meaning as the term "VOTE OF A MAJORITY OF THE OUTSTANDING VOTING SECURITIES"
given it in the 1940 Act.

(c) "CUSTODIAN" means any Person other than the Trust who has
custody of any Trust Property as required by Section 17(f) of the 1940 Act, but
does not include a system for the central handling of securities described in
said Section 17(f).

(d) "DECLARATION" means this Declaration of Trust as amended from
time to time. Reference in this Declaration of Trust to "DECLARATION", "HEREOF,"
and "HEREUNDER" shall be deemed to refer to this Declaration rather than
exclusively to the article or section in which such words appear.

(e) "DISTRIBUTOR" means a party, other than the Trust, to a
contract described in Section 3.1 hereof.

(f)"HIS" shall include the feminine and neuter, as well as the
masculine, genders, and the plural as well as the singular number, in accordance
with the context.

(g) The "1940 ACT" means the Investment Company Act of 1940, as
amended from time to time. (h) "PERSON" means and includes individuals,
corporations, partnerships, trusts, associations, joint ventures and other
entities, whether or not legal entities, and governments and agencies and
political subdivisions thereof.

(i) "SERIES" shall mean any separate Series of shares called
"Funds", that may be established and designated pursuant to Section 5.11.

(j) "SHAREHOLDER" means a record owner of Outstanding Shares.

(k) "SHARES" means the equal proportionate units of interest into
which the beneficial interest in the Trust shall be divided from time to time,
including the Shares of any and all series which may be established by the
Trustees, and includes fractions of Shares as well as whole Shares. "OUTSTANDING
SHARES" means those Shares shown from time to time on the books of the Trust or
its Transfer Agent as then issued and outstanding, but shall not include Shares
which have been redeemed or repurchased by the Trust and which are at the time
held in the Treasury of the Trust.

(l)"TRANSFER AGENT" means any Person other than the Trust who
maintains the Shareholder records of the Trust, such as the list of
Shareholders, the number of Shares credited to each account, and the like.

(m) The "TRUST" means Templeton Variable Products Series Fund.

(n) The "TRUST PROPERTY" means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the account
of the Trust, including any series of the Trust, or the Trustees in their
capacity as such.

(o) The "TRUSTEES" means any Person who has signed this
Declaration, so long as he shall continue in office in accordance with the terms
hereof, and any other Person who may from time to time be duly elected,
qualified and serving as Trustees in accordance with the provisions of Article
II hereof, and reference herein to a Trustee or the Trustees shall refer to such
Person or Persons in this capacity or their capacities as Trustees hereunder.

ARTICLE II

TRUSTEES

SECTION 2.1. GENERAL POWERS. The Trustees shall have exclusive and
absolute control over the Trust Property and over the business of the Trust to
the same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, but with such powers of delegation as may be
permitted, and such obligations and duties as may be prescribed, by this
Declaration. The Trustees shall have power to conduct the business of the Trust
and carry on its operations in any and all of its branches and maintain offices
both within and without the Commonwealth of Massachusetts, in any and all states
of the United States of America, in the District of Columbia, and in any and all
commonwealths, territories, dependencies, colonies, possessions, agencies or
instrumentalities of the United States of America and of foreign governments,
and to do all such other things and execute all such instruments as they may
deem necessary, proper or desirable in order to promote the interests of the
Trust, including such things as may not be herein specifically mentioned. Any
determination as to what is in the interests of the Trust made by the Trustees
in good faith shall be conclusive. In construing the provisions of this
Declaration, the presumption shall be in favor of a grant of power to the
Trustees.

The enumeration of any specific power herein shall not be construed as
limiting the aforesaid power. Such powers of the Trustees may be executed
without order of or resort to any court.

SECTION 2.2. INVESTMENTS. The Trustees shall have the power:

(a) To operate as and carry on the business of an open-end,
management investment company, as defined in the 1940 Act, and exercise all the
powers necessary and appropriate to the conduct of such operations.

(b) To invest in, hold for investment, or reinvest in, securities
(which term "securities" shall include common and preferred stocks; warrants;
bonds, debentures, bills, time notes and all other evidences of indebtedness;
negotiable or non-negotiable instruments; mortgage related securities such as
mortgage-backed securities and collateralized mortgage obligations; privately
placed debt securities; "when-issued" securities; government securities,
including securities of any state, municipality or other political subdivision
thereof, or any government or quasi-governmental agency or instrumentality;
securities of issuers organized under foreign laws; and money market instruments
including bank certificates of deposit, finance paper, commercial paper,
bankers' acceptances and all kinds of repurchase agreements, of any corporation,
company, trust, association, firm or other business organization however
established, and of any country, state, municipality or other political
subdivision, or any governmental or quasi-governmental agency or
instrumentality).

(c) To acquire (by purchase, subscription or otherwise), to hold,
to trade in and deal in, to acquire or sell any rights, options, futures
contracts or other instruments to purchase or sell, and to sell or otherwise
dispose of, to lend, and to pledge any securities, property or other assets.

(d) To exercise all rights, powers and privileges of ownership or
interest in all securities and repurchase agreements included in the Trust
Property, including the right to vote thereon and otherwise act with respect
thereto and to do all acts for the preservation, protection, improvement and
enhancement in value of all such securities and repurchase agreements.

(e) To acquire (by purchase, lease or otherwise) and to hold,
use, maintain, develop and dispose of (by sale or otherwise) any property, real
or personal, including cash, and any interest therein.

(f) To borrow money and in this connection issue notes or other
evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust Property; to endorse, guarantee, or
undertake the performance of any obligation or engagement of any other Person
and to lend Trust Property.

(g) To aid by further investment any corporation, company, trust,
association or firm, any obligation of or interest in which is included in the
Trust Property or in the affairs of which the Trustees have any direct or
indirect interest; to do all acts and things designed to protect, preserve,
improve or enhance the value of such obligation or interest.

(h) In general to carry on any other business in connection with
or incidental to any of the foregoing powers, to do everything necessary,
suitable or proper for the accomplishment of any purpose or the attainment of
any object or the furtherance of any power hereinbefore set forth, either alone
or in association with others, and to do every other act or thing incidental or
appurtenant to or growing out of or connected with the aforesaid business or
purposes, objects or powers.

The foregoing clauses shall be construed both as objects and powers,
and the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.

The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.

SECTION 2.3. LEGAL TITLE. Legal title to all the Trust Property shall
be vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more of the Trustees, or in the name of the Trust, or in the name of any
other Person as nominee, on such terms as the Trustees may determine, provided
that the interest of the Trust therein is deemed appropriately protected. The
right, title and interest of the Trustees in the Trust Property and the property
of each series of the Trust shall vest automatically in each Person who may
hereafter become a Trustee. Upon the termination of the term of office,
resignation, removal or death of a Trustee, he shall automatically cease to have
any right, title or interest in any of the Trust Property and the right, title
and interest of such Trustee in all such property shall vest automatically in
the remaining Trustees. Such vesting and cessation of title shall be effective
whether or not conveying documents have been executed and delivered.

SECTION 2.4. ISSUANCE AND REPURCHASE OF SECURITIES. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of, transfer, and otherwise deal in Shares and,
subject to the provisions set forth in Articles VI and VII and Section 5.11
hereof, to apply to any such repurchase, redemption, retirement, cancellation or
acquisition of Shares any funds or property of the particular series of the
Trust with respect to which such Shares are issued, whether capital or surplus
or otherwise, to the full extent now or hereafter permitted by the laws of the
Commonwealth of Massachusetts governing business corporations.

SECTION 2.5. DELEGATION; COMMITTEES. The Trustees shall have power to
delegate from time to time to such of their number or to officers, employees or
agents of the Trust the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Trustees or
otherwise as the Trustees may deem expedient, to the same extent as such
delegation is permitted by the 1940 Act.

SECTION 2.6. COLLECTION AND PAYMENT. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and, without need for any court order, to enter into releases, agreements and
other instruments.

SECTION 2.7. EXPENSES. The Trustees shall have the power to incur and
pay any expenses which in the opinion of the Trustees are necessary or
incidental to carrying out any of the purposes of this Declaration, and to pay
reasonable compensation from the Trust and/or its series to themselves as
Trustees. The Trustees shall fix the compensation of all officers, employees and
Trustees.

SECTION 2.8. MANNER OF ACTING; BY-LAWS. Except as otherwise provided
herein or in the By-laws, any action to be taken by the Trustees may be taken by
a majority of the Trustees present at a meeting of Trustees (a quorum being
present), including any meeting held by means of a conference telephone circuit
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, or by written consents of the entire number
of Trustees then in office. The Trustees may adopt By-laws not inconsistent with
this Declaration to provide for the conduct of the business of the Trust and may
amend or repeal such By-laws to the extent such power is not reserved to the
Shareholders.

Notwithstanding the foregoing provisions of this Section 2.8 and in
addition to such provisions or any other provision of this Declaration or of the
By-laws, the Trustees may by resolution appoint a committee consisting of one or
more Trustees and less than the whole number of Trustees then in office, which
committee may be empowered to act for and bind the Trustees and the Trust, as if
the acts of such committee were the acts of all the Trustees then in office,
with respect to the institution, prosecution, dismissal, settlement, review or
investigation of any action, suit or proceeding which shall be pending or
threatened to be brought before any court, administrative agency or other
adjudicatory body.

SECTION 2.9. MISCELLANEOUS POWERS. The Trustees shall have the power
to: (a) employ or contract with such Persons as the Trustees may deem desirable
for the transaction of the business of the Trust; (b) enter into joint ventures,
partnerships and any other combinations or associations, to the extent permitted
by law; (c) remove Trustees or fill vacancies in or add to their number, elect
and remove such officers and appoint and terminate such agents or employees as
they consider appropriate, and appoint from their own number, and terminate, any
one or more committees which may exercise some or all of the power and authority
of the Trustees as the Trustees may determine; (d) to the extent permitted by
law, purchase, and pay for out of Trust Property, insurance policies insuring
the Shareholders, Trustees, officers, employees, agents, investment advisers,
administrators, distributors, selected dealers or independent contractors of the
Trust against all claims arising by reason of holding any such position or by
reason of any action taken or omitted by any such Person in such capacity; (e)
establish pension, profit-sharing, Share purchase, and other retirement,
incentive and benefit plans for any Trustees, officers, employees and agents of
the Trust; (f) to the extent permitted by law, indemnify any person with whom
the Trust has dealings, including persons referred to in subparagraph (d),
above, to such extent as the Trustees shall determine; (g) determine and change
the fiscal year of the Trust and the method by which its accounts shall be kept;
and (h) adopt a seal for the Trust, but the absence of such seal shall not
impair the validity of any instrument executed on behalf of the Trust.

SECTION 2.10. PRINCIPAL TRANSACTIONS. Except in transactions not
permitted by the 1940 Act or rules and regulations adopted by the Commission,
the Trustees may, on behalf of the Trust, buy any securities from or sell any
securities to, or lend any assets of the Trust to, any Trustee or officer of the
Trust or any firm of which any such Trustee or officer is a member acting as
principal, or have any such dealings with persons acting as investment adviser,
administrator, Distributor or Transfer Agent or with any Interested Person of
such Person; and the Trust may employ any such Person, or firm or company in
which such Person is an Interested Person, as broker, legal counsel, registrar,
Transfer Agent, dividend disbursing agent or Custodian upon customary terms.

SECTION 2.11. NUMBER OF TRUSTEES. The number of Trustees shall
initially be one (1), and thereafter shall be such number as shall be fixed from
time to time by a written instrument signed by a majority of the Trustees,
provided, however, that the number of Trustees shall in no event be less than
one (1) nor more than fifteen (15).

SECTION 2.12. ELECTION AND TERM. Except for the Trustees named herein,
designated by such Trustees prior to the issuance of Shares, or appointed to
fill vacancies pursuant to Section 2.14 hereof, the Trustees shall be elected by
the Shareholders owning of record a plurality of the Shares voting at a meeting
of Shareholders called for that purpose. The Trustees need not be elected
annually or at regular intervals. Except as provided in Section 5.10, the
Trustees shall not be required to call a meeting of Shareholders for the purpose
of electing Trustees, provided, however, that in the event that at any time,
other than the time preceding the first meeting of Shareholders for the purpose
of electing Trustees, less than a majority of the Trustees holding office at
that time were elected by the Shareholders, a meeting of the Shareholders for
the purpose of electing Trustees shall be held promptly and in any event within
60 days (unless the Commission shall by order extend such period). Except in the
event of resignation or removal pursuant to Section 2.13 hereof, each Trustee
shall hold office until the next such meeting of Shareholders and until his
successor is duly elected and qualified.

SECTION 2.13. RESIGNATION AND REMOVAL. Any Trustee may resign his trust
(without need for prior or subsequent accounting) by an instrument in writing
signed by him and delivered to the other Trustees and such resignation shall be
effective upon such delivery, or at a later date according to the terms of the
instrument. Upon the resignation or removal of a Trustee, or his otherwise
ceasing to be a Trustee, he shall execute and deliver such documents as the
remaining Trustees shall require for the purpose of conveying to the Trust or
the remaining Trustees any Trust Property held in the name of the resigning or
removed Trustee. Upon the incapacity or death of any Trustee, his legal
representative shall execute and deliver on his behalf such documents as the
remaining Trustee shall require as provided in the preceding sentence.

SECTION 2.14. VACANCIES. The term of office of a Trustee shall
terminate and a vacancy shall occur in the event of the death, resignation,
removal, bankruptcy, adjudicated incompetence or other incapacity to perform the
duties of the office of a Trustee. No such vacancy shall operate to annul the
Declaration or to revoke any existing vacancy, including a vacancy existing by
reason of an increase in the number of Trustees. Subject to the provisions of
Section 16(a) of the 1940 Act, the remaining Trustees shall fill such vacancy by
the appointment of such other person as they in their discretion shall see fit,
made by a written instrument signed by a majority of the Trustees then in
office. Any such appointment shall not become effective, however, until the
person named in the written instrument of appointment shall have accepted in
writing such appointment and agreed in writing to be bound by the terms of the
Declaration. An appointment of a Trustee may be made in anticipation of a
vacancy to occur at a later date by reason of retirement, resignation or
increase in the number of Trustees, provided that such appointment shall not
become effective prior to such retirement, resignation or increase in the number
of Trustees. Whenever a vacancy in the number of Trustees shall occur, until
such vacancy is filled as provided in this Section 2.14, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by the Declaration.
A written instrument certifying the existence of such vacancy signed by a
majority of the Trustees in office shall be conclusive evidence of the existence
of such vacancy.

SECTION 2.15. DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may,
by power of attorney, delegate his power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall less than two (2) Trustees personally exercise the powers granted to
the Trustees under this Declaration, except as herein otherwise expressly
provided.

ARTICLE III

CONTRACTS

SECTION 3.1. UNDERWRITING CONTRACT. The Trustees may in their
discretion from time to time enter into an exclusive or non-exclusive
underwriting contract or contracts providing for the sale of the Shares to net
the Trust not less than the amount provided for in Section 7.1 of Article VII
hereof, whereby the Trustees may either agree to sell the Shares to the other
party to the contract or appoint such other party their sales agent for the
Shares, and in either case on such terms and conditions as may be prescribed in
the By-laws, if any, and such further terms and conditions as the Trustees may
in their discretion determine not inconsistent with the provisions of this
Article III or of the By-laws; and such contract may also provide for the
repurchase of the Shares by such other party as agent of the Trustees.

SECTION 3.2. ADVISORY, MANAGEMENT OR ADMINISTRATIVE CONTRACTS. The
Trustees may in their discretion from time to time enter into one or more
investment advisory, management or administrative contracts whereby the other
party(ies) to such contract(s) shall undertake to furnish to the Trust or to one
or more of its series such management, investment advisory, administrative,
statistical and research facilities and services and such other facilities and
services, if any, and all upon such terms and conditions as the Trustees may in
their discretion determine, including the grant of authority to such other party
to recommend or to determine what securities shall be purchased or sold by the
Trust or a series and what portion of assets shall be uninvested, which
authority shall include the power to make changes in investments, and to
recommend or to select the brokers or dealers to be used for such transactions.

SECTION 3.3. OTHER SERVICE CONTRACTS. The Trustees are also empowered,
at any time and from time to time, to contract with any corporations, trusts,
associations, or other organizations, appointing it or them the Business
Manager, Custodian(s), Transfer Agent(s) and/or shareholder servicing agent(s)
and/or other agents for the Trust or one or more of the series. Every such
contract shall comply with such requirements and restrictions as may be set
forth in the By-laws or stipulated by resolution of the Trustees.

SECTION 3.4. AFFILIATIONS OF TRUSTEES OR OFFICERS, ETC. The fact that:

(i) any of the Shareholders, Trustees or officers of the Trust is
a shareholder, director, officer, partner, trustee, employee,
manager, adviser or distributor of or for any partnership,
corporation, trust, association or other organization or of or
for any parent or affiliate of any organization, with which a
contract of the character described in Sections 3.1, 3.2 or 3.3
above may have been or may hereafter be made, or that any such
organization, or any parent or affiliate thereof, is a
Shareholder of or has an interest in the Trust, or that

(ii) any partnership, corporation, trust, association or other
organization with which a contract of the character described in
Sections 3.1, 3.2 or 3.3 above may have been or may hereafter be
made also has any one or more of such contracts with one or more
other partnerships, corporations, trusts, associations or other
organizations, or has other businesses or interests, shall not
affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or
executing the same or create any liability or accountability to
the Trust or its Shareholders. SECTION 3.5. COMPLIANCE WITH 1940
ACT. Any contract entered into by the Trust shall be consistent
with applicable requirements of the 1940 Act or other applicable
law.

ARTICLE IV

LIMITATIONS OF LIABILITY OF SHAREHOLDERS,

TRUSTEES AND OTHERS

SECTION 4.1. NO PERSONAL LIABILITY OF SHAREHOLDERS, TRUSTEES, ETC. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property or the acts, obligations or affairs of the
Trust. No Trustee, officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person; and all such
Persons shall look solely to the Trust Property for satisfaction of claims of
any nature arising in connection with the affairs of the Trust. Every note,
bond, contract, instrument, certificate, share or undertaking made or issued by
the Trustees, or by any officers or officer shall give notice that this
Declaration is on file with the Secretary of The Commonwealth of Massachusetts,
and shall recite to the effect that the same was executed or made by or on
behalf of the Trust or by them as Trustees or Trustee or as officers or officer
and not individually, and that the obligations of such instrument are not
binding upon any of them or the Shareholders individually but are binding only
upon the assets and property of the Trust, or the particular Series in question,
as the case may be, but the omission thereof shall not operate to bind any
Trustees or Trustee or officers or officer or Shareholders or Shareholder
individually. If any Shareholder, Trustee, officer, employee, or agent, as such,
of the Trust is made a party to any suit or proceeding to enforce any such
liability of the Trust, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each Shareholder harmless
from and against all claims and liabilities to which such Shareholder may become
subject by reason of his being or having been a Shareholder, and shall reimburse
such Shareholder for all legal and other expenses reasonably incurred by him in
connection with any such claim or liability, provided that any such expenses
shall be paid solely out of the funds and property of the series of the Trust
with respect to which such Shareholder's Shares are issued. The rights accruing
to a Shareholder under this Section 4.1 shall not exclude any other right to
which such Shareholder may be lawfully entitled, nor shall anything herein
contained restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not specifically provided
for herein.

SECTION 4.2. NON-LIABILITY OF TRUSTEES, ETC. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its Shareholders,
or to any Shareholder, Trustee, officer, employee, agent or service provider
thereof for any action or failure to act by him (her) or any other such Trustee,
officer, employee, agent or service provider (including without limitation the
failure to compel in any way any former or acting Trustee to redress any breach
of trust) except for his own bad faith, willful misfeasance, gross negligence or
reckless disregard of the duties involved in the conduct of his office. The term
"service provider," as used in this Section 4.2, shall include any investment
adviser, principal underwriter, transfer agent, business manager or other person
with whom the Trust has an agreement for provision of services.

SECTION 4.3. MANDATORY INDEMNIFICATION.

(a) Subject to the exceptions and limitations contained in
paragraph (b) below:

(i) every person who is, or has been, a Trustee or officer of the
Trust shall be indemnified by the Trust to the fullest extent permitted by law
against all liability and against all expenses reasonably incurred or paid by
him in connection with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or having been a Trustee
or officer and against amounts paid or incurred by him in the settlement
thereof;

(ii) the words "claim", "action", "suit", or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal, or other,
including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.

(b) No indemnification shall be provided hereunder to a Trustee or officer:

(i) against any liability to the Trust or the Shareholders by
reason of a final adjudication by the court or other body before which the
proceeding was brought that he engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office;

(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable belief
that his action was in the best interest of the Trust;

(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i) resulting in a
payment by a Trustee or officer, unless there has been a determination that such
Trustee or officer did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office:

(A) by the court or other body approving the settlement or other
disposition; or

(B) based upon a review of readily available facts (as opposed to
a full trial-type inquiry) by (1) vote of a majority of the Disinterested
Trustees acting on the matter (provided that a majority of the Disinterested
Trustees then in office act on the matter) or (2) written opinion of independent
legal counsel.

(c) To the extent permitted by law, the rights of indemnification
herein provided may be insured against by policies maintained by the Trust,
shall be severable, shall not affect any other rights to which any Trustee or
officer may now or hereafter be entitled, shall continue as to a person who has
ceased to be such Trustee or officer and shall inure to the benefit of the
heirs, executors, administrators and assigns of such a person. Nothing contained
herein shall affect any rights to indemnification to which personnel of the
Trust other than Trustees and officers may be entitled by contract or otherwise
under law.

(d) Expenses of preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described in paragraph (a) of
this Section 4.3 may be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the recipient to repay such
amount if it is ultimately determined that he is not entitled to indemnification
under this Section 4.3, provided that either:

(i) such undertaking is secured by a surety bond or some other
appropriate security provided by the recipient, or the Trust shall be insured
against losses arising out of any such advances; or

(ii)a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees act on the matter) or an
independent legal counsel in a written opinion shall determine, based upon a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the recipient ultimately will be found
entitled to indemnification.

As used in this Section 4.3, a "Disinterested Trustee" is one who is not
(i) an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), or (ii)involved in the claim, action, suit or proceeding.

SECTION 4.4. NO BOND REQUIRED OF TRUSTEES. No Trustee shall be obligated to
give any bond or other security for the performance of any of his duties
hereunder.

SECTION 4.5. NO DUTY OF INVESTIGATION; NOTICE IN TRUST INSTRUMENTS,
ETC. No purchaser, lender, transfer agent or other Person dealing with the
Trustees or any officer, employee or agent of the Trust shall be bound to make
any inquiry concerning the validity of any transaction purporting to be made by
the Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or on the order
of the Trustees or of said officer, employee or agent. Every obligation,
contract, instrument, certificate, Share, other security of the Trust or
undertaking, and every other act or thing whatsoever executed in connection with
the Trust shall be conclusively presumed to have been executed or done by the
executors thereof only in their capacity as Trustees under this Declaration or
in their capacity as officers, employees or agents of the Trust. Every written
obligation, contract, instrument, certificate, Share, other security of the
Trust or undertaking made or issued by the Trustees may recite that the same is
executed or made by them not individually, but as Trustees under the
Declaration, and that the obligations of the Trust under any such instrument are
not binding upon any of the Trustees or Shareholders individually, but bind only
the estate of the Trust or series, as applicable, and may contain any further
recital which they or he may deem appropriate, but the omission of such recital
shall not operate to bind the Trustees individually. The Trustees may maintain
insurance for the protection of the Trust Property, its Shareholders, Trustees,
officers, employees and agents in such amount as the Trustees shall deem
adequate to cover possible tort liability, and such other insurance as the
Trustees in their sole judgment shall deem advisable.

SECTION 4.6. RELIANCE ON EXPERTS, ETC. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other records
of the Trust, upon an opinion of counsel, or upon reports made to the Trust by
any of its officers or employees or by the Investment Adviser, the Distributor,
Business Manager, Transfer Agent, selected dealers, accountants, appraisers or
other experts or consultants selected with reasonable care by the Trustees,
officers or employees of the Trust, regardless of whether such counsel or expert
may also be a Trustee.

ARTICLE V

SHARES OF BENEFICIAL INTEREST

SECTION 5.1. BENEFICIAL INTEREST. The interest of the beneficiaries
hereunder shall be divided into transferable Shares of beneficial interest of
$0.01 par value per share. All Shares shall be of one class, except as provided
in Section 5.11 hereof. The number of shares of beneficial interest authorized
hereunder is unlimited. All Shares issued hereunder including, without
limitation, Shares issued in connection with a dividend in Shares or a split of
Shares, shall be fully paid and non-assessable.

SECTION 5.2. RIGHTS OF SHAREHOLDERS. The ownership of the Trust
Property and the property of each series of the Trust of every description and
the right to conduct any business hereinbefore described are vested exclusively
in the Trustees, and the Shareholders shall have no interest therein other than
the beneficial interest conferred by their Shares, and they shall have no right
to call for any partition or division of any property, profits, rights or
interests of the Trust nor can they be called upon to share or assume any losses
of the Trust or suffer an assessment of any kind by virtue of their ownership of
Shares. The Shares shall be personal property giving only the rights in this
Declaration specifically set forth. The Shares shall not entitle the holder to
preference, preemptive, appraisal, conversion or exchange rights, except as the
Trustees may determine with respect to any series of Shares.

SECTION 5.3. TRUST ONLY. It is the intention of the Trustees to create
only the relationship of trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration of Trust shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners or members of
a joint stock association.

SECTION 5.4. ISSUANCE OF SHARES. The Trustees in their discretion may,
from time to time without vote of the Shareholders, issue Shares, in addition to
the then issued and outstanding Shares and Shares held in the treasury, to such
party or parties and for such amount and type of consideration, including cash
or property, at such time or times and on such terms as the Trustees may deem
best, and may in such manner acquire other assets (including the acquisition of
assets subject to, and in connection with the assumption of liabilities) and
businesses. In connection with any issuance of Shares, the Trustees may issue
fractional Shares and Shares held in the treasury, and Shares may be issued in
separate series as provided in Section 5.11 hereof. The Trustees may from time
to time divide or combine the Shares into a greater or lesser number without
thereby changing the proportionate beneficial interests in the Trust or any
series. Contributions to the Trust may be accepted for, and Shares shall be
redeemed as, whole Shares and/or 1/1,000ths of a Share or integral multiples
thereof. The Trustees, the Distributor or any other person the Trustees may
authorize for the purpose may, in their discretion, reject any application for
the issuance of Shares.

SECTION 5.5. REGISTER OF SHARES. A register shall be kept at the
principal office of the Trust or an office of the Transfer Agent which shall
contain the names and addresses of the Shareholders and the number of Shares
held by them respectively and a record of all transfers thereof. Such register
shall be conclusive as to who are the holders of the Shares and who shall be
entitled to receive dividends or distributions or otherwise to exercise or enjoy
the rights of Shareholders. No Shareholder shall be entitled to receive payment
of any dividend or distribution, nor to have notice given to him as herein or in
the By-laws provided, until he has given his address to the Transfer Agent or
such other officer or agent of the Trustees as shall keep the said register for
entry thereon. It is not contemplated that certificates will be issued for the
Shares; however, the Trustees, in their discretion, may authorize the issuance
of share certificates and promulgate appropriate rules and regulations as to
their use.

SECTION 5.6. TRANSFER OF SHARES. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereunto
duly authorized in writing, upon delivery to the Trustees or the Transfer Agent
of a duly executed instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other matters as may
reasonably be required. Upon such delivery the transfer shall be recorded on the
register of the Trust. Until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes hereunder and
neither the Trustees nor any Transfer Agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of the proposed
transfer.

Any Person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees or the Transfer
Agent, but until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor any Transfer Agent or registrar nor any officer or agent of the
Trust shall be affected by any notice of such death, bankruptcy or incompetence,
or other operation of law.

SECTION 5.7. NOTICES. Any and all notices to which any Shareholder may
be entitled and any and all communications shall be deemed duly served or given
if mailed, postage pre-paid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.

SECTION 5.8. TREASURY SHARES. Shares held in the treasury shall, until
reissued pursuant to Section 5.4, not confer any voting rights on the Trustees,
nor shall such Shares be entitled to any dividends or other distributions
declared with respect to the Shares.

SECTION 5.9. VOTING POWERS. The Shareholders shall have power to vote
only (i) for the election of Trustees as provided in Section 2.12; (ii) with
respect to any investment advisory or investment management contract entered
into pursuant to Section 3.2; (iii) with respect to termination of the Trust as
provided in Section 8.2; (iv) with respect to any amendment of this Declaration
to the extent and as provided in Section 8.3; (v)with respect to any merger,
consolidation or sale of assets as provided in Section 8.4; (vi) with respect to
incorporation of the Trust to the extent and as provided in Section 8.5; (vii)
to the same extent as the stockholders of a Massachusetts business corporation
as to whether or not a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the Shareholders; and (viii) with respect to such additional matters relating
to the Trust as may be required by this Declaration, the By-laws or any
registration of the Trust as an investment company under the 1940 Act with the
Commission (or any successor agency) or as the Trustees may consider necessary
or desirable. Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote, except that the Trustees may, in conjunction with
the establishment of any series of Shares, establish conditions under which the
several series shall have separate voting rights or no voting rights. There
shall be no cumulative voting in the election of Trustees. Until Shares are
issued, the Trustees may exercise all rights of Shareholders and may take any
action required by law, this Declaration or the By-laws to be taken by
Shareholders. The By-laws may include further provisions for Shareholders' votes
and meetings and related matters.

SECTION 5.10. MEETINGS OF SHAREHOLDERS. A meeting of the Shareholders
shall be held at such times, on such day and at such hour as the Trustees may
from time to time determine, either at the principal office of the Trust, or at
such other place as may be designated by the Trustees, for the purposes
specified in Section 2.12 or 2.13 and for such other purposes as may be
specified by the Trustees.

SECTION 5.11. SERIES DESIGNATION. The Trustees, in their discretion
from time to time, may authorize the division of Shares into two or more series,
and the different series shall be established and designated, and the variations
in the relative rights and preferences as between the different series shall be
fixed and determined, by the Trustees; provided, that all Shares shall be
identical except for such variations as shall be fixed and determined by the
Trustees and set forth in the Trust's then current registration statement, and
the reasonable consequences of such variations. All references to Shares in this
Declaration shall be deemed to be Shares of any or all series as the context may
require.

If the Trustees shall divide the Shares of the Trust into two or more
series, the following provisions shall be applicable:

(a) All provisions herein relating to the
Trust shall apply equally to each series of the Trust except
as the context requires otherwise.

(b) The number of authorized Shares and the
number of Shares of each series that may be issued shall be
unlimited. The Trustees may classify or reclassify any
unissued Shares or any Shares previously issued and reacquired
of any series into one or more series that may be established
and designated from time to time. The Trustees may hold as
treasury shares (of the same or some other series), reissue
for such consideration and on such terms as they may
determine, or cancel any Shares of any series reacquired by
the Trust at their discretion from time to time.

(c) All consideration received by the Trust
for the issue or sale of Shares of a particular series,
together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the
sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds in
whatever form the same may be, shall irrevocably belong to
that series for all purposes, subject only to the rights of
creditors of such series and except as may otherwise be
required by applicable tax laws, and shall be so recorded upon
the books of account of the Trust. In the event that there are
any assets, income, earnings, profits, and proceeds thereof,
funds, or payments which are not readily identifiable as
belonging to any particular series, the Trustees shall
allocate them among any one or more of the series established
and designated from time to time in such manner and on such
basis as they, in their sole discretion, deem fair and
equitable. Each such allocation by the Trustees shall be
conclusive and binding upon all persons for all purposes.

(d) The assets belonging to each particular
series shall be charged with the liabilities of the Trust in
respect of that series and all expenses, costs, charges and
reserves attributable to that series, and any general
liabilities, expenses, costs, charges or reserves of the Trust
which are not readily identifiable as belonging to any
particular series shall be allocated and charged by the
Trustees to and among any one or more of the series
established and designated from time to time in such manner
and on such basis as the Trustees in their sole discretion
deem fair and equitable and no series shall be liable to any
person except for its allocated share. Each allocation of
liabilities, expenses, costs, charges and reserves by the
Trustees shall be conclusive and binding upon all persons for
all purposes. The Trustees shall have full discretion, to the
extent not inconsistent with the 1940 Act, to determine which
items are capital; and each such determination and allocation
shall be conclusive and binding upon all persons. All persons
extending credit to, or contracting with or having any claim
against a particular series of the Trust shall look only to
the assets of that particular series for payment of such
credit, contract or claim.

(e) Each Share of a series of the Trust shall
represent a beneficial interest in the net assets of such
series. Each holder of Shares of a series shall be entitled to
receive his pro rata share of distributions of income and
capital gains made with respect to such series. Upon
redemption of his Shares or indemnification for liabilities
incurred by reason of his being or having been a Shareholder
of a series, such Shareholder shall be paid solely out of the
funds and property of such series of the Trust. Upon
liquidation or termination of a series of the Trust,
Shareholders of such series shall be entitled to receive a pro
rata share of the net assets of such series. A Shareholder of
a particular series of the Trust shall not be entitled to
participate in a derivative or class action on behalf of any
other series or the Shareholders of any other series of the
Trust.

(f) The establishment and designation of any
series of Shares shall be effective upon the execution by a
majority of the then Trustees of an instrument setting forth
such establishment and designation and the relative rights and
preferences of such series, or as otherwise provided in such
instrument. The Trustees may by an instrument executed by a
majority of their number abolish any series and the
establishment and designation thereof. Except as otherwise
provided in this Article V, the Trustees shall have the power
to determine the designations, preferences, privileges,
limitations and rights, of each class and series of Shares.
Each instrument referred to in this paragraph shall have the
status of an amendment to this Declaration.

SECTION 5.12. POWER OF TRUSTEES TO CHANGE PROVISIONS RELATING TO
SHARES. Notwithstanding any other provision of this Declaration of Trust and
without limiting the power of the Trustees to amend the Declaration of Trust as
provided elsewhere herein, the Trustees shall have the power to amend this
Declaration of Trust, at any time and from time to time, in such manner as the
Trustees may determine in their sole discretion, without the need for
Shareholder action, so as to add to, delete, replace or otherwise modify any
provisions relating to the Shares contained in this Declaration of Trust,
provided that before adopting any such amendment without Shareholder approval
the Trustees shall determine that it is consistent with the fair and equitable
treatment of all Shareholders or that Shareholder approval is not otherwise
required by the 1940 Act or other applicable law.

Without limiting the generality of the foregoing, the Trustees may, for
the above-stated purposes, amend the Declaration of Trust to:

(a) create one or more Series of Shares (in addition to
any Series already existing or otherwise) with such rights and
preferences and such eligibility requirements for investment therein as
the Trustees shall determine and reclassify any or all outstanding
Shares as shares of particular Series in accordance with such
eligibility requirements;

(b) amend any of the provisions set forth in Section 5.11 of this
Article V;

(c) combine one or more Series of Shares into a single Series on
such terms and conditions as the Trustees shall determine;

(d) change or eliminate any eligibility requirements
for investment in Shares of any Series, including without limitation,
to provide for the issue of Shares of any Series in connection with any
merger or consolidation of the Trust with another Trust or company or
any acquisition by the Trust of part or all of the assets of another
trust or investment company;

(e) change the designation of any Series of Shares;

(f) change the method of allocating dividends among the various
Series of Shares;

(g) allocate any specific assets or liabilities of the Trust or
any specific items of income or expense of the Trust to one or more
Series of Shares;

(h) specifically allocate assets to any or all Series
of Shares or create one or more additional Series of Shares which are
preferred over all other Series of Shares in respect of assets
specifically allocated thereto or any dividends paid by the Trust with
respect to any net income, however determined, earned from the
investment and reinvestment of any assets so allocated or otherwise and
provide for any special voting or other rights with respect to such
Series.

ARTICLE VI

REDEMPTION AND REPURCHASE OF SHARES

SECTION 6.1. REDEMPTION OF SHARES. All Shares of the Trust shall be
redeemable at the redemption price determined in the manner set out in this
Declaration. Redeemed or repurchased Shares may be resold by the Trust.

The Trust shall redeem the Shares at the price determined as
hereinafter set forth, upon the appropriately verified written application of
the record holder thereof (or upon such other form of request as the Trustees
may determine) at such office or agency as may be designated from time to time
for that purpose by the Trustees. The Trustees may from time to time specify
additional conditions, not inconsistent with the 1940 Act, regarding the
redemption of Shares in the Trust's then effective registration statement or
prospectus under the Securities Act of 1933.

SECTION 6.2. PRICE. Shares will be redeemed at their net asset value
determined as set forth in Section 7.1 hereof as of such time as the Trustees
shall have theretofore prescribed by resolution. In the absence of such
resolution, the redemption price of Shares deposited shall be the net asset
value of such Shares next determined as set forth in Section 7.1 hereof after
receipt of such application.

SECTION 6.3. PAYMENT. Payment for such Shares shall be made in cash or
in property out of the assets of the relevant series of the Trust to the
Shareholder of record at such time and in the manner, not inconsistent with the
1940 Act or other applicable laws, as may be specified from time to time in the
Trust's then effective registration statement or prospectus under the Securities
Act of 1933, subject to the provisions of Section 6.4 hereof.

SECTION 6.4. EFFECT OF SUSPENSION OF DETERMINATION OF NET ASSET VALUE.
If, pursuant to Section 6.9 hereof, the Trustees shall declare a suspension of
the determination of net asset value, the rights of Shareholders (including
those who shall have applied for redemption pursuant to Section 6.1 hereof but
who shall not yet have received payment) to have Shares redeemed and paid for by
the Trust shall be suspended until the termination of such suspension is
declared. Any record holder who shall have his redemption right so suspended
may, during the period of such suspension, by appropriate written notice of
revocation at the office or agency where application was made, revoke any
application for redemption not honored and withdraw any certificates on deposit.
The redemption price of Shares for which redemption applications have not been
revoked shall be the net asset value of such Shares next determined as set forth
in Section 7.1 after the termination of such suspension, and payment shall be
made within seven (7) days after the date upon which the application was made
plus the period after such application during which the determination of net
asset value was suspended.

SECTION 6.5. REPURCHASE BY AGREEMENT. The Trust may repurchase Shares
directly, or through the Distributor or another agent designated for the
purpose, by agreement with the owner thereof at a price not exceeding the net
asset value per share determined as of the time when the purchase or contract of
purchase is made or the net asset value as of any time which may be later
determined pursuant to Section 7.1 hereof, provided payment is not made for the
Shares prior to the time as of which such net asset value is determined.

SECTION 6.6. REDEMPTION OF SHAREHOLDER'S INTEREST. The Trust shall have
the right at any time to redeem Shares of any Shareholder for their then current
net asset value per Share if at such time the aggregate purchase price of the
Shares owned by the Shareholder is less than $500, subject to such terms and
conditions as the Trustees may approve.

SECTION 6.7. REDEMPTION OF SHARES IN ORDER TO QUALIFY AS REGULATED
INVESTMENT COMPANY; DISCLOSURE OF Holding. If the Trustees shall, at any time
and in good faith, be of the opinion that direct or indirect ownership of Shares
or other securities of the Trust has or may become concentrated in any Person to
an extent which would disqualify any series of the Trust as a regulated
investment company under the Internal Revenue Code, then the Trustees shall have
the power by lot or other means deemed equitable by them (i) to call for
redemption by any such Person of a number, or principal amount, of Shares or
other securities of the Trust sufficient to maintain or bring the direct or
indirect ownership of Shares or other securities of the Trust into conformity
with the requirements for such qualification and (ii) to refuse to transfer or
issue Shares or other securities of the Trust to any Person whose acquisition of
the Shares or other securities of the Trust in question would result in such
disqualification. The redemption shall be effected at the redemption price and
in the manner provided in Section 6.1.

The holders of Shares of the Trust shall upon demand disclose to the
Trustees in writing such information with respect to direct and indirect
ownership of Shares of the Trust as the Trustees may deem necessary to comply
with the provisions of the Internal Revenue Code, or to comply with the
requirements of any other taxing authority.

SECTION 6.8. REDUCTIONS IN NUMBER OF OUTSTANDING SHARES PURSUANT TO NET
ASSET VALUE FORMULA. The Trust may also reduce the number of outstanding Shares
pursuant to the provisions of Section 7.3.

SECTION 6.9. SUSPENSION OF RIGHT OF REDEMPTION. The Trustees may adopt
procedures under which the Trust may declare a suspension of the right of
redemption or postpone the date of payment or redemption for the whole or any
part of any period (i)during which the New York Stock Exchange is closed other
than customary weekend and holiday closings, (ii) during which trading on the
New York Stock Exchange is restricted, (iii) during which an emergency exists as
a result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of its net assets, or (iv) during any other period when
the Commission may for the protection of security holders of the Trust by order
permit suspension of the right of redemption or postponement of the date of
payment or redemption; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions prescribed in (ii), (iii),
or (iv) exist. To the extent permitted by the Commission, (i) and (ii) above may
be expanded to include other securities exchanges. Such suspension shall take
effect at such time as the Trust shall specify and there shall be no right of
redemption or payment on redemption until the Trust shall declare the suspension
at an end.

ARTICLE VII

DETERMINATION OF NET ASSET VALUE,

NET INCOME AND DISTRIBUTIONS

SECTION 7.1. NET ASSET VALUE. The value of the assets of any series of
the Trust shall be determined by appraisal of the securities allocated to such
series, such appraisal to be on the basis of the market value of such securities
or, consistent with the rules and regulations of the Commission, by such other
method as shall be deemed to reflect the fair value thereof, determined in good
faith by or under the direction of the Trustees. Money market instruments with
remaining maturities of less than sixty days may be valued on an amortized cost
basis, and the Money Market Fund may use the amortized cost method to determine
the value of its entire portfolio of securities. From the total value of said
assets, there shall be deducted all indebtedness, interest, taxes, payable or
accrued, including estimated taxes on unrealized book profits, expenses and
management charges accrued to the appraisal date, net income determined and
declared as a distribution and all other items in the nature of liabilities
attributable to such series which shall be deemed appropriate. The resulting
amount which shall represent the total net assets of the series shall be divided
by the number of Shares of such series outstanding at the time and the quotient
so obtained shall be deemed to be the net asset value of the Shares of such
series (which may be rounded to the nearest whole cent). The net asset value of
the Shares shall be determined at least once daily on such days and in
accordance with the requirements provided for in applicable rules of the
Commission, at such time or times as the Trustees shall determine. The power and
duty to make the daily calculations may be delegated by the Trustees to the
Investment Adviser, the Custodian, the Business Manager, the Transfer Agent or
such other Person as the Trustees may determine. The Trustees may suspend the
daily determination of net asset value to the extent permitted by the 1940 Act.

SECTION 7.2. DISTRIBUTIONS TO SHAREHOLDERS. The Trustees shall from
time to time distribute ratably among the Shareholders of a series such
proportion of the net profits, surplus (including paid-in surplus), capital, or
assets of such series held by the Trustees as they may deem proper. Such
distributions may be made in cash or property (including without limitation any
type of obligations of such series or any assets thereof), and the Trustees may
distribute ratably among the Shareholders additional Shares of such series
issuable hereunder in such manner, at such times, and on such terms as the
Trustees may deem proper. Such distributions may be among the Shareholders of
record at the time of declaring a distribution or among the Shareholders of
record at such other date or time or dates or times as the Trustees shall
determine. The Trustees may in their discretion determine that, solely for the
purposes of such distributions, Outstanding Shares shall exclude Shares for
which orders have been placed subsequent to a specified time on the date the
distribution is declared or on the next preceding day if the distribution is
declared as of a day on which the Transfer Agent for the Trust or applicable
series is not open for business. The Trustees may always retain from the net
profits such amount as they may deem necessary to pay the debts or expenses of
the series or to meet obligations of the series, or as they may deem desirable
to use in the conduct of its affairs or to retain for future requirements or
extensions of the business.

Inasmuch as the computation of net income and gains for Federal income
tax purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional or lesser amounts
sufficient to enable the Trust or the series to avoid or reduce liability for
taxes.

SECTION 7.3. DETERMINATION OF NET INCOME. The net income of any series
may consist of (i) all dividend and interest income accrued on portfolio assets
of the series, less (ii) all actual and accrued liabilities determined in
accordance with generally accepted accounting principles and plus or minus (iii)
net realized or net unrealized gains and losses on the assets of the series.
Interest income may include discount earned (including both original issue and
market discount) on discount paper accrued ratably to the date of maturity or
determined in such other manner as the Trustees may determine. Expenses of the
series, including the advisory or management fee, shall be accrued each day.
Such net income may be determined by or under the direction of the Trustees as
of such time or times as the Trustees shall determine, and all the net income of
the series, so determined, may be declared as a dividend on the Outstanding
Shares of such series. If, for any reason, the net income of the series
determined at any time is a negative amount, the Trustees shall have the power
(i) to offset each Shareholder's pro rata share of such negative amount from the
accrued dividend account of such Shareholder, or (ii) to reduce the number of
Outstanding Shares of the series by reducing the number of Shares in the account
of such Shareholder by that number of full and fractional Shares which
represents the amount of such excess negative net income, or (iii) to cause to
be recorded on the books of the series an asset account in the amount of such
negative net income, which account may be reduced by the amount, provided that
the same shall thereupon become the property of the series and shall not be paid
to any Shareholder, of dividends declared thereafter upon the Outstanding Shares
on the day such negative net income is experienced, until such asset account is
reduced to zero; or (iv) to combine the methods described in clauses (i) and
(ii) and (iii) of this sentence, in order to cause the net asset value per Share
of the series to remain at a constant amount per Outstanding Share immediately
after each such determination and declaration. The Trustees shall also have the
power to omit to declare a dividend out of net income for the purpose of causing
the net asset value per Share of the series to be increased to a constant
amount. The Trustees shall not be required to adopt, but may at any time adopt,
discontinue or amend a practice of maintaining the net asset value per Share of
a series at a constant amount, in accordance with applicable rules under the
1940 Act.

SECTION 7.4. ALLOCATION BETWEEN PRINCIPAL AND INCOME. The Trustees
shall have full discretion to determine whether any cash or property received
shall be treated as income or as principal and whether any item of expense shall
be charged to the income or the principal account, and their determination made
in good faith shall be conclusive. In the case of stock dividends received, the
Trustees shall have full discretion to determine, in the light of the particular
circumstances, how much if any of the value thereof shall be treated as income,
the balance, if any, to be treated as principal.

SECTION 7.5. POWER TO MODIFY FOREGOING PROCEDURES. Notwithstanding any
of the foregoing provisions of this Article VII, the Trustees may prescribe, in
their absolute discretion, such other bases and times for determining the per
Share net asset value of the series' Shares or net income, or the declaration
and payment of dividends and distributions as they may deem necessary or
desirable.

ARTICLE VIII

DURATION; TERMINATION OF TRUST;

AMENDMENT; MERGERS, ETC.

SECTION 8.1. DURATION. The Trust or any series of the Trust shall
continue without limitation of time but subject to the provisions of this
Article VIII.

SECTION 8.2. TERMINATION OF TRUST OR SERIES OF THE TRUST. (a) The Trust
or any series of the Trust may be terminated by the affirmative vote of the
holders of not less than two-thirds of the Shares outstanding and entitled to
vote, at any meeting of Shareholders or by an instrument in writing, without a
meeting, signed by a majority of the Trustees and consented to by the holders of
not less than two-thirds of such Shares, or by such other vote as may be
established by the Trustees with respect to any series of Shares. Upon the
termination of the Trust or any series of the Trust,

(i) The Trust or the series of the Trust shall
carry on no business except for the purpose of winding up its affairs.

(ii) The Trustees shall proceed to wind up the
affairs of the Trust or the series of the Trust and all of the powers
of the Trustees under this Declaration shall continue until the affairs
of the Trust or the series of the Trust shall have been wound up,
including the power to fulfill or discharge the contracts of the
Trustees on behalf of the Trust or any series of the Trust, collect its
assets, sell, convey, assign, exchange, transfer or otherwise dispose
of all or any part of the remaining Trust Property or property of the
series of the Trust to one or more persons at public or private sale
for consideration which may consist in whole or in part of cash,
securities or other property of any kind, discharge or pay its
liabilities, and do all other acts appropriate to liquidate its
business; provided that any sale, conveyance, assignment, exchange,
transfer or other disposition of all or substantially all the Trust
Property or property of the series of the Trust shall require
Shareholder approval in accordance with Section 8.4 hereof.

(iii) After paying or adequately providing for
the payment of all liabilities, and upon receipt of such releases,
indemnities and refunding agreements as they deem necessary for their
protection, the Trustees may distribute the remaining Trust Property,
in cash or in kind or partly each, among the Shareholders according to
their respective rights.

(b) After termination of the Trust or any series of the
Trust and distribution to the Shareholders as herein provided, a majority of the
Trustees shall execute and lodge among the records of the Trust or the series of
the Trust an instrument in writing setting forth the fact of such termination,
and the Trustees shall thereupon be discharged from all further liabilities and
duties hereunder, and the rights and interests of all Shareholders shall
thereupon cease.

SECTION 8.3. AMENDMENT PROCEDURE. (a) This Declaration may be amended
by a vote of the holders of a majority of the Shares outstanding and entitled to
vote or by any instrument in writing, without a meeting, signed by a majority of
the Trustees and consented to by the holders of a majority of the Shares
outstanding and entitled to vote. The Trustees may also amend this Declaration
without the vote or consent of Shareholders to change the name of the Trust, to
supply any omission, to cure, correct or supplement any ambiguous, defective or
inconsistent provision hereof, or if they deem it necessary to conform this
Declaration to the requirements of applicable federal laws or regulations or the
requirements of the regulated investment company provisions of the Internal
Revenue Code, but the Trustees shall not be liable for failing so to do.

(b) No amendment may be made under this Section 8.3
which would change any rights with respect to any Shares of the Trust by
reducing the amount payable thereon upon liquidation of the Trust or by
diminishing or eliminating any voting rights pertaining thereto, except with the
vote or consent of the holders of two-thirds of the Shares outstanding and
entitled to vote, or by such other vote as may be established by the Trustees
with respect to any series of Shares. Nothing contained in this Declaration
shall permit the amendment of this Declaration to impair the exemption from
personal liability of the Shareholders, Trustees, officers, employees and agents
of the Trust or to permit assessments upon Shareholders.

(c) A certificate signed by a majority of the Trustees
setting forth an amendment and reciting that it was duly adopted by the
Shareholders or by the Trustees as aforesaid or a copy of the Declaration, as
amended, and executed by a majority of the Trustees, shall be conclusive
evidence of such amendment when lodged among the records of the Trust.

Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of securities of the Trust shall become effective,
this Declaration may be terminated or amended in any respect by the affirmative
vote of a majority of the Trustees or by an instrument signed by a majority of
the Trustees.

SECTION 8.4. MERGER, CONSOLIDATION AND SALE OF ASSETS. The Trust may
merge or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust Property, including its good will, upon such terms and conditions and for
such consideration when and as authorized at any meeting of Shareholders called
for the purpose by the affirmative vote of the holders of two-thirds of the
Shares outstanding and entitled to vote, or by an instrument or instruments in
writing without a meeting, consented to by the holders of two-thirds of the
Shares or by such other vote as may be established by the Trustees with respect
to any series of Shares; provided, however, that, if such merger, consolidation,
sale, lease or exchange is recommended by the Trustees, the vote or written
consent of the holders of a majority of the Shares outstanding and entitled to
vote, or such other vote or written consent as may be established by the
Trustees with respect to any series of Shares, shall be sufficient
authorization; and any such merger, consolidation, sale, lease or exchange shall
be deemed for all purposes to have been accomplished under and pursuant to the
statutes of the Commonwealth of Massachusetts.

SECTION 8.5. INCORPORATION. With the approval of the holders of a
majority of the Shares outstanding and entitled to vote, or by such other vote
as may be established by the Trustees with respect to any series of Shares, the
Trustees may cause to be organized or assist in organizing a corporation or
corporations under the laws of any jurisdiction or any other trust, partnership,
association or other organization to take over all of the Trust Property or to
carry on any business in which the Trust shall directly or indirectly have any
interest, and to sell, convey and transfer the Trust Property to any such
corporation, trust, association or organization in exchange for the Shares or
securities thereof or otherwise, and to lend money to, subscribe for the Shares
or securities of, and enter into any contracts with any such corporation, trust,
partnership, association or organization, or any corporation, partnership,
trust, association or organization in which the Trust holds or is about to
acquire shares or any other interest. The Trustees may also cause a merger or
consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to the
extent permitted by law, as provided under the law then in effect. Nothing
contained herein shall be construed as requiring approval of Shareholders for
the Trustees to organize or assist in organizing one or more corporations,
trusts, partnerships, associations or other organizations and selling, conveying
or transferring a portion of the Trust Property for value to such organizations
or entities.

ARTICLE IX

REPORTS TO SHAREHOLDERS

The Trustees shall at least semi-annually submit to the Shareholders a
written financial report, which may be included in the Trust's prospectus, of
the transactions of the Trust, including financial statements which shall at
least annually be certified by independent public accountants.

ARTICLE X

MISCELLANEOUS

SECTION 10.1. FILING. This Declaration and any amendment hereto shall
be filed in the office of the Secretary of the Commonwealth of Massachusetts and
in such other places as may be required under the laws of Massachusetts and may
also be filed or recorded in such other places as the Trustees deem appropriate.
Each amendment so filed shall be accompanied by a certificate signed and
acknowledged by a Trustee stating that such action was duly taken in a manner
provided herein, and unless such amendment or such certificate sets forth some
later time for the effectiveness of such amendment, such amendment shall be
effective upon its filing. A restated Declaration, integrating into a single
instrument all of the provisions of the Declaration which are then in effect and
operative, may be executed from time to time by a majority of the Trustees and
shall, upon filing with the Secretary of the Commonwealth of Massachusetts, be
conclusive evidence of all amendments contained therein and may hereafter be
referred to in lieu of the original Declaration and the various amendments
thereto.

SECTION 10.2. GOVERNING LAW. This Declaration is executed by the
Trustees and delivered in the Commonwealth of Massachusetts and with reference
to the laws thereof, and the rights of all parties and the validity and
construction of every provision hereof shall be subject to and construed
according to the laws of said State.

SECTION 10.3. COUNTERPARTS. This Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.

SECTION 10.4. RELIANCE BY THIRD PARTIES. Any certificate executed by an
individual who, according to the records of the Trust appears to be a Trustee
hereunder, certifying to: (a) the number or identity of Trustees or
Shareholders, (b) the due authorization of the execution of any instrument or
writing, (c)the form of any vote passed at a meeting of Trustees or
Shareholders, (d) the fact that the number of Trustees or Shareholders present
at any meeting or executing any written instrument satisfies the requirements of
this Declaration, (e)the form of any By-laws adopted by or the identity of any
officers elected by the Trustees, or (f) the existence of any fact or facts
which in any manner relate to the affairs of the Trust, shall be conclusive
evidence as to the matters so certified in favor of any Person entitled to rely
upon such certificates in dealing with the Trustees and their successors.

SECTION 10.5. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS. (a) The
provisions of this Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the Internal Revenue Code or with other applicable
laws and regulations, the conflicting provision shall be deemed never to have
constituted a part of this Declaration; provided, however, that such
determination shall not affect any of the remaining provisions of this
Declaration or render invalid or improper any action taken or omitted prior to
such determination.

(b) If any provision of this Declaration shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect such provisions in any other jurisdiction or any
other provision of this Declaration in any jurisdiction.

SECTION 10.6. NAME RESERVATION. The Trustees on behalf of the Trust
acknowledge that Templeton, Galbraith & Hansberger Ltd. and its subsidiaries
("TGH") licensed to the Trust the non-exclusive right to use the name
"Templeton" as part of the name of the Trust, and has reserved the right to
grant the non-exclusive use of the name "Templeton" or any derivative thereof to
any other party. In addition, TGH reserves the right to grant the non-exclusive
use of the name Templeton to, and to withdraw such right from, any other
business or other enterprise. TGH reserves the right to withdraw from the Trust
the right to use said name Templeton and will withdraw such right if the Trust
ceases to employ, for any reason, TGH, an affiliate, or any successor as adviser
of the Trust.

IN WITNESS WHEREOF, the undersigned has executed this instrument this
25th day of February, 1988.

-----------------------------
Eric G. Woodbury
Ten Post Office Square South
Boston, Massachusetts 02109

On this _____ day of _____________, in the year 1988, before me,
___________________, a notary public, personally appeared
____________________________ (or proved to me on the basis of satisfactory
evidence) to be the person whose name is subscribed to this instrument, and
acknowledged that he executed it.

-----------------------------
Notary Public

SEAL
My commission expires:

FINANCIAL STATEMENTS

[TO BE PROVIDED]

AMENDMENT TO

DECLARATION OF TRUST

TEMPLETON VARIABLE PRODUCTS SERIES FUND

This Amendment to the Declaration of Trust (the "Declaration") of
Templeton Variable Products Series Fund (the "Trust") is made this ____ day of
___________, 1997 by the parties signatory hereto, as Trustees of the Trust (the
"Trustees").

WITNESSETH

WHEREAS, the Declaration was made on February 25, 1988 and amended on
June 15, 1988, May 1, 1992 and December 5, 1995 and the Trustees now desire to
further amend the Declaration; and

WHEREAS, Article V, Section 5.12 of the Declaration provides that the
Trustees may amend the Declaration, without Shareholder action, so as to add to,
delete, replace or otherwise modify any provisions relating to the Shares
contained in the Declaration, provided that before adopting any such amendment
without Shareholder approval the Trustees shall determine that it is consistent
with the fair and equitable treatment of all Shareholders or that Shareholder
approval is not otherwise required by the Investment Company Act of 1940 (the
"1940 Act") or other applicable law; and

WHEREAS, the Trustees have determined that the following amendment to
the Declaration is consistent with the fair and equitable treatment of all
Shareholders and that Shareholder approval is not otherwise required by the 1940
Act or other applicable law;

NOW, THEREFORE, the Trustees hereby declare that Article V, Section
5.12 be redesignated as Article V, Section 5.13 and that Article V, Sections 5.1
and 5.11 be deleted and replaced with the following:

SECTION 5.1. BENEFICIAL INTEREST. The interest of the beneficiaries
hereunder shall be divided into transferable Shares which may be divided into
one or more separate and distinct series, or classes thereof, as the Trustees
shall from time to time create and establish. The number of shares of beneficial
interest authorized hereunder is unlimited and each Share shall have a par value
of $0.01. All Shares issued hereunder including, without limitation, Shares
issued in connection with a dividend in Shares or a split of Shares, shall be
fully paid and non-assessable.

SECTION 5.11. SERIES DESIGNATION. The Trustees, in their discretion,
may authorize the division of Shares into two or more series, and the different
series shall be established and designated, and the variations in the relative
rights and preferences as between the different series shall be fixed and
determined, by the Trustees; provided, that all Shares shall be identical except
that there may be variations so fixed and determined between different series as
to investment objective, purchase price, allocation of expenses, right of
redemption, special and relative rights as to dividends and on liquidation,
conversion rights, and conditions under which the several series shall have
separate voting rights. All references to Shares in this Declaration shall be
deemed to be Shares of any or all series as the context may require.

If the Trustees shall divide the Shares of the Trust into two or more
series, the following provisions shall be applicable:

(a) All provisions herein relating to the Trust shall apply equally to
each series of the Trust except as the context requires otherwise.

(b) The number of authorized Shares and the number of Shares of each
series that may be issued shall be unlimited. The Trustees may classify or
reclassify any unissued Shares or any Shares previously issued and reacquired of
any series into one or more series that may be established and designated from
time to time. The Trustees may hold as treasury shares (of the same or some
other series), reissue for such consideration and on such terms as they may
determine, or cancel any Shares of any series reacquired by the Trust at their
discretion from time to time.

(c) All consideration received by the Trust for the issue or sale of
Shares of a particular series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the rights
of creditors of such series and except as may otherwise be required by
applicable tax laws, and shall be so recorded upon the books of account of the
Trust. In the event that there are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable as
belonging to any particular series, the Trustees shall allocate them among any
one or more of the series established and designated from time to time in such
manner and on such basis as they, in their sole discretion, deem fair and
equitable. Each such allocation by the Trustees shall be conclusive and binding
upon the Shareholders of all series for all purposes.

(d) The assets belonging to each particular series shall be charged
with the liabilities of the Trust in respect of that series and all expenses,
costs, charges and reserves attributable to that series, and any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular series shall be allocated
and charged by the Trustees to and among any one or more of the series
established and designated from time to time in such manner and on such basis as
the Trustees in their sole discretion deem fair and equitable and no series
shall be liable to any person except for its allocated share. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the Shareholders of all series for all purposes. The
Trustees shall have full discretion, to the extent not inconsistent with the
1940 Act, to determine which items are capital; and each such determination and
allocation shall be conclusive and binding upon the Shareholders. The assets of
a particular series of the Trust shall, under no circumstances, be charged with
liabilities attributable to any other series of the Trust. All persons extending
credit to, or contracting with or having any claim against a particular series
of the Trust shall look only to the assets of that particular series for payment
of such credit, contract or claim. No Shareholder or former Shareholder of any
series shall have any claim on or right to any assets allocated or belonging to
any other series.

(e) Each Share of a series of the Trust shall represent a beneficial
interest in the net assets of such series. Each holder of Shares of a series
shall be entitled to receive his pro rata share of distributions of income and
capital gains made with respect to such series. Upon redemption of his Shares or
indemnification for liabilities incurred by reason of his being or having been a
Shareholder of a series, such Shareholder shall be paid solely out of the funds
and property of such series of the Trust. Upon liquidation or termination of a
series of the Trust, Shareholders of such series shall be entitled to receive a
pro rata share of the net assets of such series. A Shareholder of a particular
series of the Trust shall not be entitled to participate in a derivative or
class action on behalf of any other series or the Shareholders of any other
series of the Trust.

(f) The establishment and designation of any series of Shares shall be
effective upon the execution by a majority of the Trustees of an instrument
setting forth such establishment and designation and the relative rights and
preferences of such series, or as otherwise provided in such instrument. The
Trustees may by an instrument executed by a majority of their number abolish any
series and the establishment and designation thereof. Except as otherwise
provided in this Article V, the Trustees shall have the power to determine the
designations, preferences, privileges, limitations and rights, of each class and
series of Shares. Each instrument referred to in this paragraph shall have the
status of an amendment to this Declaration.

SECTION 5.12. CLASS DESIGNATION. The Trustees, in their discretion, may
authorize the division of the Shares of the Trust, or, if any series be
established, the Shares of any series, into two or more classes, and the
different classes shall be established and designated, and the variations in the
relative rights and preferences as between the different classes shall be fixed
and determined, by the Trustees; provided, that all Shares of the Trust or of
any series shall be identical to all other Shares of the Trust or the same
series, as the case may be, except that there may be variations between
different classes as to allocation of expenses, right of redemption, special and
relative rights as to dividends and on liquidation, conversion rights, and
conditions under which the several classes shall have separate voting rights.
All references to Shares in this Declaration shall be deemed to be Shares of any
or all classes as the context may require.

If the Trustees shall divide the Shares of the Trust or any series into
two or more classes, the following provisions shall be applicable:

(a) All provisions herein relating to the Trust, or any series of the
Trust, shall apply equally to each class of Shares of the Trust or of any series
of the Trust, except as the context requires otherwise.

(b) The number of Shares of each class that may be issued shall be
unlimited. The Trustees may classify or reclassify any unissued Shares of the
Trust or any series or any Shares previously issued and reacquired of any class
of the Trust or of any series into one or more classes that may be established
and designated from time to time. The Trustees may hold as treasury Shares (of
the same or some other class), reissue for such consideration and on such terms
as they may determine, or cancel any Shares of any class reacquired by the Trust
at their discretion from time to time.

(c) Liabilities, expenses, costs, charges and reserves related to the
distribution of, and other identified expenses that should properly be allocated
to, the Shares of a particular class may be charged to and borne solely by such
class and the bearing of expenses solely by a class of Shares may be
appropriately reflected (in a manner determined by the Trustees) and cause
differences in the net asset value attributable to, and the dividend, redemption
and liquidation rights of, the Shares of different classes. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the Shareholders of all classes for all purposes.

(d) The establishment and designation of any class of Shares shall be
effective upon the execution of a majority of the then Trustees of an instrument
setting forth such establishment and designation and the relative rights and
preferences of such class, or as otherwise provided in such instrument. The
Trustees may, by an instrument executed by a majority of their number, abolish
any class and the establishment and designation thereof. Each instrument
referred to in this paragraph shall have the status of an amendment to this
Declaration.

IN WITNESS WHEREOF, the undersigned have executed this
instrument this _____ day of ________________, 1997.

- ------------------------------
Harris J. Ashton

- ------------------------------
Nicholas F. Brady

- ------------------------------
S. Joseph Fortunato

- ------------------------------
Andrew H. Hines, Jr.

- ------------------------------
Edith E. Holiday

- ------------------------------
Charles B. Johnson

- -----------------------------
Betty P. Krahmer

- ------------------------------
Gordon S. Macklin

- ------------------------------
Fred R. Millsaps

CERTIFICATE

Pursuant to Section 10.1 of the Declaration, the undersigned Trustee
hereby acknowledges and certifies that this Amendment to the Declaration of
Trust of Templeton Variable Products Series Fund is made in accordance with the
provisions of the Declaration, and shall be effective upon its filing with the
Secretary of the Commonwealth of Massachusetts.

IN WITNESS WHEREOF, the undersigned has executed this instrument this
____ day of__________________, 1997.

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

TEMPLETON VARIABLE PRODUCTS SERIES FUND

Amended Establishment and Designation
of Series of Shares of Beneficial Interest, Par Value $0.01 Per Share

The undersigned, being a majority of the Trustees of Templeton Variable
Products Series Fund, a Massachusetts business trust (the "Trust"), acting
pursuant to Section 5.11 of the Declaration of Trust dated February 25, 1988
(the "Declaration of Trust") of the Trust, and having divided the shares of
beneficial interest of the Trust into six separate series (each individually a
"Fund" or collectively the "Funds") by an Establishment and Designation of
Series of Shares of Beneficial Interest, Par Value $0.01 per Share dated
February 25, 1988 and amended on June 15, 1988, May 1, 1992, and December 5,
1995, hereby establish and designate three additional Funds and amend and
restate the Funds' special and relative rights as follows:

1. The Funds shall be designated Templeton Money Market Fund,
Templeton Bond Fund, Templeton Stock Fund, Templeton Asset Allocation Fund,
Templeton International Fund, Templeton Developing Markets Fund, Franklin Growth
Investments Fund, Mutual Shares Investments Fund, and Mutual Discovery
Investments Fund.

2. Each Fund shall be authorized to hold cash and invest in securities
and instruments and use investment techniques as described in the Trust's
registration statement under the Securities Act of 1933, as amended from time to
time. Each share of beneficial interest, par value $0.01 per share, of each Fund
("Share") shall be redeemable as provided in the Declaration of Trust, shall be
entitled to one vote (or fraction thereof in respect of a fractional Share) on
matters on which Shares of that series shall be entitled to vote and shall
represent a pro rata beneficial interest in the assets allocated to that Fund.
The proceeds of sales of Shares of a Fund, together with any income and gain
thereon, less any diminution or expenses thereof, shall irrevocably belong to
that Fund, unless otherwise required by law. Each Share of a Fund shall be
entitled to receive its pro rata share of net assets of that Fund upon
liquidation of that Fund. Upon redemption of a Shareholder's Shares, or
indemnification for liabilities incurred by reason of a Shareholder being or
having been a Shareholder of a Fund, such Shareholder shall be paid solely out
of the property of such Fund.

3. Shareholders of each Fund shall vote separately as a class on any
matter except, consistent with the Investment Company Act of 1940, as amended,
(the "Act") and the rules thereunder and the Trust's registration statement
thereunder, (i) the election of Trustees, (ii) any amendment to the Declaration
of Trust, unless the amendment affects fewer than all classes, in which case
Shareholders of the affected classes shall vote separately, and (iii)
ratification of the selection of auditors. In each case of such separate voting,
the Trustees shall determine whether, for the matter to be effectively acted
upon within the meaning of Rule 18f-2 under the Act or any successor rule as to
a Fund, the applicable percentage (as specified in the Declaration of Trust, or
the Act and the rules thereunder) of the Shares of that Fund alone must be voted
in favor of the matter, or whether the favorable vote of such applicable
percentage of the Shares of each Fund entitled to vote on the matter is
required.

4. The assets and liabilities of the Trust shall be allocated among
the above-referenced Funds as set forth in Section 5.11 of the Declaration of
Trust, except as provided below:

a. Costs incurred and payable by the Trust in
connection with its organization and the initial registration and public
offering of Templeton Money Market Fund, Templeton Bond Fund, Templeton Stock
Fund and Templeton Asset Allocation Fund shall be divided equally among those
Funds and shall be amortized for each such Fund over the period beginning on the
date that such costs became payable and ending 60 months after the commencement
of operations of the Trust.

b. The liabilities, expenses, costs, charges or
reserves of the Trust which are not readily identifiable as belonging to any
particular Fund shall be allocated among the Funds on the basis of their
relative average daily net assets.

c. The Trustees may from time to time in particular
cases make specific allocations of assets or liabilities among the Funds.

5. The Trustees (including any successor Trustees) shall have the
right at any time and from time to time to reallocate assets and expenses or to
change the designation of any Fund now or hereafter created, or to otherwise
change the special and relative rights of any such Fund, provided that such
change shall not adversely affect the rights of Shareholders of a Fund.

6. This instrument shall be effective as of February 14, 1997.

Dated: February 14, 1997

/s/CHARLES B. JOHNSON /s/HARRIS J. ASHTON
- ------------------------------ ------------------------------
Charles B. Johnson, Harris J. Ashton,
as Trustee as Trustee

/s/BETTY P.KRAHMER /s/FRED R.MILLSAPS
- ------------------------------ ------------------------------
Betty P. Krahmer, Fred R. Millsaps,
as Trustee as Trustee

/s/NICHOLAS F. BRADY /s/ANDREW H. HINES, JR.
- ------------------------------ ------------------------------
Nicholas F. Brady, Andrew H. Hines, Jr.
as Trustee as Trustee

/s/S. JOSEPH FORTUNATO /s/GORDON S. MACKLIN
- ------------------------------ ------------------------------
S. Joseph Fortunato, Gordon S. Macklin,
as Trustee as Trustee

/s/EDITH E. HOLIDAY
- ------------------------------
Edith E. Holiday,
as Trustee

TEMPLETON VARIABLE PRODUCTS SERIES FUND

Fifth Amended Establishment and Designation
of Series of Shares of Beneficial Interest, Par Value $0.01 Per Share

The undersigned, being a majority of the Trustees of Templeton Variable
Products Series Fund, a Massachusetts business trust (the "Trust"), acting
pursuant to Sections 5.11 and 5.12 of the Declaration of Trust dated February
25, 1988 (the "Declaration of Trust") of the Trust, and having divided the
shares of beneficial interest of the Trust into nine separate series (each
individually a "Fund" or collectively the "Funds") and two separate classes by
an Establishment and Designation of Series of Shares of Beneficial Interest, Par
Value $0.01 per Share dated February 25, 1988 and amended on June 15, 1988, May
1, 1992, December 5, 1995, and February 14, 1997, hereby establish and designate
one additional Fund, which shall consist of two classes, and amend and restate
the Funds' and each class's special and relative rights as follows:

1. The Funds shall be designated Templeton Money Market Fund,
Templeton Bond Fund, Templeton Stock Fund, Templeton Asset Allocation Fund,
Templeton International Fund, Templeton Developing Markets Fund, Franklin Growth
Investments Fund, Franklin Small Cap Investments Fund, Mutual Shares Investments
Fund, and Mutual Discovery Investments Fund.

2. The classes shall be designated as follows:

Templeton Asset Allocation Fund Class 1
Templeton Asset Allocation Fund Class 2
Templeton Bond Fund Class 1
Templeton Bond Fund Class 2
Templeton Developing Markets Fund Class 1
Templeton Developing Markets Fund Class 2
Templeton International Fund Class 1
Templeton International Fund Class 2
Templeton Money Market Fund Class 1
Templeton Stock Fund Class 1
Templeton Stock Fund Class 2
Franklin Growth Investments Fund Class 1
Franklin Growth Investments Fund Class 2
Franklin Small Cap Investments Fund Class 1
Franklin Small Cap Investments Fund Class 2
Mutual Shares Investments Fund Class 1
Mutual Shares Investments Fund Class 2
Mutual Discovery Investments Fund Class 1
Mutual Discovery Investments Fund Class 2

3. Each Fund shall be authorized to hold cash and invest in securities
and instruments and use investment techniques as described in the Trust's
registration statement under the Securities Act of 1933, as amended from time to
time. Each share of beneficial interest, par value $0.01 per share, of each Fund
("Share") shall be redeemable as provided in the Declaration of Trust, shall be
entitled to one vote (or fraction thereof in respect of a fractional Share) on
matters on which Shares of that series shall be entitled to vote and shall
represent a pro rata beneficial interest in the assets allocated to that Fund.
The proceeds of sales of Shares of a Fund, together with any income and gain
thereon, less any diminution or expenses thereof, shall irrevocably belong to
that Fund, unless otherwise required by law. Each Share of a Fund shall be
entitled to receive its pro rata share of net assets of that Fund upon
liquidation of that Fund. Upon redemption of a Shareholder's Shares, or
indemnification for liabilities incurred by reason of a Shareholder being or
having been a Shareholder of a Fund, such Shareholder shall be paid solely out
of the property of such Fund.

4. Shareholders of each Fund shall vote separately as a class on any
matter except, consistent with the Investment Company Act of 1940, as amended,
(the "1940 Act") and the rules thereunder and the Trust's registration statement
thereunder, (i) the election of Trustees, (ii) any amendment to the Declaration
of Trust, unless the amendment affects fewer than all Funds, in which case
Shareholders of the affected Funds shall vote separately, and (iii) ratification
of the selection of auditors. Shareholders of each Fund shall vote together as a
single class on any matter, except to the extent required by the 1940 Act and
the rules thereunder, or when the Trustees have determined that the matter
affects only the interests of Shareholders of a particular class of Shares of a
Fund, in which case only the Shareholders of such class shall be entitled to
vote thereon. In each case of such separate voting, the Trustees shall determine
whether, for the matter to be effectively acted upon within the meaning of Rule
18f-2 under the 1940 Act or any successor rule as to a Fund, the applicable
percentage (as specified in the Declaration of Trust, or the 1940 Act and the
rules thereunder) of the Shares of that Fund alone must be voted in favor of the
matter, or whether the favorable vote of such applicable percentage of the
Shares of each Fund entitled to vote on the matter is required.

5. The assets and liabilities of the Trust shall be allocated among
the above-referenced Funds as set forth in Section 5.11 of the Declaration of
Trust, except as provided below:

a. Costs incurred and payable by the Trust in
connection with its organization and the initial registration and public
offering of Franklin Small Cap Investments Fund shall be payable by that Fund
and shall be amortized for that Fund over the period beginning on the date that
such costs became payable and ending 60 months after the commencement of
operations of the Trust.

b. Liabilities, expenses, costs, charges and reserves
related to the distribution of, and other identified expenses that should
properly be allocated to, the Shares of a particular class may be charged to and
borne solely by such class and the bearing of expenses solely by a class of
Shares may be appropriately reflected (in a manner determined by the Trustees),
and cause differences in, the net asset value attributable to, and the dividend,
redemption and liquidation rights of, the Shares of different classes of a Fund.
Each allocation of liabilities, expenses, costs, charges and reserves by the
Trustees shall be conclusive and binding upon the Shareholders of all classes of
a Fund for all purposes. The liabilities, expenses, costs, charges or reserves
of the Trust which are not readily identifiable as belonging to any particular
Fund shall be allocated among the Funds on the basis of their relative average
daily net assets.

c. The Trustees may from time to time in particular
cases make specific allocations of assets or liabilities among the Funds.

6. Shares of each class of a Fund may vary between themselves as to
rights of redemption and conversion rights, as may be approved by the Trustees
and set forth in a Fund's then-current prospectus.

7. The Trustees (including any successor Trustees) shall have the
right at any time and from time to time to reallocate assets and expenses or to
change the designation of any Fund or any class thereof, now or hereafter
created, or to otherwise change the special and relative rights of any such Fund
or any class thereof, provided that such change shall not adversely affect the
rights of Shareholders of such Fund or class.

IN WITNESS WHEREOF, the undersigned have signed this instrument as of
February 27, 1998. This Instrument may be executed by the Trustees on separate
counterparts but shall be effective only when signed by a majority of the
Trustees.

/s/CHARLES B. JOHNSON /s/HARRIS J. ASHTON
- ------------------------------- ------------------------------
Charles B. Johnson, Harris J. Ashton,
as Trustee as Trustee

/s/BETTY P.KRAHMER /s/FRED R. MILLISAPS
- ------------------------------- ------------------------------
Betty P. Krahmer, Fred R. Millsaps
as Trustee as Trustee

/s/NICHOLAS F. BRADY /s/ANDREW H. HINES, JR.
- ------------------------------- ------------------------------
Nicholas F. Brady, Andrew H. Hines, Jr.
as Trustee as Trustee

/s/S. JOSEPH FORTUNATO /s/GORDON S. MACKLIN
- ------------------------------- ------------------------------
S. Joseph Fortunato, Gordon S. Macklin,
as Trustee as Trustee

/s/EDITH E. HOLIDAY
- -------------------------------
Edith E. Holiday,
as Trustee

BY-LAWS

TEMPLETON VARIABLE PRODUCTS SERIES FUND

TABLE OF CONTENTS

PAGE

ARTICLE I - DEFINITIONS 1

ARTICLE II - OFFICES 1
Section 1. Resident Agent 1
Section 2. Offices 1

ARTICLE III - SHAREHOLDERS 2
Section 1. Meetings 2
Section 2. Notice of Meetings 2
Section 3. Record Date for Meetings
And Other Purposes 2
Section 4. Proxies 3
Section 5. Action without Meeting 4

ARTICLE IV - TRUSTEES 4
Section 1. Meetings of the Trustees 4
Section 2. Quorum and Manner of Acting 5

ARTICLES V - COMMITTEES 6
Section 1. Executive and Other Committees 6
Section 2. Meetings, Quorum and Manner of Acting 7

ARTICLE VI - OFFICERS 7
Section 1. General Provisions 7
Section 2. Term of Office and Qualifications 8
Section 3. Removal 8
Section 4. Powers and Duties of the President 8
Section 5. Powers and Duties of Vice President 9
Section 6. Powers and Duties of the Treasurer 9
Section 7. Powers and Duties of the Secretary 9
Section 8. Powers and Duties of Assistant Treasurer 10
Section 9. Powers and Duties of Assistant Secretary 10
Section 10. Compensation of Officers and Trustees
And Members of the Advisory Board 10

ARTICLE VII - FISCAL YEAR 11

ARTICLE VIII - SEAL 11

ARTICLES IX - WAIVERS OF NOTICE 11

TABLE OF CONTENTS (continued)

PAGE

ARTICLE X - CUSTODY OF SECURITIES 12
Section 1. Employment of a Custodian 12
Section 2. Action Upon Termination of
Custodian Agreement 12
Section 3. Provisions of Custodian Agreement 13
Section 4. Central Certificate System 14
Section 5. Acceptance of Receipts in Lieu of
Certificates 14

ARTICLE XI- AMENDMENTS 15

ARTICLE XII - INSPECTIONOF BOOKS 15

ARTICLE XIII - MISCELLANEOUS 15

BY-LAWS

TEMPLETON VARIABLE PRODUCTS SERIES FUND

ARTICLE I

DEFINITIONS

Any terms defined in the Declaration of Trust of Templeton Variable
Products Series Fund dated February 25, 1988, as amended from time to time,
shall have the same meaning when used herein.

ARTICLE II

OFFICES

SECTION 1. RESIDENT AGENT. The Trust shall maintain a resident
agent in the Commonwealth of Massachusetts, which agent shall initially be CT
Corporation System, 2 Oliver Street, Boston, Massachusetts 02109. The Trustees
may designate a successor resident agent, provided, however, that such
appo9intment shall not become effective until written notice thereof is
delivered to the office of the Secretary of the Commonwealth.

SECTION 2. OFFICES. The Trust may have its principal office and other
offices in such places within as well as without the Commonwealth as the
Trustees may from time to time determine.

<PAGE>

ARTICLE III

SHAREHOLDERS

SECTION 1. MEETINGS. Meetings of the Shareholders shall be held as
provided in the Declaration of Trust at such place within or without the
Commonwealth of Massachusetts as the Trustees shall designate. The holders of a
majority of outstanding Shares present in person or by proxy shall constitute a
quorum at any meeting of the Shareholders.

SECTION 2. NOTICE OF MEETINGS. Notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail to each Shareholder at his address as recorded on
the register of the Trust mailed at least ten (10) days and not more than sixty
(60) days before the meeting. Only the business stated in the notice of the
meeting shall be considered at such meeting. Any adjourned meeting may be held
as adjourned without further notice. No notice need by given to any Shareholder
who shall have failed to inform the Trust of his current address or if a written
waiver of notice, executed before or after the meeting by the Shareholder or his
attorney thereunto authorized, is filed with the records of the meeting.

SECTION 3. RECORD DATE FOR MEETINGS AND OTHER PURPOSES. For the purpose
of determining the Shareholders who are entitled to notice of and to vote at any
meeting, or to participate in any distribution, or for the purpose of any other
action, the Trustees may from time to time close the transfer books for such
period, not exceeding thirty (30) days, as the Trustees may determine; or
without closing the transfer books the Trustees may fix a date not more than
ninety (90) days prior to the date of any meeting of Shareholders or
distribution or other action as a record date for the determinations of the
persons to be treated as Shareholders of record for such purposes, except for
dividend payments which shall be governed by the Declaration.

SECTION 4. PROXIES. At any meeting of Shareholders, any holder of
Shares entitled to vote there are may vote by proxy, provided that not proxy
shall be voted at any meeting unless it shall have been placed on file with
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken.
Proxies may be solicited in the name of one or more Trustees or one or more of
the officers of the Trust. Only Shareholders of record shall be entitled to
vote. Each whole share shall be entitled to one vote as to any mater on which it
is entitled by the Declaration to vote, and each fractional Share shall be
entitled to a proportionate fractional vote. When any Share is held jointly by
several persons, any one of them may vote at any meeting in person or by proxy
in respect of such Share, but if more than one of them shall be present at such
meeting in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Share. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise,
and the burden of proving invalidity shall rest on the challenger. If the holder
of any such Share is a minor or legally incompetent, and subject to guardianship
or the legal control of any other person as regards the charge or management of
such Share, he may vote by his guardian or such other person appointed or having
such control, and such vote may be given in person or by proxy.

SECTION 5. ACTION WITHOUT MEETING. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders may be
taken without a meeting if a majority of Shareholders entitled to vote on the
mater (or such larger proportion thereof as shall be required by law, the
Declaration or these By-Laws for approval of such matter) consent to the action
in writing and the written consents are filed with the records of the meetings
of Shareholders. Such consents shall be treated for all purposes as a vote taken
at a meeting of Shareholders.

ARTICLE IV

TRUSTEES

SECTION 1. MEETINGS OF THE TRUSTEES. The trustees may in their
discretion provide for regular or stated meetings of the Trustees. Notice of
regular or stated meetings need to be given. Meetings of the Trustees other than
regular or stated meetings shall be held whenever called by the President, or by
any one of the Trustees, at the time being in office. Notice of the time and
place of each meeting other than regular or stated meetings shall be given by
the Secretary or an Assistant Secretary or by the officer or Trustee calling the
meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be telegraphed, cabled, or wirelessed to each Trustee at his
business address, or personally delivered to him at least one day before the
meeting. Such notice may, however, be waived by any Trustee. Notice of a meeting
need not be given to any Trustee if a written waiver of notice, executed by him
before or after the meeting, is filed with the records of the meeting, or to any
Trustee who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him. A notice or waiver of notice need not
specify the purpose of any meeting. The Trustees may meet by means of a
telephone conference circuit or similar communications equipment by means of
which all persons participating in the meeting shall be deemed to have been held
at a place designated by the Trustees at the meeting. Participation in a
telephone conference meeting shall constitute presence in person at such
meeting. Any action required or permitted to be taken at any meeting of the
Trustees may be taken by the Trustee without a meeting if all the Trustees
consent to the action in writing and the written consents are filed with the
records of the Trustees' meetings. Such consents shall be treated as a vote for
all purposes.

SECTION 2. QUORUM AND MANNER OF ACTING. A majority of the
Trustees shall be present in person at any regular or special meeting of the
Trustees in order to constitute a quorum for the transaction of business at such
meeting and (except as otherwise required by law, the Declaration or these
By-Laws) the act of a majority of the Trustees present at any such meeting, at
which a quorum is present, shall be the act of the Trustees. In the absence of a
quorum, a majority of the Trustees present may adjourn the meeting from time to
time until a quorum shall be present. Notice of an adjourned meeting need not be
given.

ARTICLE V

COMMITTEES

SECTION 1. EXECUTIVE AND OTHER COMMITTEES. The Trustees by
vote or a majority of all the Trustees may elect from their own number an
Executive Committee to consist of not less than three (3) to hold office at the
pleasure of the Trustees, which shall have the power to conduct the current and
ordinary business of the Trust while the Trustees are not in session, including
the purchase and sale of securities and the designation of securities to be
delivered upon redemption of share of the Trust, and such other powers of the
Trustees as the Trustees may, from time to time, delegate to the, except those
powers which by law, the Declaration or these By-Laws they are prohibited from
delegating. The Trustees may also elect from their own number other Committee
from time-to time, the number composing such Committees, the powers conferred
upon the same (subject to the same limitations as with respect to the Executive
Committee) and the term of membership on such Committees to be determined by the
Trustees. The Trustees may designate a chairman of any such Committee. In the
absence of such designation, the Committee may elect its own Chairman.

SECTION 2. MEETINGS, QUORUM AND MANNER OF ACTING. The Trustees
may (1) provide for stated meetings of any Committee, (2) specify the manner of
calling and notice required for special meetings of any Committee, (3) specify
the number of members of a Committee required to constitute a quorum and the
number of members of a Committee required to exercise specified powers delegated
to such Committee, (4) authorize the making of decisions to exercise specified
powers by written assent of the requisite number of members of a Committee
without a meeting, and (5) authorize the members of a Committee to meet by means
of a telephone conference circuit.

The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the Office of the Trust.

ARTICLE VI

OFFICERS

SECTION 1. GENERAL PROVISIONS. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Executive Vice Presidents, one
or more Vice Presidents, one or more Assistant Secretaries, and one or more
Assistant Treasurers. The Trustees may delegate to any officer or Committee the
power of appoint any subordinate officers or agents.

SECTION 2. TERM OF OFFICE AND QUALIFICATIONS. Except as otherwise
provided by law, the Declaration or these By-Laws, the President, the Treasurer
and the Secretary shall each hold office until his successor shall have hold
office at the pleasure of the Trustees. The Secretary and Treasurer may be the
same person. A Vice President and the Treasurer or Assistant Treasurer or a Vice
President and the Secretary may be the same person, but the offices of Vice
President and Secretary and Treasurer shall not be held by the same person. The
President shall hold no other office. Except as above provided, any two offices
may be held by the same person. Any officer may be, but none need be, a Trustee
or Shareholder.

SECTION 3. REMOVAL. The Trustees, at any regular or special meeting of
the Trustees, may remove any officer without cause, by a vote of majority of the
Trustees then in office. Any officers or agent appointed by an officer or
Committee may be removed with or without cause by such appointing officer or
Committee.

SECTION 4. POWERS AND DUTIES OF THE PRESIDENT. The President may call
meetings of the Trustees and of any Committee thereof when he deems it necessary
and shall preside at all meetings of the Shareholders. Subject to the control of
the Trustees and to the control of any Committees of the Trustees, within their
respective spheres, as provided by the Trustees, he shall at all times exercise
a general supervision and direction over the affairs of the Trust. He shall have
the power to employ attorneys and counsel for the Trust and to employ such
subordinate officers, agents, clerks and employees as he may find necessary to
transact the business of the Trust. He shall also have the power to grant,
issue, execute or sign such powers of attorney, proxies or other documents as
may be deemed advisable or necessary in furtherance of the interests of the
Trust. The President shall have such other powers and duties as from time to
time may be conferred upon or assigned to him by the Trustees.

SECTION 5. POWERS AND DUTIES OF THE VICE PRESIDENT. In the absence or
disability of the President, any Vice President designated by the Trustees shall
perform all the duties and may exercise any of the powers of the President,
subject to the control of the Trustees. Each Vice President shall perform such
other duties as may be assigned to him from time to time by the Trustees and the
President.

SECTION 6. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall be
the principal financial and accounting officer of the Trust. He shall deliver
all funds of the Trust which may come into his hands to such Custodian as the
Trustees may employ pursuant to Article X of these By-Laws. He shall in general
perform all the duties incident to the office of Treasurer and such other duties
as from time to time may be assigned to him by the Trustees.

SECTION 7. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall keep
the minutes of all meetings of the Trustees and of the Shareholders in proper
books provided for that purposes: he shall have custody of the seal of the
Trust; he shall have charge of the Share transfer books, lists and records
unless the same are n the charge of the Transfer Agent. He shall attend to the
giving and serving of all notices by the Trust in accordance with the provisions
of these By-Laws and as required by law; and subject to these By-Laws, he shall
in general perform all duties incident to the office of Secretary and such other
duties as from time to time may be assigned to him by the Trustees.

SECTION 8. POWERS AND DUTIES OF ASSISTANT TREASURER. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Treasurer. Each Assistant Treasurer shall perform such other duties as from time
to time may be assigned to him by the Trustees.

SECTION 9. POWERS AND DUTIES OF ASSISTANT SECRETARIES. In the absence
or disability of the Secretary, any Assistant Secretary designated by the
Trustees shall perform all the duties, and may exercise any of the powers, of
the Secretary. Each Assistant Secretary shall perform such other duties as from
time to time may be assigned to him by the Trustees.

SECTION 10. COMPENSATION OF OFFICERS AND TRUSTEES AND MEMBER OF THE
ADVISORY BOARD. Subject to any applicable provisions of the Declaration, the
compensation of the officers and Trustees and members of any Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers, by
any Committee or officer upon whom such power may be conferred by the Trustees.
No officer shall be prevented from receiving such compensation as such officer
by reason of the fact that he is also a Trustee.

ARTICLE VII

FISCAL YEAR

The fiscal year of the Trust shall begin on the first day of January of
each year and shall end on the 31st day of December in each year, provided,
however, that the Trustees may from time to time change the fiscal year.

ARTICLE VIII

SEAL

The Trustees may adopt a seal which shall be in such form and shall
have such inscription thereon as the Trustees may from time to time prescribe.

ARTICLE IX

WAIVERS OF NOTICE

Whenever any notice is required to be given by law, the Declaration or
these By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. A notice shall be deemed to have been telegraphed,
cabled or wirelessed for the purposes of thee By-Laws when it has been delivered
to a representative of any telegraph , cable or wireless company with
instructions that it be telegraphed, cabled or wirelessed.

ARTICLE X

CUSTODY OF SECURITES

SECTION 1. EMPLOYMENT OF A CUSTODIAN. The Trust shall place and at all
time maintain in the custody of a Custodian (including any sub-custodian for the
Custodian, which may be a foreign bank which meets applicable requirements of
law) all funds, securities and similar investments included in the Trust
Property. The Custodian (and any sub-custodian) shall be a bank having not less
than $2,000,000 aggregate capital, surplus and undivided profits and shall be
appointed from time to time by the Trustees, who shall fix its remuneration.

SECTION 2. ACTION UPON TERMINATION OF CUSTODIAN AGREEMENT. Upon
termination of a Custodian Agreement or inability of the Custodian to continue
to serve, the Trustees shall promptly appoint a successor custodian, but in the
event that no successor custodian can be found who has the required
qualifications and is willing to serve, the Trustees shall call as promptly as
possible a special meeting of the Shareholders to determine whether the Trust
shall function without a custodian or shall be liquidated. If so directed by
vote of the holders of the a majority of the outstanding voting securities, the
Custodian shall deliver and pay over all Trust Property held by it as specified
in such vote.

SECTION 3. PROVISIONS OF CUSTODIAN AGREEMENT. The following provisions
shall apply to the employment of a Custodian and to any contract entered into
with the Custodian so employed:

The Trustees shall cause to be delivered to the Custodian all
securities included in the Trust Property or to which the
Trust may become entitled, and shall order the same to be
delivered by the Custodian only in completion of a sale,
exchange, transfer, pledge, loan of portfolio securities to
another person, or other disposition thereof, all as the
Trustees may generally or from time to time require or approve
or to a successor Custodian; and the Trustees shall cause all
funds included in the Trust Property or to which it may become
entitled to be paid to the Custodian, and shall order the same
disbursed only for investment against delivery of the
securities acquired, or the return of cash held as collateral
for loans of portfolio securities, in payment of expenses,
including management compensation, and liabilities of the
Trust, including distributions to shareholders, or to a
successor Custodian. In connection with the Trust's purchase
or sale of futures contracts, the Custodian shall transmit,
prior to receipt on behalf of the Trust of any securities or
other property, funds from the Trust's custodian account in
order to furnish to and maintain funds with brokers as margin
to guarantee the performance of the Trust's futures
obligations in accordance with the applicable requirements of
commodities exchanges and brokers.

SECTION 4. CENTRAL CERTIFICATE SYSTEM. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees may direct the
Custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.

SECTION 5. ACCEPTANCE OF RECEIPTS IN LIEU OF CERTIFICATES. Subject to
such rules, regulation and orders as the Commission may adopt, the Trustees may
direct the Custodian to accept written receipts or other written evidence
indicating purchases of securities held in book-entry form in the Federal
Reserve System in accordance with regulations promulgated by the Board of
Governors of the Federal Reserve System and the local Federal Reserve Banks in
lieu of receipt of certificates representing such securities.

ARTICLE XI

AMENDMENTS

These By-Laws, or any of them, may be altered, amended or repealed, or
new By-Laws may be adopted by (a) vote f a majority of the Shares outstanding
and entitled to vote or (b) the Trustees, provided, however, that no By-Law may
be amended, adopted or repealed by the Trustees if such amendment, adopted or
repeal requires, pursuant to law, the Declaration or these By-Laws, a vote of
the Shareholders.

ARTICLE XII

INSPECTION OF BOOKS

The Trustees shall from time to time determine whether and to what
extent, and at what times and places, and under what conditions and regulations
the accounts and books of the Trust or any of them shall be open to the
inspection of the shareholders; and no shareholder shall have any right of
inspecting any account or book or document of the Trust except as conferred by
laws or authorized by the Trustees or by resolution of the shareholders.

ARTICLE XIIII

MISCELLANEOUS

(A) Except as hereinafter provided, no officer or Trustee of the Trust
and no partner, officer, director or shareholder of the Investment Adviser of
the Trust or of the Distributor of the Trust and no Investment Adviser or
Distributor of the Trust, shall take long or short positions in the securities
issued by the Trust.

(1) The foregoing provisions shall not prevent the Distributor
from purchasing Shares from the Trust if such purchases
are limited (except for reasonable allowances for clerical
errors, delays and errors of transmission and cancellation
of orders) to purchases for the purpose of filling orders
for such Shares received by the Distributor, and provided
that orders to purchase from the Trust are entered with
the Trust or the Custodian promptly upon receipt by the
Distributor of purchase orders for such Shares, unless the
Distributor is otherwise instructed by the customer.

(2) The foregoing provision shall not prevent the Distributor
from purchasing Shares of the Trust as agent for the
account of the Trust.

(3) The foregoing provision shall not prevent the purchase
from the Trust or from the Distributor of Shares issued by
the Trust or by any partner, officer, director or
shareholder of the Investment Adviser of the Trust or of
the Distributor of the Trust at the price available to the
public generally at the moment of such purchase, or as
described in the then currently effective Prospectus of
the Trust.

(4) The foregoing shall not prevent the Distributor, or any
affiliate thereof, of the rust from purchasing Shares
prior to the effectiveness of the first registration
statement relating to the Shares under the Securities Act
of 1933.

(B) The Trust shall not lend assets of the Trust to any
officer or Trustee of the Trust, or to any partner, officer, director
or shareholder of, or person financially interested in, the Investment
Adviser of the Trust, or the Distributor of the Trust, or to the
Investment Adviser of he Trust or to the Distributor of the Trust.

(C) The Trust shall not impose any restrictions upon the
transfer of the Shares of the Trust except as provided in the
Declaration, but this requirement shall not prevent the charging of
customary transfer agent fees.

(D) The Trust shall not permit any officer or director of
Trustee of the Trust, or any partner, officer or director of the
Investment Adviser or Distributor of the Trust to deal for or on behalf
of the Trust with himself as principal or agent, or with any
partnership, association or corporation in which he has a financial
interest; provided that the foregoing provisions shall not prevent (a)
officers and Trustees of the Trust or partners, officers or directors
of the Investment Adviser or Distributor of the Trust from buying,
holding or selling shares in the Trust, or from being partners,
officers or directors or otherwise financially interested in the
Investment Adviser or Distributor of the Trust; (b) purchases or sales
of securities or other property by the Trust from or to an affiliated
person or to the Investment Adviser or Distributor of the Trust if such
transaction is exempt from the applicable provisions of the 1940 Act;
(c) purchases of investments for the portfolio of the Trust or sales of
investments owned by the Trust through a security dealer who is, or one
or more of whose partners, shareholders, officers or directors is, an
officer or Trustee of the Trust, or a partner, officer or director of
the Investment Adviser or Distributor of the Trust, if such
transactions are handled in the capacity of broker only and commissions
charged do not exceed customary brokerage charges for such services;
(d) employment of legal counsel, registrar, Transfer Agent, dividend
disbursing agent or Custodian who is, or has a partner, shareholder,
officer, or director who is, an officer or Trustee of the Trust, or a
partner, officer or director of the Investment Adviser or Distributor
of the Trust, if only customary fees are charged for services to the
Trust, (e) sharing statistical research, legal and management expenses
and office hire and expenses with any other investment company in which
an officer or Trustee of the Trust, or a partner, officer or director
of the Investment Adviser or Distributor of the Trust, is an officer
and director or otherwise financially interested.

LAW OF OFFICES
DECHERT PRICE AND RHOADS
1175 Eye Street, N.W.
Washington, DC 20006-2401

April 28, 1998

Templeton Variable Products
Series Fund
500 E. Broward Boulevard
Suite 2100
Ft. Lauderdale, FL 33394

Gentlemen:

In connection with the registration under the Securities Act of 1933 of
an indefinite number of shares of beneficial interest of Templeton Variable
Products Series Fund (the "Trust"), we have examined such matters as we deemed
necessary to give this opinion.

On the basis of the foregoing, it is our opinion that the Trust is a
business trust duly organized and existing under the laws of Massachusetts, and
that its shares have been duly authorized, and when sold in compliance with the
Securities Act of 1933 and the Investment Company Act of 1940 and paid for as
contemplated by the Trust's Agreement and Declaration of Trust and its
Registration Statement, will be validly issued, fully paid, and non-assessable.

We hereby consent to the filing of this opinion as an exhibit to the
Trust's Registration Statement on Form N-1A and to all references to our firm
therein, and in any amendments thereto.

Very truly yours,
/s/ Dechert Price and Rhoads

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the use of our reports dated January 30, 1998, on the
financial statements of Templeton Stock Fund, Templeton International Fund,
Templeton Developing Markets Fund, Templeton Asset Allocation Fund, Templeton
Bond Fund and Templeton Money Market Fund series of Templeton Variable Products
Series Fund referred to therein, which appears in the 1997 Annual Report to
Shareholders and which are incorporation herein by reference, in Post Effective
Amendment No. 18 to the Registration Statement on Form N-1A, File No. 33-20313
as filed with the Securities and Exchange Commission.

We also consent to the reference to our firm in each Prospectus under the
caption "Financial Highlights", where appropriate and in the Statement of
Additional Information under the caption "Independent Accountants."

/s/MCGLADREY & PULLEN, LLP
McGaldrey & Pullen, LLP

New York, New York
April 20, 1998

EXHIBIT 18(A)

TEMPLETON VARIABLE PRODUCTS SERIES FUND
on behalf of
TEMPLETON ASSET ALLOCATION FUND
TEMPLETON BOND FUND
TEMPLETON DEVELOPING MARKETS FUND
TEMPLETON INTERNATIONAL FUND
TEMPLETON STOCK FUND
FRANKLIN GROWTH INVESTMENTS FUND
MUTUAL SHARES INVESTMENTS FUND
MUTUAL DISCOVERY INVESTMENTS FUND
FRANKLIN SMALL CAP INVESTMENTS FUND

Multiple Class Plan

This Multiple Class Plan (the "Plan") has been adopted by a majority of
the Board of Trustees of Templeton Variable Products Series Fund (the
"Investment Company") on behalf of each series named above (each, a "Multi-Class
Fund"). The Investment Company's Money Market Fund series is not included in
this Plan. The Board has determined that the Plan is in the best interests of
each class of each Fund and of the Investment Company as a whole. The Plan sets
forth the provisions relating to the establishment of multiple classes of shares
("Shares") of the Multi-Class Funds.

1. Each Fund shall offer two classes of shares, to be known as Class 1 and
Class 2 Shares.

2. All Shares shall be sold solely to certain life insurance company
("Insurance Company") variable accounts for the purpose of funding certain
variable annuity and variable life insurance contracts ("Variable Contracts")
and to such other investors as are determined to be eligible to purchase Shares.
Neither Class of Shares shall be subject to any front-end or deferred sales
charges.

3. The distribution plan adopted by the Investment Company pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, (the "Rule 12b-1
Plan") associated with the Class 2 Shares may be used to pay Franklin/Templeton
Distributors, Inc. ("Distributors"), the Insurance Companies or others to assist
in the promotion and distribution of Class 2 shares or Variable Contracts
offering Class 2 shares. Payments made under the Plan may be used for, among
other things, the printing of prospectuses and reports used for sales purposes,
preparing and distributing sales literature and related expenses,
advertisements, education of contract owners or dealers and their
representatives, and other distribution-related expenses, including a prorated
portion of Distributors' or the Insurance Companies' overhead expenses
attributable to the distribution of these Variable Contracts. Payments made
under the Plan may also be used to pay Insurance Companies, dealers or others
for, among other things, furnishing personal services and maintaining customer
accounts and records, or as service fees as defined under NASD rules. Agreements
for the payment of fees to the Insurance Companies or others shall be in a form
which has been approved from time to time by the Board, including the
non-interested Board members.

The Investment Company has not adopted any 12b-1 Plan for Class 1 shares.

4. The only difference currently in expenses as between Class 1 and Class 2
Shares shall relate to differences in Rule 12b-1 plan expenses.

5. There are currently no conversion features associated with the Class 1
and Class 2 Shares.

6. Shares of either class may be exchangeable for Shares of the same or
different classes of another series of the Investment Company or of another
underlying investment company according to the terms and conditions related to
transfer privileges set forth in the Variable Contract prospectuses, as they may
be amended from time to time.

7. Each Class will vote separately with respect to any Rule 12b-1 Plan
related to that Class.

8. On an ongoing basis, the Investment Company's Board members, pursuant to
their fiduciary responsibilities under the 1940 Act and otherwise, will monitor
the Multi-Class Funds for the existence of any material conflicts between the
interests of the various classes of shares. The Board members, including a
majority of the Board members who are not interested persons of the Investment
Company as defined by the Act, shall take such action as is reasonably necessary
to eliminate any such conflict that may develop. The investment advisers of each
Multi-Class Fund and Distributors shall be responsible for alerting the Board to
any material conflicts that arise.

9. All material amendments to this Plan must be approved by a majority of
the Investment Company's Board members, including a majority of the Board
members who are not interested persons of the Investment Company as defined by
the Act.

10. I, ________________, [Secretary] of Templeton Variable Products Series
Fund, do hereby certify that this Multiple Class Plan was adopted by the Board
of Trustees of the Investment Company on _______________, 1997.

------------------------
[Secretary]

<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton Stock Fund December 31, 1997 annual report and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000829959
<NAME> TEMPLETON VARIABLE PRODUCTS SERIES FUND
<SERIES>
<NUMBER> 001
<NAME> TEMPLETON STOCK FUND-CLASS 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 593040167
<INVESTMENTS-AT-VALUE> 747718390
<RECEIVABLES> 2303869
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 196128
<TOTAL-ASSETS> 750218387
<PAYABLE-FOR-SECURITIES> 662893
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 893515
<TOTAL-LIABILITIES> 1556408
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 514303925
<SHARES-COMMON-STOCK> 31577825
<SHARES-COMMON-PRIOR> 28162508
<ACCUMULATED-NII-CURRENT> 15048456
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 64631375
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 154678223
<NET-ASSETS> 748661979
<DIVIDEND-INCOME> 18866558
<INTEREST-INCOME> 2228566
<OTHER-INCOME> 0
<EXPENSES-NET> 6004150
<NET-INVESTMENT-INCOME> 15090974
<REALIZED-GAINS-CURRENT> 64659885
<APPREC-INCREASE-CURRENT> (2630723)
<NET-CHANGE-FROM-OPS> 77120136
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11299102)
<DISTRIBUTIONS-OF-GAINS> (53491951)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4159792
<NUMBER-OF-SHARES-REDEEMED> (3715179)
<SHARES-REINVESTED> 2970704
<NET-CHANGE-IN-ASSETS> 104296214
<ACCUMULATED-NII-PRIOR> 11508408
<ACCUMULATED-GAINS-PRIOR> 53211617
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4629013
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6004150
<AVERAGE-NET-ASSETS> 734358386
<PER-SHARE-NAV-BEGIN> 22.88
<PER-SHARE-NII> 0.47
<PER-SHARE-GAIN-APPREC> 2.11
<PER-SHARE-DIVIDEND> (0.40)
<PER-SHARE-DISTRIBUTIONS> (1.87)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.15
<EXPENSE-RATIO> 0.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<LEGEND>
The schedule contains summary fianacial information extracted from the
Templeton Stock Fund Decmeber 31, 1997 annual report and is qualified in
its entirety by refernce to such financial statements.
</LEGEND>
<CIK> 0000829959
<NAME> TEMPLETONVARIABLE PRODUCTS SERIES FUND
<SERIES>
<NUMBER> 002
<NAME> TEMPLETON STOCK FUND-CLASS 2

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 593040167
<INVESTMENTS-AT-VALUE> 747718390
<RECEIVABLES> 2303869
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 196128
<TOTAL-ASSETS> 750218387
<PAYABLE-FOR-SECURITIES> 662893
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 893515
<TOTAL-LIABILITIES> 1556408
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 514303925
<SHARES-COMMON-STOCK> 708995
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 15048456
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 64631375
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 154678223
<NET-ASSETS> 748661979
<DIVIDEND-INCOME> 18866558
<INTEREST-INCOME> 2228566
<OTHER-INCOME> 0
<EXPENSES-NET> 6004150
<NET-INVESTMENT-INCOME> 15090974
<REALIZED-GAINS-CURRENT> 64659885
<APPREC-INCREASE-CURRENT> (2630723)
<NET-CHANGE-FROM-OPS> 77120136
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 780245
<NUMBER-OF-SHARES-REDEEMED> (71250)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 104296214
<ACCUMULATED-NII-PRIOR> 11508408
<ACCUMULATED-GAINS-PRIOR> 53211617
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4629013
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6004150
<AVERAGE-NET-ASSETS> 8347817
<PER-SHARE-NAV-BEGIN> 21.51
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 1.58
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.15
<EXPENSE-RATIO> 1.14
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton Asset Allocation Fund December 31, 1997 annual report and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000829959
<NAME> TEMPLETON VARIABLE PRODUCTS SERIES FUND
<SERIES>
<NUMBER>011
<NAME> TEMPLETON ASSET ALLOCATION FUND-CLASS 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 590048479
<INVESTMENTS-AT-VALUE> 730504841
<RECEIVABLES> 28365959
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1175213
<TOTAL-ASSETS> 760046013
<PAYABLE-FOR-SECURITIES> 13752497
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1060298
<TOTAL-LIABILITIES> 14812795
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 561655063
<SHARES-COMMON-STOCK> 32908712
<SHARES-COMMON-PRIOR> 26377866
<ACCUMULATED-NII-CURRENT> 21482994
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 20966644
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 141128517
<NET-ASSETS> 745233218
<DIVIDEND-INCOME> 14542873
<INTEREST-INCOME> 13020529
<OTHER-INCOME> 0
<EXPENSES-NET> 5017914
<NET-INVESTMENT-INCOME> 22545488
<REALIZED-GAINS-CURRENT> 20904466
<APPREC-INCREASE-CURRENT> 45084450
<NET-CHANGE-FROM-OPS> 88534404
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17068780)
<DISTRIBUTIONS-OF-GAINS> (32390362)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5703031
<NUMBER-OF-SHARES-REDEEMED> (1580128)
<SHARES-REINVESTED> 2407943
<NET-CHANGE-IN-ASSETS> 189206054
<ACCUMULATED-NII-PRIOR> 16968534
<ACCUMULATED-GAINS-PRIOR> 31490512
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3834087
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5017914
<AVERAGE-NET-ASSETS> 676068671
<PER-SHARE-NAV-BEGIN> 21.08
<PER-SHARE-NII> 0.67
<PER-SHARE-GAIN-APPREC> 2.44
<PER-SHARE-DIVIDEND> (0.63)
<PER-SHARE-DISTRIBUTIONS> (1.21)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.35
<EXPENSE-RATIO> 0.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 590048479
<INVESTMENTS-AT-VALUE> 730504841
<RECEIVABLES> 28365959
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1175213
<TOTAL-ASSETS> 760046013
<PAYABLE-FOR-SECURITIES> 13752497
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1060298
<TOTAL-LIABILITIES> 14812795
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 561655063
<SHARES-COMMON-STOCK> 433110
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 21482994
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 20966644
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 141128517
<NET-ASSETS> 745233218
<DIVIDEND-INCOME> 14542873
<INTEREST-INCOME> 13020529
<OTHER-INCOME> 0
<EXPENSES-NET> 5017914
<NET-INVESTMENT-INCOME> 22545488
<REALIZED-GAINS-CURRENT> 20904466
<APPREC-INCREASE-CURRENT> 45084450
<NET-CHANGE-FROM-OPS> 88534404
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 453139
<NUMBER-OF-SHARES-REDEEMED> (20029)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 189206054
<ACCUMULATED-NII-PRIOR> 16968534
<ACCUMULATED-GAINS-PRIOR> 31490512
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3834087
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5017914
<AVERAGE-NET-ASSETS> 5198718
<PER-SHARE-NAV-BEGIN> 20.29
<PER-SHARE-NII> 0.16
<PER-SHARE-GAIN-APPREC> 1.87
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.32
<EXPENSE-RATIO> 1.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the Templeton
Bond Fund December 31, 1997 annual report and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000829959
<NAME> TEMPLETON VARIABLE PRODUCTS SERIES FUND
<SERIES>
<NUMBER> 003
<NAME> TEMPLETON BOND FUND

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 31259019
<INVESTMENTS-AT-VALUE> 30670272
<RECEIVABLES> 2808944
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 381288
<TOTAL-ASSETS> 33860504
<PAYABLE-FOR-SECURITIES> 1874635
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 159695
<TOTAL-LIABILITIES> 2034330
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32405420
<SHARES-COMMON-STOCK> 2877625
<SHARES-COMMON-PRIOR> 2927751
<ACCUMULATED-NII-CURRENT> 2029360
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2151536)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (457070)
<NET-ASSETS> 31826174
<DIVIDEND-INCOME> 1975
<INTEREST-INCOME> 2491382
<OTHER-INCOME> 0
<EXPENSES-NET> 224457
<NET-INVESTMENT-INCOME> 2268900
<REALIZED-GAINS-CURRENT> 28170
<APPREC-INCREASE-CURRENT> (1501377)
<NET-CHANGE-FROM-OPS> 795693
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2415770)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 419880
<NUMBER-OF-SHARES-REDEEMED> (695358)
<SHARES-REINVESTED> 225352
<NET-CHANGE-IN-ASSETS> (2219707)
<ACCUMULATED-NII-PRIOR> 2383203
<ACCUMULATED-GAINS-PRIOR> (2386679)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 164371
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 224457
<AVERAGE-NET-ASSETS> 32874226
<PER-SHARE-NAV-BEGIN> 11.63
<PER-SHARE-NII> 0.80
<PER-SHARE-GAIN-APPREC> (0.53)
<PER-SHARE-DIVIDEND> (0.84)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.06
<EXPENSE-RATIO> 0.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the Templeton
Money Market Fund Decmeber 31, 1997 annual report and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000829959
<NAME> TEMPLETON VARIABLE PRODUCTS SERIES FUND
<SERIES>
<NUMBER> 004
<NAME> TEMPLETON MONEY MARKET FUND

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 16698698
<INVESTMENTS-AT-VALUE> 16698698
<RECEIVABLES> 768117
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 11388
<TOTAL-ASSETS> 17478203
<PAYABLE-FOR-SECURITIES> 1500000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 193840
<TOTAL-LIABILITIES> 1693840
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15784363
<SHARES-COMMON-STOCK> 15784363
<SHARES-COMMON-PRIOR> 14085861
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 15784363
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 761500
<OTHER-INCOME> 0
<EXPENSES-NET> 73920
<NET-INVESTMENT-INCOME> 687580
<REALIZED-GAINS-CURRENT> (55)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 687525
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (687525)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 46697371
<NUMBER-OF-SHARES-REDEEMED> (45673970)
<SHARES-REINVESTED> 675101
<NET-CHANGE-IN-ASSETS> 1698502
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 48465
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 73920
<AVERAGE-NET-ASSETS> 13847665
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton Developing Markets Fund December 31, 1997 annual report and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000829959
<NAME> TEMPLETON VARIABLE PRODUCTS SERIES FUND
<SERIES>
<NUMBER> 031
<NAME> TEMPLETON DEVELOPING MARKETS FUND-CLASS 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 233230440
<INVESTMENTS-AT-VALUE> 164261974
<RECEIVABLES> 13875301
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 598268
<TOTAL-ASSETS> 178735543
<PAYABLE-FOR-SECURITIES> 5179858
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 527432
<TOTAL-LIABILITIES> 5707290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 243498841
<SHARES-COMMON-STOCK> 24640374
<SHARES-COMMON-PRIOR> 7660863
<ACCUMULATED-NII-CURRENT> 2681614
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4183736)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (68968466)
<NET-ASSETS> 173028253
<DIVIDEND-INCOME> 3390412
<INTEREST-INCOME> 1360701
<OTHER-INCOME> 0
<EXPENSES-NET> 2332461
<NET-INVESTMENT-INCOME> 2418652
<REALIZED-GAINS-CURRENT> (3846233)
<APPREC-INCREASE-CURRENT> (67576957)
<NET-CHANGE-FROM-OPS> (69004538)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (397958)
<DISTRIBUTIONS-OF-GAINS> (298468)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17460410
<NUMBER-OF-SHARES-REDEEMED> 547862
<SHARES-REINVESTED> 66963
<NET-CHANGE-IN-ASSETS> 100783087
<ACCUMULATED-NII-PRIOR> 381731
<ACCUMULATED-GAINS-PRIOR> 240154
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1859449
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2332461
<AVERAGE-NET-ASSETS> 144574992
<PER-SHARE-NAV-BEGIN> 9.43
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> (2.82)
<PER-SHARE-DIVIDEND> (0.04)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.63
<EXPENSE-RATIO> 1.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 233230440
<INVESTMENTS-AT-VALUE> 164261974
<RECEIVABLES> 13875301
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 598268
<TOTAL-ASSETS> 178735543
<PAYABLE-FOR-SECURITIES> 5179858
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 527432
<TOTAL-LIABILITIES> 5707290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 243498841
<SHARES-COMMON-STOCK> 1444784
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2681614
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4183736)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (68968466)
<NET-ASSETS> 173028253
<DIVIDEND-INCOME> 3390412
<INTEREST-INCOME> 1360701
<OTHER-INCOME> 0
<EXPENSES-NET> 2332461
<NET-INVESTMENT-INCOME> 2418652
<REALIZED-GAINS-CURRENT> (3846233)
<APPREC-INCREASE-CURRENT> (67576957)
<NET-CHANGE-FROM-OPS> (69004538)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1574880
<NUMBER-OF-SHARES-REDEEMED> (130096)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 100783087
<ACCUMULATED-NII-PRIOR> 381731
<ACCUMULATED-GAINS-PRIOR> 240154
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1859449
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2332461
<AVERAGE-NET-ASSETS> 6254272
<PER-SHARE-NAV-BEGIN> 9.85
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> (3.27)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.62
<EXPENSE-RATIO> 1.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton International Fund December 31, 1997 annual report and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000829959
<NAME> TEMPLETON VARIABLE PRODUCTS SERIES FUND
<SERIES>
<NUMBER> 022
<NAME> TEMPLETON INTERNATIONAL FUND-CLASS 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 784727259
<INVESTMENTS-AT-VALUE> 942222449
<RECEIVABLES> 14945440
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 11791
<TOTAL-ASSETS> 957179680
<PAYABLE-FOR-SECURITIES> 151411
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1011414
<TOTAL-LIABILITIES> 1162825
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 734445509
<SHARES-COMMON-STOCK> 46501531
<SHARES-COMMON-PRIOR> 37112231
<ACCUMULATED-NII-CURRENT> 22712773
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 41363383
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 157495190
<NET-ASSETS> 956016855
<DIVIDEND-INCOME> 25886917
<INTEREST-INCOME> 3997366
<OTHER-INCOME> 0
<EXPENSES-NET> 6946248
<NET-INVESTMENT-INCOME> 22938035
<REALIZED-GAINS-CURRENT> 44773859
<APPREC-INCREASE-CURRENT> 33944248
<NET-CHANGE-FROM-OPS> 101656142
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19635324)
<DISTRIBUTIONS-OF-GAINS> (7892630)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13166780
<NUMBER-OF-SHARES-REDEEMED> (5280097)
<SHARES-REINVESTED> 1502617
<NET-CHANGE-IN-ASSETS> 273032479
<ACCUMULATED-NII-PRIOR> 16391933
<ACCUMULATED-GAINS-PRIOR> 7500283
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5356048
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6946248
<AVERAGE-NET-ASSETS> 847793274
<PER-SHARE-NAV-BEGIN> 18.40
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> 2.01
<PER-SHARE-DIVIDEND> (0.51)
<PER-SHARE-DISTRIBUTIONS> (0.21)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.18
<EXPENSE-RATIO> 0.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton International Fund December 31, 1997 annual report and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK>0000829959
<NAME> TEMPLETON VARIABLE PRODUCTS SERIES FUND
<SERIES>
<NUMBER> 023
<NAME> TEMPLETON INTERNATIONAL FUND-CLASS 2

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 784727259
<INVESTMENTS-AT-VALUE> 942222449
<RECEIVABLES> 14945440
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 11791
<TOTAL-ASSETS> 957179680
<PAYABLE-FOR-SECURITIES> 151411
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1011414
<TOTAL-LIABILITIES> 1162825
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 734445509
<SHARES-COMMON-STOCK> 874330
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 22712773
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 41363383
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 157495190
<NET-ASSETS> 956016855
<DIVIDEND-INCOME> 25886917
<INTEREST-INCOME> 3997366
<OTHER-INCOME> 0
<EXPENSES-NET> 6946248
<NET-INVESTMENT-INCOME> 22938035
<REALIZED-GAINS-CURRENT> 44773859
<APPREC-INCREASE-CURRENT> 33944248
<NET-CHANGE-FROM-OPS> 101656142
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1240830
<NUMBER-OF-SHARES-REDEEMED> (366500)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 273032479
<ACCUMULATED-NII-PRIOR> 16391933
<ACCUMULATED-GAINS-PRIOR> 7500283
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5356048
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6946248
<AVERAGE-NET-ASSETS> 8292034
<PER-SHARE-NAV-BEGIN> 18.48
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 1.59
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.14
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>