TEMPLETON VARIABLE PRODUCTS SERIES FUND, 497, 1998-10-07

TEMPLETON VARIABLE PRODUCTS SERIES FUND
497, 1998-10-07

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[TEMPLETON INVESTMENT PLUS LOGO]

TEMPLETON
INVESTMENT
PLUS

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

PROSPECTUS

o TEMPLETON INVESTMENT PLUS
Phoenix Home Life Variable
Accumulation Account
Prospectus Dated May 1, 1998
As Supplemented October 5, 1998

o TEMPLETON VARIABLE
PRODUCTS SERIES FUND
Prospectus Dated May 1, 1998
As Supplemented October 7, 1998

o THE PHOENIX EDGE SERIES FUND
Prospectus Dated May 1, 1998

[FRANKLIN TEMPLETON LOGO]

PAGE

LOGO
TEMPLETON VARIABLE PRODUCTS SERIES FUND

PROSPECTUS -- MAY 1, 1998,
AS SUPPLEMENTED OCTOBER 7, 1998

CLASS 1 SHARES

TEMPLETON ASSET ALLOCATION FUND
TEMPLETON BOND FUND
TEMPLETON DEVELOPING MARKETS FUND
TEMPLETON INTERNATIONAL FUND
TEMPLETON STOCK FUND

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

Templeton Variable Products Series Fund (the "Trust"), is an open-end,
management investment company, offering nine 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 has two classes of shares: Class 1 and Class 2. This prospectus offers
only Class 1 shares and is for use with Contracts 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.

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.

TIP. P98 10/98 PHOENIX

PAGE

(THIS PAGE INTENTIONALLY LEFT BLANK)

PAGE

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
- ----------------------------------------------------------------------
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

(THIS PAGE INTENTIONALLY LEFT BLANK)

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.

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

<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............................................. 0.60%
Other Expenses.............................................. 0.18%
----
TOTAL FUND OPERATING EXPENSES............................... 0.78%
</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 FIVE YEARS TEN YEARS
- -----------------------------------------------
<S> <C> <C> <C>
$8 $25 $43 $97
</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.

*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.

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

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

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

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

<TABLE>
<CAPTION>
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

(THIS PAGE INTENTIONALLY LEFT BLANK)

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

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

<TABLE>
<CAPTION>
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,
-----------------------------------------------------------------
1997 1996 1995 1994 1993 1992*
-----------------------------------------------------------------
<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 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 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 managed over $220 billion in assets as of March 31, 1998.
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"), 100 Fountain Parkway, St.
Petersburg, Florida 33716, 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 normally intends to pay annual dividends 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. 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.

PAGE

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 offers nine separately managed portfolios or 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. Each Fund offers two classes of
shares, Class 1 and Class 2. All shares purchased before May 1, 1997, when the
Trust first issued class 2 shares, are considered Class 1 shares. Class 2 shares
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. Class 1 Shares 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.

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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.

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[FRANKLIN TEMPLETON LOGO]

100 Fountain Parkway
St. Petersburg, Florida 33716-1205

INSURANCE ISSUER
Phoenix Home Life Mutual Insurance Co.

INVESTMENT MANAGERS
Templeton Investment Counsel, Inc. ("TICI")

Templeton Asset Management Ltd., Singapore

Templeton Global Bond Managers, a division of ("TICI")

DISTRIBUTOR
WS Griffith and Co., Inc.

SERVICE CENTER
Phoenix's Variable Products Operations
1-800/243-4840

TLTIP P 10/98