TEMPLETON VARIABLE PRODUCTS SERIES FUND, N-30D, 1999-03-04

TEMPLETON VARIABLE PRODUCTS SERIES FUND
N-30D, 1999-03-04

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ANNUAL
REPORT

DECEMBER 31, 1998

TEMPLETON
VARIABLE PRODUCTS
SERIES FUND

[FRANKLIN TEMPLETON LOGO]

PAGE

A WORD ABOUT RISK

All of the portfolios are subject to certain risks, which will cause investment
return and the value of your principal to increase or decrease. Generally,
investments offering the potential for higher returns are accompanied by a
higher degree of risk. Stocks and other equities, representing an ownership
interest in a company, have historically outperformed other asset classes over
the long term but tend to fluctuate more dramatically over the shorter term.
Securities of smaller companies, and companies involved in reorganization or
bankruptcy, may have greater price swings and greater credit and other risks.

Bonds and other debt obligations are affected by changes in interest rates and
the creditworthiness of their issuers, and changes in interest rates, with
prices declining as interest rates increase. High yield, lower-rated ("junk")
bonds generally have greater price swings and higher default risks than
investment grade bonds.

Foreign investing, especially in emerging market countries, has additional risks
such as changes in currency values, market price swings, and economic,
political, or social instability. These, and other risks pertaining to specific
portfolios, such as specialized industry or geographic sectors or use of complex
securities, are discussed in the prospectus. Your investment representative can
help you determine which portfolios may be right for you.

PAGE

TABLE OF CONTENTS

TEMPLETON VARIABLE PRODUCTS SERIES FUND
ANNUAL REPORT

<TABLE>
<S> <C>
Letter to Contract Owners ....................................... 2

Class 1 Portfolio Reports

Franklin Small Cap Investments Fund .......................... FS-1

Mutual Shares Investments Fund ............................... MS-1

Templeton Asset Allocation Fund .............................. TA-1

Templeton Bond Fund .......................................... TB-1

Templeton Developing Markets Fund ............................ TD-1

Templeton International Fund ................................. TI-1

Templeton Stock Fund ......................................... TS-1

TEMPLETON VARIABLE PRODUCTS SERIES FUND
PROSPECTUS SUPPLEMENT ........................................... PS-1
</TABLE>

PLEASE NOTE:

Templeton Variable Products Series Fund ("the Trust") currently consists of
eight separate investment portfolios, all of which offer Class 1 and Class 2
shares. Only the portfolios and class listed in the above Table of Contents are
currently available under your insurance contract. Please consult prospectuses
for your insurance contract and the Trust for further information. Please retain
this document, including the enclosed prospectus supplement on page PS-1, with
your current prospectus for reference.

TFAC1 A98 2/99 TAG

PAGE

LETTER TO CONTRACT OWNERS

Dear Contract Owner:

We are pleased to bring you the annual report of Templeton Variable Products
Series Fund for the 12 months ended December 31, 1998.

During the year under review, stock markets around the world gave new meaning to
the word "volatility." Some European and U.S. equity markets reached all-time
highs during the first part of the period, but by late summer, they suffered
major declines due largely to Asia's financial turmoil and Russia's economic
meltdown. However, they generally rallied in October and November, finishing the
year with significant gains. Conversely, many Latin American markets experienced
substantial losses in 1998, while Asian markets posted mixed results.

In the U.S., large-capitalization companies led the market, with the Dow
Jones(R) Industrial Average rising 18.1% and the Standard & Poor's(R) 500 Stock
Index posting a return of 28.6% for the reporting period. However, many
small-cap stocks did not fare as well, and the Russell 2000(R) Index declined
2.6%.*

Most European equity markets appreciated substantially in 1998 in an environment
of falling interest rates, benign inflation, government tax incentives, and
increased management focus on shareholder value. Italian, Spanish, and French
markets, all of which increased more than 40%, were among the region's leaders.*

On the other hand, non-performing loans and slowing economies contributed to
falling share prices in some Asian developing nations such as Indonesia, which
declined 30.6% over the one-year period. Latin American stock markets also
dropped sharply in the wake of falling commodity prices, ripple effects of
Asia's

*Sources: Standard & Poor's Micropal and Bloomberg, Indices are unmanaged. Price
appreciation or depreciation is measured in U.S. dollars and includes reinvested
dividends or interest. One cannot invest directly in an index. Dow Jones
Industrial Average's total return is calculated by Wilshire Associates Inc.

PAGE

financial crises, and investor concerns about the devaluation of the Brazilian
real. Measured in U.S. dollars, Mexico's Bolsa Index plunged 37.4% and Brazil's
Bovespa Index dropped 38.2%.*

Many bond markets were also subject to volatility throughout 1998, but
strengthened for the year as a whole. Benefiting from slowing economic growth
and benign inflation, U.S. bond prices rose in 1998, and European debt
securities performed well, as government efforts to meet European Monetary Union
membership standards helped lead to lower interest rates. However, fixed-income
markets in developing countries experienced severe declines due to factors such
as Asia's economic malaise. The Salomon Brothers World Government Bond Index,
representative of developing-market countries' government bonds, produced a
15.3% total return, while the J.P. Morgan Emerging Markets Bond Index Plus,
which tracks the performance of bond markets in developing markets, fell 14.4%.*

It is important to remember, of course, that all securities markets move up or
down, and bad years can be mixed with good years. Since no one can predict
exactly how financial markets will perform, we urge you to exercise patience and
focus not on short-term market movements, but on your long-term investment
goals.

We appreciate your participation in the Templeton Variable Products Series Fund
and look forward to serving your investment needs in the years to come.

Sincerely,

/S/ Charles E. Johnson
Charles E. Johnson
President
Templeton Variable Products Series Fund

PAGE

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PAGE

FRANKLIN SMALL CAP INVESTMENTS FUND

Investment Goal: Franklin Small Cap Investments Fund seeks long-term capital
growth. It tries to achieve this goal by investing in equity securities of
small-capitalization companies - those with a market capitalization of less than
$1.5 billion at the time of investment.

This annual report covers the period from May 1, 1998 (the fund's inception)
through December 31, 1998. During the reporting period, investors concerned
about a global economic slowdown seemed to view liquid, large-cap shares as a
relatively safe haven, and small-cap stocks underperformed their larger
counterparts. The Russell 2000(R) Index, which measures the performance of
small-cap stocks, dropped 11.9%, while the Dow Jones(R) Industrial Average,
which is representative of large, blue chip equities, rose 2.6%.*

Our investment style of buying growth stocks at a reasonable price led us to
invest in many companies that have strong long-term potential but did not fare
well in the face of a potential economic slowdown. For example, our shares of
Atwood Oceanics Inc., an operator of deep-water drilling rigs, fell 68.9% during
the reporting period. However, not all the news was bad. Our holdings of
Pharmaceutical Product Development Inc., and Serologicals Corp. appreciated in
value, as many investors favored industries that were relatively immune to
cyclical influences and had low exposure to international markets. The stock
prices of some of our technology holdings, including VERITAS Software Corp. and
Gemstar International Group Ltd., also rose as both companies' earnings exceeded
many analysts' expectations.

Believing that use of the Internet and corporate intranets could lead to
substantial growth for technology companies into the next century, we initiated
a position in Etec Systems Inc., a developer of electron and laser beam systems
used to manufacture integrated circuits. We also purchased shares of 24/7 Media
Inc. and Entrust Technologies, both of which help companies set up Internet
commerce systems.

PORTFOLIO BREAKDOWN
FRANKLIN SMALL CAP INVESTMENTS FUND
BASED ON TOTAL NET ASSETS
12/31/98

[This chart shows in pie format the portfolio breakdown of Franklin Small Cap
Investments Fund's securities on December 31, 1998, based on total net assets.]

[Pie Chart]

<TABLE>
<S> <C>
Stocks 67.9%
Short-Term Investments & Other Net Assets 32.1%
</TABLE>

*Source: Standard & Poor's Micropal. Dow Jones Industrial Average's total return
is calculated by Wilshire Associates Inc. Price appreciation or depreciation
includes reinvested dividends. One cannot invest directly in an index.

FS-1

PAGE

TOP 10 HOLDINGS
FRANKLIN SMALL CAP
INVESTMENTS FUND
12/31/98

[The following table shows the top 10 investment holdings of Franklin Small Cap
Investments Fund's securities on December 31, 1998, based on total net assets.]

<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
- -------- ----------
<S> <C>
Sapient Corp.
Data Processing
and Reproduction 1.7%

HNC Software Inc.
Data Processing
and Reproduction 1.7%

Tommy Hilfiger Corp.
Textiles and Apparel 1.6%

Documentum Inc.
Data Processing
and Reproduction 1.4%

Affiliated Computer
Services Inc., A
Business and Public Services 1.4%

Synopsys Inc.
Energy Sources 1.3%

Millicom International
Cellular, SA
Telecommunications 1.3%

Uniphase Corp.
Industrial Components 1.3%

Varco International Inc.
Energy Sources 1.2%

I2 Technologies Inc.
Data Processing and
Reproduction 1.1%
</TABLE>

For a complete list of portfolio holdings, please see the fund's Statement of
Investments.

Looking forward, we are optimistic about the prospects for small-cap stocks.
Although shares of small-cap companies have been out of favor for the past few
years, they may outperform large-cap stocks in the future. Following the U.S.
bear markets of 1974 and 1990, small-cap stocks performed better than large caps
for a time. In our opinion, the same could be true again when economies
worldwide have stabilized.

Please remember, this discussion reflects our views, opinions and portfolio
holdings as of December 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which may affect our
strategies and the fund's portfolio composition. Although past performance is
not predictive of future results, these insights may help you understand our
investment and management philosophy.

Of course, there are risks involved in investing in a fund seeking long-term
growth from small or relatively new or unseasoned companies. These risks, which
include relatively small revenues, limited product lines and small market share,
are further discussed in the fund's prospectus.

We thank you for participating in Franklin Small Cap Investments Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.

Sincerely,

/s/ Edward B. Jamieson
Edward B. Jamieson
Portfolio Manager
Franklin Small Cap Investments Fund

IMPORTANT NOTE:

The Board of Trustees recently approved the Portfolio Manager's recommendation
to revise the definition of small cap companies to include companies with market
capitalizations of $1.5 billion or less, in response to changes in the small cap
market indices. In addition, the Fund has the flexibility to invest in companies
of any size under $1.5 billion, and need not seek to have one-third of its
assets invested in companies with market capitalizations under $550 million.

FS-2

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PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
Financial Highlights

<TABLE>
<CAPTION>
CLASS 1
------------------
PERIOD ENDED
DECEMBER 31, 1998+
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $10.00
-------
Income from investment operations:
Net investment income...................................... .11
Net realized and unrealized losses......................... (.88)
------------------
Total from investment operations............................ (.77)
------------------
Net asset value, end of period.............................. $9.23
------------------
------------------
Total Return*............................................... (7.70)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $231
Ratios to average net assets:
Expenses................................................... 1.00%**
Expenses, excluding waiver and payments by affiliate....... 1.75%**
Net investment income...................................... 1.97%**
Portfolio turnover rate..................................... 36.43%
</TABLE>

*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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. TOTAL
RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
+FOR THE PERIOD MAY 1, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998.
FS- 4

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
CLASS 2
------------------
PERIOD ENDED
DECEMBER 31, 1998+
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $8.55
------
Income from investment operations:
Net investment income...................................... .02
Net realized and unrealized gains.......................... .66
------------------
Total from investment operations............................ .68
------------------
Net asset value, end of period.............................. $9.23
------------------
------------------
Total Return*............................................... 7.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $6,211
Ratios to average net assets:
Expenses................................................... 1.25%**
Expenses, excluding waiver and payments by affiliate....... 2.00%**
Net investment income...................................... 1.73%**
Portfolio turnover rate..................................... 36.43%
</TABLE>

*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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. TOTAL
RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
+FOR THE PERIOD JULY 30, 1998 (COMMENCEMENT OF SALES) TO DECEMBER 31, 1998.
See Notes to Financial Statements.
FS- 5

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 67.9%
APPLIANCES & HOUSEHOLD DURABLES .1%
Ethan Allen Interiors Inc. ................................. United States 100 $ 4,100
----------
BANKING 2.1%
Bank United Corp., A........................................ United States 800 31,400
Espirito Santo Financial Group SA, ADR...................... Luxembourg 500 9,781
*Golden State Bancorp Inc. ................................. United States 2,700 44,888
*Hambrecht & Quist Group.................................... United States 200 4,538
*Silicon Valley Bancshares.................................. United States 1,500 25,547
Westamerica Bancorporation.................................. United States 600 22,050
----------
138,204
----------
BEVERAGES & TOBACCO .9%
*Foodmaker Inc. ............................................ United States 2,600 57,363
----------
BROADCASTING & PUBLISHING .8%
*24/7 Media Inc. ........................................... United States 600 16,800
*Doubleclick Inc. .......................................... United States 400 18,225
*Lamar Advertising Co., A................................... United States 400 14,900
----------
49,925
----------
BUSINESS & PUBLIC SERVICES 6.1%
*Affiliated Computer Services Inc., A....................... United States 2,000 90,000
*Brightpoint Inc. .......................................... United States 2,100 28,875
*Catalytica Inc. ........................................... United States 2,000 36,000
*International Network Services............................. United States 800 53,200
*Jones Intercable Inc., A................................... United States 500 17,813
Norrell Corp. .............................................. United States 100 1,475
*Pharmaceutical Product Development Inc. ................... United States 1,700 51,106
*RemedyTemp Inc., A......................................... United States 300 4,538
*Renal Care Group Inc. ..................................... United States 1,800 51,863
*Sylvan Learning Systems Inc. .............................. United States 2,000 61,000
----------
395,870
----------
CHEMICALS .3%
*U.S. Liquids Inc. ......................................... United States 1,000 22,500
----------
DATA PROCESSING & REPRODUCTION 13.5%
*Activision Inc. ........................................... United States 300 3,338
*Advanced Energy Industries Inc. ........................... United States 100 2,500
*AnswerThink Consulting Group Inc. ......................... United States 2,000 53,750
*Applied Graphics Technologies Inc. ........................ United States 400 6,600
*BEA Systems Inc. .......................................... United States 1,500 18,375
*Cambridge Technology Partners Inc. ........................ United States 2,500 55,313
*Documentum Inc. ........................................... United States 1,700 90,844
*Entrust Technologies....................................... United States 1,500 35,813
*Harbinger Corp. ........................................... United States 350 2,800
*HNC Software Inc. ......................................... United States 2,700 109,168
*I2 Technologies Inc. ...................................... United States 2,400 72,900
*Information Advantage Inc. ................................ United States 2,000 15,125
*Intuit Inc. ............................................... United States 800 58,000
*Jabil Circuit Inc. ........................................ United States 500 37,313
*Komag Inc. ................................................ United States 300 3,113
*Micromuse Inc. ............................................ United States 2,340 45,630
*NOVA Corp. ................................................ United States 700 24,281
*Sapient Corp. ............................................. United States 2,000 112,000
*VERITAS Software Corp. .................................... United States 400 23,975
*Visio Corp. ............................................... United States 500 18,281
*Whittman-Hart Inc. ........................................ United States 1,200 33,150
*Wind River Systems......................................... United States 700 32,900
*Xoom Inc. ................................................. United States 400 13,200
----------
868,369
----------
</TABLE>

FS- 6

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ELECTRICAL & ELECTRONICS 5.8%
*Dupont Photomasks Inc. .................................... United States 100 $ 4,244
EG&G Inc. .................................................. United States 1,000 27,813
*Etec Systems Inc. ......................................... United States 1,400 56,000
*Integrated Systems Inc. ................................... United States 1,000 14,938
*Level One Communications Inc. ............................. United States 1,400 49,700
*Novellus Systems Inc. ..................................... United States 800 39,600
*Photronics Inc. ........................................... United States 200 4,794
*PMC-Sierra Inc. ........................................... United States 1,000 63,125
*Sanmina Corp. ............................................. United States 700 43,750
*Vantive Corp. ............................................. United States 100 800
*Xylan Corp. ............................................... United States 3,900 68,494
----------
373,258
----------
ELECTRONIC COMPONENTS & INSTRUMENTS .2%
Optical Coating Laboratory Inc. ............................ United States 200 5,200
*SIPEX Corp. ............................................... United States 200 7,025
----------
12,225
----------
ENERGY SOURCES 7.6%
*Atwood Oceanics Inc. ...................................... United States 3,000 51,000
*Barrett Resources Corp. ................................... United States 2,600 62,400
Expeditors International of Washington Inc. ................ United States 1,600 67,200
*Marine Drilling Cos. Inc. ................................. United States 3,000 23,063
*Newfield Exploration Co. .................................. United States 3,200 66,800
Range Resources Corp. ...................................... United States 100 344
Snyder Oil Corp. ........................................... United States 1,700 22,631
*Synopsys Inc. ............................................. United States 1,600 86,800
*Tom Brown Inc. ............................................ United States 2,600 26,081
*Tuboscope Inc. ............................................ United States 700 5,688
*Varco International Inc. .................................. United States 10,000 77,500
----------
489,507
----------
FINANCIAL SERVICES 2.3%
Allied Capital Corp. ....................................... United States 300 5,194
*E*Trade Group Inc. ........................................ United States 1,000 46,781
Freedom Securities Corp. ................................... United States 100 1,513
Heller Financial Inc. ...................................... United States 1,100 32,313
*Security Dynamics Technologies Inc. ....................... United States 2,600 59,800
----------
145,601
----------
HEALTH & PERSONAL CARE 4.5%
*Coherent Inc. ............................................. United States 1,000 12,438
*HealthCare Financial Partners Inc. ........................ United States 600 23,925
*Incyte Pharmaceuticals Inc. ............................... United States 200 7,475
*Inhale Therapeutic Systems Inc. ........................... United States 1,600 52,800
Mentor Corp. ............................................... United States 1,000 23,438
*New American Healthcare Corporation........................ United States 100 1,119
*PAREXEL International Corp. ............................... United States 2,100 52,500
*Pediatrix Medical Group Inc. .............................. United States 1,000 59,938
*Serologicals Corp. ........................................ United States 1,800 54,000
----------
287,633
----------
INDUSTRIAL COMPONENTS 2.4%
*CUNO Inc. ................................................. United States 300 4,875
*Gentex Corp. .............................................. United States 3,200 64,000
*Uniphase Corp. ............................................ United States 1,200 83,250
----------
152,125
----------
</TABLE>

FS- 7

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
INSURANCE 2.6%
Executive Risk Inc. ........................................ United States 1,000 $ 54,938
Financial Security Assurance Holdings Ltd. ................. United States 1,200 65,100
Life USA Holding Inc. ...................................... United States 200 2,575
Reinsurance Group of America................................ United States 600 42,000
*Risk Capital Holdings Inc. ................................ United States 100 2,175
----------
166,788
----------
LEISURE & TOURISM 1.6%
MeriStar Hospitality Corp. ................................. United States 3,000 55,688
*Prime Hospitality Corp. ................................... United States 4,600 48,588
*Rio Hotel & Casino Inc. ................................... United States 100 1,588
----------
105,864
----------
MACHINERY & ENGINEERING 1.0%
*FLIR Systems Inc. ......................................... United States 1,500 34,875
Roper Industries Inc. ...................................... United States 1,600 32,600
*Safety-Kleen Corp. ........................................ United States 125 1,766
----------
69,241
----------
MERCHANDISING 1.1%
*Mettler-Toledo International Inc. ......................... United States 1,600 44,900
*Beyond.Com Corp. .......................................... United States 1,300 26,975
----------
71,875
----------
METALS & MINING .6%
Carpenter Technology Corp. ................................. United States 700 23,756
*Gibraltar Steel Corp. ..................................... United States 700 15,925
----------
39,681
----------
MULTI-INDUSTRY .8%
Federated Investors Inc., B................................. United States 2,800 50,750
----------
REAL ESTATE 3.0%
Arden Realty Inc. .......................................... United States 1,500 34,781
Camden Property Trust....................................... United States 1,600 41,600
Cornerstone Properties Inc. ................................ United States 2,200 34,375
FelCor Lodging Trust Inc. .................................. United States 800 18,450
Glenborough Realty Trust Inc. .............................. United States 1,400 28,525
Storage Trust Realty........................................ United States 1,400 32,725
----------
190,456
----------
RECREATION & OTHER CONSUMER GOODS .8%
*SFX Entertainment Inc. .................................... United States 250 13,719
*Vail Resorts Inc. ......................................... United States 1,700 37,400
----------
51,119
----------
TELECOMMUNICATIONS 5.3%
*Com21 Inc. ................................................ United States 400 8,400
*Excel Switching Corp. ..................................... United States 100 3,800
*Fvc.com Inc. .............................................. United States 400 6,300
*Gemstar International Group Ltd. .......................... United States 500 28,625
*ICG Communications Inc. ................................... United States 1,800 38,700
*Intermedia Communications Inc. ............................ United States 3,000 51,750
*Millicom International Cellular, SA........................ Luxembourg 2,400 83,700
*Natural MicroSystems Corp. ................................ United States 1,000 7,281
*Paging Network Inc. ....................................... United States 100 469
*Primus Telecommunications Group Inc. ...................... United States 2,000 33,000
*Tekelec.................................................... United States 2,700 44,719
*Western Wireless Corp., A.................................. United States 1,600 35,200
----------
341,944
----------
</TABLE>

FS- 8

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TEXTILES & APPAREL 3.1%
*Tommy Hilfiger Corp. ...................................... United States 1,700 $ 102,000
*Tropical Sportswear International Corp. ................... United States 1,500 53,813
Wolverine World Wide Inc. .................................. United States 3,300 43,725
----------
199,538
----------
TRANSPORTATION 1.4%
Air Express International Corp. ............................ United States 1,500 32,625
*Alaska Air Group Inc. ..................................... United States 700 30,975
*Atlantic Coast Airlines Inc. .............................. United States 1,000 25,000
----------
88,600
----------
WHOLESALE & INTERNATIONAL TRADE
Reliance Steel & Aluminum Co. .............................. United States 100 2,763
----------
TOTAL COMMON STOCKS (COST $3,910,242)....................... 4,375,299
----------
PRINCIPAL
AMOUNT**
--------
(a)REPURCHASE AGREEMENT 31.6%
Joint Repurchase Agreement, 4.681%, 01/04/99, (Maturity
Value $2,034,166) (COST $2,033,109)....................... $2,033,109 2,033,109
Barclays Capital Inc. (Maturity Value $103,300)
Bear, Stearns Securities Corp. (Maturity Value $26,782)
Chase Securities Inc. (Maturity Value $210,425)
CIBC Oppenheimer Corp. (Maturity Value $210,425)
Donaldson, Lufkin & Jennrette Securities Corp. (Maturity
Value $210,425)
Dresdner Kleinwort Benson, North America LLC (Maturity Value
$210,425)
Goldman, Sachs & Co. (Maturity Value $57,389)
Greenwich Capital Markets Inc. (Maturity Value $210,425)
Lehman Securities Inc. (Maturity Value $38,259)
NationsBanc Montgomery Securities LLC ($210,425)
Paine Webber Inc. (Maturity Value $114,778)
Paribas Corp. (Maturity Value $210,425)
Warburg Dillon Read LLC (Maturity Value $220,683)
Collateralized by U.S. Treasury Bills and Notes
----------
TOTAL INVESTMENTS (COST $5,943,351) 99.5%................... 6,408,408
OTHER ASSETS, LESS LIABILITIES .5%.......................... 33,682
----------
TOTAL NET ASSETS 100.0%..................................... $6,442,090
----------
----------
</TABLE>

*NON-INCOME PRODUCING.
**SECURITIES TRADED IN U.S. DOLLARS.
(A)SEE NOTE 1(C) REGARDING JOINT REPURCHASE AGREEMENT.
See Notes to Financial Statements.
FS- 9

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $3,910,242)...... $4,375,299
Repurchase agreement, at value and cost.................... 2,033,109
Cash....................................................... 40,817
Receivables from dividends................................. 5,471
----------
Total assets........................................... 6,454,696
----------
Liabilities:
Payables:
Investment securities purchased........................... 2,121
To affiliates............................................. 2,572
Accrued expenses........................................... 7,913
----------
Total liabilities...................................... 12,606
----------
Net assets, at value........................................ $6,442,090
==========
Net assets consist of:
Undistributed net investment income........................ $ 17,706
Net unrealized appreciation................................ 465,057
Accumulated net realized gain.............................. 182,914
Beneficial shares.......................................... 5,776,413
----------
Net assets, at value........................................ $6,442,090
==========
CLASS 1:
Net asset value per share ($230,861 / 25,000 shares
outstanding)............................................. $9.23
==========
CLASS 2:
Net asset value per share ($6,211,229 / 673,059 shares
outstanding)............................................. $9.23
==========
</TABLE>

See Notes to Financial Statements.
FS- 10

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 1, 1998 TO DECEMBER 31, 1998

<TABLE>
<S> <C> <C>
Investment Income:
Dividends.................................................. $ 6,742
Interest................................................... 23,149
-------
Total investment income............................... $ 29,891
--------
Expenses:
Management fees (Note 3)................................... 7,524
Administrative fees (Note 3)............................... 1,450
Distribution fees -- Class 2 (Note 3)...................... 2,112
Custodian fees............................................. 100
Reports to shareholders.................................... 4,900
Registration and filing fees............................... 275
Professional fees.......................................... 1,350
Trustees' fees and expenses................................ 1,900
Other...................................................... 103
-------
Total expenses........................................ 19,714
Expenses waived/paid by affiliate (Note 3)............ (7,529)
--------
Net expenses...................................... 12,185
--------
Net investment income........................... 17,706
--------
Realized and unrealized gains:
Net realized gain from investments.................... 182,914
Net unrealized appreciation on investments............ 465,057
--------
Net realized and unrealized gain............................ 647,971
--------
Net increase in net assets resulting from operations........ $665,677
--------
--------
</TABLE>

See Notes to Financial Statements.
FS- 11

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
Financial Statements (continued)

STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998+
------------------
<S> <C>
Increase in net assets:
Operations:
Net investment income..................................... $ 17,706
Net realized gain from investments........................ 182,914
Net unrealized appreciation on investments................ 465,057
------------------
Net increase in net assets resulting from operations... 665,677
Fund share transactions (Note 2):
Class 1.................................................. 250,000
Class 2.................................................. 5,526,413
------------------
Net increase in net assets............................. 6,442,090
Net assets:
Beginning of period........................................ --
------------------
End of period.............................................. $6,442,090
------------------
------------------
Undistributed net investment income included in net assets:
End of period.............................................. $ 17,706
------------------
------------------
</TABLE>

+FOR THE PERIOD MAY 1, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998.
See Notes to Financial Statements.
FS- 12

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Small Cap Investments Fund (the Fund) is a separate, diversified series
of Templeton Variable Products Series Fund (the Trust), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks long-term capital growth by investing primarily in equity securities of
smaller capitalization growth companies. The following summarizes the Fund's
significant accounting policies.

a. SECURITY VALUATION:

Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.

b. FOREIGN CURRENCY TRANSLATION:

Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.

The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.

Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.

c. JOINT REPURCHASE AGREEMENT:

The Fund may enter into a joint repurchase agreement whereby its uninvested cash
balance is deposited into a joint cash account to be used to invest in one or
more repurchase agreements. The value and face amount of the joint repurchase
agreement are allocated to the Fund based on its pro-rata interest. A repurchase
agreement is accounted for as a loan by the Fund to the seller, collateralized
by securities which are delivered to the Fund's custodian. The market value,
including accrued interest, of the initial collateralization is required to be
at least 102% of the dollar amount invested by the Funds, with the value of the
underlying securities marked to market daily to maintain coverage of at least
100%. At December 31, 1998, all outstanding repurchase agreements had been
entered into on that date.

d. INCOME TAXES:

No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.

e. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.

FS- 13

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)

e. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)

Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.

Common expenses incurred by the Trust are allocated among the funds comprising
the Trust based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.

f. ACCOUNTING ESTIMATES:

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.

2. BENEFICIAL SHARES

The Fund offers two classes of shares: Class 1 and Class 2 shares. The shares
differ by their initial sales load, distribution fees, voting rights on matters
affecting a single class and the exchange privilege of each class.

At December 31, 1998, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's Class 1 and Class 2 shares were as
follows:

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998*
---------------------
SHARES AMOUNT
---------------------
<S> <C> <C>
CLASS 1 SHARES:
Shares sold................................................. 25,000 $ 250,000
---------------------
Net increase................................................ 25,000 $ 250,000
---------------------
---------------------
</TABLE>

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998**
---------------------
SHARES AMOUNT
---------------------
<S> <C> <C>
CLASS 2 SHARES:
Shares sold................................................. 681,475 $5,599,186
Shares redeemed............................................. (8,416) (72,773)
---------------------
Net increase................................................ 673,059 $5,526,413
---------------------
---------------------
*Commencement of sales of Class 1 shares was May 1, 1998.
**Commencement of sales of Class 2 shares was July 30, 1998.
</TABLE>

Templeton Funds Annuity Company, the Fund's administrative manager, is the
record owner of 100% of the Fund's Class 1 shares as of December 31, 1998.

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Certain officers of the Trust are also officers or directors of Franklin
Advisers, Inc. (Advisers), Franklin Templeton Services, Inc. (FT Services) and
Franklin/Templeton Distributors, Inc. (Distributors), the Fund's investment
manager, administrative manager and principal underwriter, respectively.

FS- 14

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
Notes to Financial Statements (continued)

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
The Fund pays an investment management fee to Advisers based on the average
daily net assets of the Fund as follows:

<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.75% First $200 million
0.65% Over $200 million, up to and including $1.3 billion
0.55% Over $1.3 billion
</TABLE>

Advisers agreed in advance to reduce management fees to the extent necessary to
limit total expenses to an annual rate of 1.00% and 1.25% of the average daily
net assets of Class 1 and Class 2 shares, respectively, through December 31,
1998, as noted in the Statement of Operations.

The Fund pays its allocated share of an administrative fee to FT Services based
on the Trust's aggregate average daily net assets as follows:

<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>

The Fund reimburses Distributors up to 0.25% per year of its average daily net
assets of Class 2 shares, for costs incurred in marketing the Fund's Class 2
shares.

4. INCOME TAXES

At December 31, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $3,910,370 was as follows:

<TABLE>
<S> <C>
Unrealized appreciation..................................... $563,523
Unrealized depreciation..................................... (98,594)
--------
Net unrealized appreciation................................. $464,929
--------
--------
</TABLE>

Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sales.

5. INVESTMENT TRANSACTIONS

Purchases of securities (excluding short-term securities) for the period ended
December 31, 1998 aggregated $4,097,905 and $370,559, respectively.

FS- 15

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund

We have audited the accompanying statement of assets and liabilities, including
the Statement of Investments, of the Franklin Small Cap Investments Fund, series
of Templeton Variable Products Series Fund (the Trust) as of December 31, 1998,
and the related statement of operations, the statement of changes in net assets,
and the financial highlights for the period from May 1, 1998 to December 31,
1998. These financial statements and financial highlights are the responsibility
of the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1998, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Franklin Small Cap Investments Fund, series of Templeton Variable Products
Series Fund as of December 31, 1998, the results of its operations, the changes
in its net assets and the financial highlights for the period indicated, in
conformity with generally accepted accounting principles.

McGladrey & Pullen, LLP

New York, New York
January 28, 1999

FS- 16

PAGE

MUTUAL SHARES INVESTMENTS FUND

Investment Objective: Mutual Shares Investments Fund seeks capital appreciation,
with income as a secondary objective. It invests primarily in domestic equity
securities and debt obligations. The fund may also invest in foreign securities.

This annual report covers the eight months from May 1, 1998 (the Fund's
inception) through December 31, 1998. During the reporting period, internet
stocks traded at levels that confounded even many traditional growth investors
and the Standard & Poor's 500's largest growth stocks, such as Microsoft, Dell
and Intel, continued their extraordinary appreciation, pushing the index to
record levels. However, during last summer's severe two-month correction, value
stocks, which typically hold up better than growth stocks in market downturns,
generally failed to do so and value investors, including Mutual Shares
Investments Fund, underperformed the various broad market indices.

Financial services stocks remained a major portfolio focus, and we are
enthusiastic about our holdings in Bank One Corp., United Asset Management Corp.
and Bear Stearns Co. Inc. Two other companies we are optimistic about are
Telephone & Data Systems Inc., a wireless and wireline telecommunication
company, and BTR Plc. whose merger with Siebe Plc. should create one of Europe's
largest engineering companies. Looking forward, we are confident that our
disciplined value and special situation approach, though recently out of favor,
will prove rewarding.

Please remember, this discussion reflects our views, opinions and portfolio
holdings as of December 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which may affect our
strategies and the Fund's portfolio composition. Although past performance is
not predictive of future results, these insights may help you understand our
investment and management philosophy.

PORTFOLIO BREAKDOWN
MUTUAL SHARES INVESTMENTS FUND
BASED ON TOTAL NET ASSETS
12/31/98

[This chart shows in pie format the portfolio breakdown of Mutual Shares
Investments Fund's securities on December 31, 1998, based on total net assets.]

[Pie Chart]

<TABLE>
<S> <C>
Stocks 80.4%
Short-Term Investments and Other Net Assets 19.6%
</TABLE>

MS-1

PAGE

TOP 10 HOLDINGS
MUTUAL SHARES INVESTMENTS FUND
12/31/98

[This following table shows the top 10 investment holdings of Mutual Shares
Investments Fund's securities on December 31, 1998, based on total net assets.]

<TABLE>
<CAPTION>
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
- --------- ----------
<S> <C>
BTR Plc.
Industrial Components,
United Kingdom 5.1%

Corporacion Financiera Alba SA
Financial Services, Spain 2.3%

Liz Claiborne Inc.
Textiles & Apparel, U.S. 2.0%

Rayonier Inc.
Forest Products & Paper, U.S. 2.0%

RJR Nabisco Holdings Corp.
Beverages & Tobacco, U.S. 1.9%

Societe Elf Aquitaine SA, Br.
Energy Sources, France 1.9%

Washington Post Co., B
Broadcasting & Publishing, U.S. 1.9%

Federated Department Stores Inc.
Merchandising, U.S. 1.9%

Household International Inc.
Financial Services, U.S. 1.9%

U.S. Industries Inc.
Food & Household Products, U.S. 1.8%
</TABLE>

For a complete list of portfolio holdings, please see the Fund's Statement of
Investments.

Effective November 1, 1998, Larry Sondike and David Marcus assumed their roles
as portfolio co-managers, a new, more focused structure, which should prove
advantageous for shareholders. However, the portfolio should continue to benefit
from the ideas of all the investment professionals at the firm.

It is important to remember that stocks offer the potential for long-term gains
but can be subject to short-term up and down price movements. Securities of
companies involved in mergers, liquidations and reorganizations and
distressed/bankruptcy investments, involve higher credit risks. These risks are
discussed in the prospectus.

We thank you for your participation in Mutual Shares Investments Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.

Sincerely,

/s/ Larry Sondike
Larry Sondike
Portfolio Manager
Mutual Shares Investments Fund

/s/ David Marcus
David Marcus
Portfolio Manager
Mutual Shares Investments Fund

MS-2

PAGE

MUTUAL SHARES
INVESTMENTS FUND
CLASS 1

PERFORMANCE SUMMARY AS OF 12/31/98

TOTAL RETURN INDEX COMPARISON
$10,000 INVESTMENT (5/1/98 - 12/31/98)

The graph below compares the performance of Mutual Shares Investments Fund -
Class 1 and the unmanaged Standard & Poor's 500 Stock Index (S&P 500), including
reinvested dividends, as well as the Lipper Growth & Income Funds Objective
Average,* for the eight month period ended December 31, 1998. The Standard &
Poor's 500 Index consists of 500 widely held common stocks within four sectors
(industrials, utilities, financials and transportation). The Fund's performance
differs from an index's because an index is not managed, does not contain cash
(the Fund generally carries a certain percentage of cash at any given time), and
includes no sales charges or management expenses. Of course, one cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
The source for the indices is Standard & Poor's Micropal.

[This following line graph hypothetically compares the performance of the Mutual
Shares Investments Fund Class 1 shares to that of the S&P 500 Index and the
Lipper Growth & Income Funds Objective Average, based on a $10,000 investement
from 5/1/98 - 12/31/98.]

[LINE GRAPH]

<TABLE>
<CAPTION>
Total Return Index Comparison
<S> <C> <C> <C>
Mutual Shares Investments S&P 500 Lipper Growth & Income Funds
Fund-Class I Objective Average
------------------------------------------------------------------------------------------------
5/1/98 $10,000 $10,000 $10,000
5/31/98 $9,760 $9,828 $9,792
6/30/98 $9,530 $10,227 $9,957
7/31/98 $9,380 $10,118 $9,700
8/31/98 $8,360 $8,655 $8,278
9/30/98 $8,610 $9,209 $8,716
10/31/98 $9,310 $9,958 $9,347
11/30/98 $9,690 $10,562 $9,821
12/31/98 $9,720 $11,170 $10,259
</TABLE>

EXPENSES: Performance reflects the Fund's Class 1 operating expenses, but does
not include any Contract fees, expenses or sales charges. If they had been
included, performance would be lower. These charges and deductions, particularly
for variable life policies, can have a significant effect on Contract values and
insurance benefits. See the Contract prospectus for a complete description of
these expenses, including sales charges. The Fund's adviser agreed to limit
Class 1 expenses to 1.00% of total net assets, which increased returns shown.
This agreement may be terminated at a later date.

*Lipper Growth and Income Funds Objective Average is an equally weighted average
calculation of performance figures for all funds within the Lipper Growth and
Income Funds Objective Category, which is defined as all mutual funds that
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. Lipper calculations include reinvested dividends but do
not include sales charges. If sales charges had been considered, the fund's
performance relative to the Lipper average may have been different.

Past performance cannot predict or guarantee future results. MS-3

PAGE

MUTUAL SHARES
INVESTMENTS FUND
CLASS 1

PERFORMANCE

Total return represents the cumulative or average annual change in value,
assuming reinvestment of dividends and capital gains. Average returns smooth out
variations in returns, which can be significant; they are not the same as
year-by-year results.

MUTUAL SHARES INVESTMENTS FUND - CLASS 1
PERIODS ENDED 12/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
(5/1/98)
---------
<S> <C>
Cumulative Total Return - 2.80%

Aggregate Total Return* - 2.80%

Value of $10,000 Investment $9,720
</TABLE>

Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions. Securities of companies involved in
mergers, liquidations and distressed/bankrupt investments involve higher credit
risks.You may have a gain or loss when you sell your shares.

* Aggregate total return represents the change in value of an investment over
the indicated period. Since these shares have existed for less than one year,
average annual total returns are not provided.

MS-4 Past performance cannot predict or guarantee future results.

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
MUTUAL SHARES INVESTMENTS FUND
Financial Highlights

<TABLE>
<CAPTION>
CLASS 1
------------------
PERIOD ENDED
DECEMBER 31, 1998+
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $10.00
------
Income from investment operations:
Net investment income...................................... .08
Net realized and unrealized losses......................... (.36)
------------------
Total from investment operations............................ (.28)
------------------
Net asset value, end of period.............................. $9.72
------------------
------------------
Total Return*............................................... (2.80)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $1,274
Ratios to average net assets:
Expenses................................................... 1.00%**
Expenses, excluding waiver and payments by affiliate....... 2.87%**
Net investment income...................................... 1.47%**
Portfolio turnover rate..................................... 23.15%
</TABLE>

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
MUTUAL SHARES INVESTMENTS FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
CLASS 2
------------------
PERIOD ENDED
DECEMBER 31, 1998+
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $9.58
------
Income from investment operations:
Net investment income...................................... .08
Net realized and unrealized gains.......................... .07
------------------
Total from investment operations............................ .15
------------------
Net asset value, end of period.............................. $9.73
------------------
------------------
Total Return*............................................... 1.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $490
Ratios to average net assets:
Expenses................................................... 1.25%**
Expenses, excluding waiver and payments by affiliate....... 3.12%**
Net investment income...................................... 4.15%**
Portfolio turnover rate..................................... 23.15%
</TABLE>

*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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. TOTAL
RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
+FOR THE PERIOD NOVEMBER 10, 1998 (COMMENCEMENT OF SALES) TO DECEMBER 31, 1998.
See Notes to Financial Statements.
MS-6

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
MUTUAL SHARES INVESTMENTS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------
<S> <C> <C> <C>
COMMON STOCKS 78.3%
AEROSPACE & MILITARY TECHNOLOGY 1.7%
*Coltec Industries Inc. .................................... United States 1,550 $ 30,225
----------

APPLIANCES & HOUSEHOLD DURABLES 1.0%
Premark International Inc. ................................. United States 500 17,313
----------
AUTOMOBILES .9%
General Motors Corp. ....................................... United States 220 15,744
----------
BANKING 3.5%
Bank One Corp. ............................................. United States 324 16,544
Bankamerica Corp. .......................................... United States 265 15,933
Chase Manhattan Corp. ...................................... United States 425 28,927
----------
61,404
----------
BEVERAGES & TOBACCO 4.1%
Philip Morris Cos. Inc. .................................... United States 350 18,725
RJR Nabisco Holdings Corp. ................................. United States 1,135 33,695
UST Inc. ................................................... United States 550 19,181
----------
71,601
----------
BROADCASTING & PUBLISHING 5.1%
Central Newspapers Inc., A.................................. United States 300 21,431
Seat Pagine Gialle SpA...................................... Italy 32,000 24,588
United News & Media Plc. ................................... United Kingdom 1,200 10,392
Washington Post Co., B...................................... United States 58 33,520
----------
89,931
----------
BUILDING MATERIALS & COMPONENTS 1.3%
*American Standard Cos. Inc. ............................... United States 650 23,400
----------
BUSINESS & PUBLIC SERVICES 1.1%
Suez Lyonnaise des Eaux SA.................................. France 90 18,496
----------
CHEMICALS 2.2%
Morton International Inc. .................................. United States 625 15,313
Olin Corp. ................................................. United States 855 24,207
----------
39,520
----------
ENERGY EQUIPMENT & SERVICES 3.4%
*Cooper Cameron Corp. ...................................... United States 1,290 31,605
*Weatherford International Inc. ............................ United States 1,500 29,063
----------
60,668
----------
ENERGY SOURCES 3.9%
*Ocean Energy Inc. ......................................... United States 3,400 21,463
Shell Transport & Trading Co. Plc. ......................... United Kingdom 2,130 13,041
Societe Elf Aquitaine SA, Br. .............................. France 290 33,536
----------
68,040
----------
FINANCIAL SERVICES 10.2%
Bear Stearns Co. Inc. ...................................... United States 500 18,687
Corporacion Financiera Alba SA.............................. Spain 240 40,142
Greenpoint Financial Corp. ................................. United States 810 28,451
Household International Inc. ............................... United States 835 33,087
Liberty Financial Companies Inc. ........................... United States 1,060 28,620
United Asset Management Corp. .............................. United States 1,200 31,200
----------
180,187
----------
FOOD & HOUSEHOLD PRODUCTS 1.8%
U.S. Industries Inc. ....................................... United States 1,750 32,594
----------
</TABLE>

MS-7

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
MUTUAL SHARES INVESTMENTS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOREST PRODUCTS & PAPER 2.0%
Rayonier Inc. .............................................. United States 750 $ 34,453
----------
INDUSTRIAL COMPONENTS 8.7%
BTR Plc. ................................................... United Kingdom 44,000 90,042
Charter Plc. ............................................... United Kingdom 450 2,441
*Lear Corp. ................................................ United States 796 30,646
Lucas Varity Plc. .......................................... United Kingdom 3,300 10,871
Lucas Varity Plc., ADR...................................... United Kingdom 605 20,268
----------
154,268
----------
INSURANCE 3.1%
*Alleghany Corp. ........................................... United States 135 25,363
Hartford Financial Services Group Inc. ..................... United States 300 16,463
Torchmark Corp. ............................................ United States 360 12,713
----------
54,539
----------
LEISURE & TOURISM 2.9%
Hilton Hotels Corp. ........................................ United States 1,600 30,600
*Promus Hotel Corp. ........................................ United States 620 20,073
----------
50,673
----------
MACHINERY & ENGINEERING 2.6%
New Holland NV.............................................. Netherlands 1,100 15,056
Siebe Plc. ................................................. United Kingdom 8,000 31,412
----------
46,468
----------
MERCHANDISING 5.5%
*Federated Department Stores Inc............................ United States 760 33,107
*Payless Shoesource Inc. ................................... United States 680 32,215
*Toys R Us Inc. ............................................ United States 1,880 31,725
----------
97,047
----------
MULTI-INDUSTRY 4.3%
CGIP-Compagnie Generale Industrie de Participation.......... France 590 32,530
Cie Financiere Richemont AG, Br., A......................... Switzerland 22 31,106
Investor AB, A.............................................. Sweden 290 12,915
----------
76,551
----------
REAL ESTATE 2.0%
*Cadillac Fairview Corp. ................................... Canada 225 4,138
Starwood Hotels & Resorts Trust............................. United States 1,375 31,195
----------
35,333
----------
TELECOMMUNICATIONS 2.0%
Telephone & Data Systems Inc. .............................. United States 675 30,333
*US Cellular Corp. ......................................... United States 115 4,370
----------
34,703
----------
TEXTILES & APPAREL 2.0%
Liz Claiborne Inc. ......................................... United States 1,100 34,719
----------
TRANSPORTATION 1.2%
Florida East Coast Industries Inc. ......................... United States 600 21,112
----------
UTILITIES ELECTRICAL & GAS 1.8%
*Citizens Utilities Co., B.................................. United States 3,873 31,468
----------
TOTAL COMMON STOCKS (COST $1,324,330)....................... 1,380,457
----------
</TABLE>

MS-8

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
MUTUAL SHARES INVESTMENTS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS 2.1%
*Embratel Participacoes SA, ADR, pfd. ...................... Brazil 170 $ 2,369
*Tele Centro Sul Participacoes SA, ADR, pfd. ............... Brazil 261 10,913
*Tele Norte Leste Participacoes SA, ADR, pfd. .............. Brazil 865 10,758
*Telesp Participacoes SA, ADR, pfd. ........................ Brazil 580 12,833
----------
TOTAL PREFERRED STOCKS (COST $45,562)....................... 36,873
----------
TOTAL INVESTMENTS (COST $1,369,892) 80.4%................... 1,417,330
OTHER ASSETS, LESS LIABILITIES 19.6%........................ 346,386
----------
TOTAL NET ASSETS 100.0%..................................... $1,763,716
----------
----------
</TABLE>

*NON INCOME PRODUCING.
See Notes to Financial Statements.
MS-9

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
MUTUAL SHARES INVESTMENTS FUND
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $1,369,892)...... $1,417,330
Cash....................................................... 333,341
Receivables:
Fund shares sold.......................................... 1,795
Dividends and other....................................... 10,067
From affiliates........................................... 6,261
----------
Total assets........................................... 1,768,794
----------
Liabilities:
Payables:
Fund shares redeemed...................................... 837
Accrued expenses........................................... 4,241
----------
Total liabilities...................................... 5,078
----------
Net assets, at value........................................ $1,763,716
==========
Net assets consist of:
Undistributed net investment income........................ $ 9,047
Net unrealized appreciation................................ 43,999
Accumulated net realized loss.............................. (20,146)
Beneficial shares.......................................... 1,730,816
----------
Net assets, at value........................................ $1,763,716
==========
CLASS 1:
Net asset value per share ($1,273,672 / 131,002 shares
outstanding)............................................. $9.72
==========
CLASS 2:
Net asset value per share ($490,044 / 50,382 shares
outstanding).............................................. $9.73
==========
</TABLE>

See Notes to Financial Statements.
MS-10

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
MUTUAL SHARES INVESTMENTS FUND
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 1, 1998 TO DECEMBER 31, 1998

<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $201)
Dividends.................................................. $ 6,174
Other...................................................... 8,384
--------
Total investment income............................... $ 14,558
--------
Expenses:
Management fees (Note 3)................................... 3,215
Administrative fees (Note 3)............................... 531
Distribution fees - Class 2 (Note 3)....................... 103
Custodian fees............................................. 100
Reports to shareholders.................................... 9,600
Registration and filing fees............................... 150
Professional fees.......................................... 650
Trustees' fees and expenses................................ 1,000
Other...................................................... 272
--------
Total expenses........................................ 15,621
Expenses waived/paid by affiliate (Note 3)............ (10,110)
--------
Net expenses...................................... 5,511
--------
Net investment income........................... 9,047
--------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... (23,688)
Foreign currency transactions............................. 3,542
--------
Net realized loss..................................... (20,146)
Net unrealized appreciation (depreciation) on:
Investments............................................... 47,438
Translation of assets and liabilities denominated in
foreign currencies...................................... (3,439)
--------
Net unrealized appreciation........................... 43,999
--------
Net realized and unrealized gain............................ 23,853
--------
Net increase in net assets resulting from operations........ $ 32,900
--------
--------
</TABLE>

See Notes to Financial Statements.
MS-11

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
MUTUAL SHARES INVESTMENTS FUND
Financial Statements (continued)

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998+
------------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 9,047
Net realized loss from investments and foreign currency
transactions............................................. (20,146)
Net unrealized appreciation on investments and translation
of assets and liabilities denominated in foreign
currencies............................................... 43,999
----------
Net increase in net assets resulting from operations... 32,900
Fund share transactions (Note 2):
Class 1.................................................. 1,247,562
Class 2.................................................. 483,254
------------------
Net increase in net assets............................. 1,763,716
Net assets:
Beginning of period........................................ --
------------------
End of period.............................................. $1,763,716
------------------
------------------
Undistributed net investment income included in net assets:
End of period.............................................. $ 9,047
------------------
------------------
</TABLE>

+FOR THE PERIOD MAY 1, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998.
See Notes to Financial Statements.
MS-12

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
MUTUAL SHARES INVESTMENTS FUND
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Mutual Shares Investments Fund (the Fund) is a separate, diversified series of
Templeton Variable Products Series Fund (the Trust), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks capital appreciation by investing primarily in domestic equity securities
and domestic debt obligations. The following summarizes the Fund's significant
accounting policies.

a. SECURITY VALUATION:

b. FOREIGN CURRENCY TRANSLATION:

Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.

c. INCOME TAXES:

No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.

d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

MS-13

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
MUTUAL SHARES INVESTMENTS FUND
Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
e. ACCOUNTING ESTIMATES:

2. BENEFICIAL SHARES

The Fund offers two classes of shares: Class 1 and Class 2 shares. The shares
differ by their distribution fees, voting rights on matters affecting a single
class and the exchange privilege of each class.

At December 31, 1998, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998*
-----------------------
SHARES AMOUNT
---------------------
<S> <C> <C>
CLASS 1 SHARES:
Shares sold................................................. 131,739 $1,254,575
Shares redeemed............................................. (737) (7,013)
-----------------------
Net increase................................................ 131,002 $1,247,562
-----------------------
-----------------------
</TABLE>

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998**
-----------------------
SHARES AMOUNT
---------------------
<S> <C> <C>
CLASS 2 SHARES:
Shares sold................................................. 51,816 $ 496,983
Shares redeemed............................................. (1,434) (13,729)
-----------------------
Net increase................................................ 50,382 $ 483,254
-----------------------
-----------------------
*Commencement of operations of Class 1 shares was May 1,
1998.
**Commencement of sales of Class 2 shares was November 10,
1998.
</TABLE>

Templeton Funds Annuity Company, the Fund's administrative manager, is record
owner of 25,000 Class 1 shares as of December 31, 1998.

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Certain officers of the Trust are also officers or directors of Franklin Mutual
Advisers, (Franklin Mutual), Franklin Templeton Services, Inc. (FT Services) and
Franklin/Templeton Distributors, Inc. (Distributors), the Fund's investment
manager, administrative manager and principal underwriter, respectively.

The Fund pays an investment management fee to Franklin Mutual of 0.60% per year
of the average daily net assets of the Fund. Franklin Mutual agreed in advance
to reduce management fees to the extent necessary to limit total expenses to an
annual rate of 1.00% and 1.25% of the average daily net assets of Class 1 and
Class 2 shares, respectively, through December 31, 1998, as noted

MS-14

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
MUTUAL SHARES INVESTMENTS FUND
Notes to Financial Statements (continued)

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
in the Statement of Operations. The Fund pays its allocated share of an
administrative fee to FT Services based on the Trust's aggregate average daily
net assets as follows:

The Fund reimburses Distributors up to .25% per year of its average daily net
assets of Class 2 shares, for costs incurred in marketing the Fund's Class 2
shares.

4. INCOME TAXES

The cost of securities for income tax purposes is the same as that shown in the
Statement of Investments. At December 31, 1998, the net unrealized appreciation
based on the cost of investments for income tax purposes was as follows:

<TABLE>
<S> <C>
Unrealized appreciation..................................... $111,357
Unrealized depreciation..................................... (63,919)
--------
Net unrealized appreciation................................. $ 47,438
========
</TABLE>

At December 31, 1998, the Fund had tax basis capital losses of $21,595 which may
be carried over to offset future capital gains. Such losses expire December 31,
2006.

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the
period ended December 31, 1998 aggregated $1,508,980 and $115,399, respectively.

MS-15

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
MUTUAL SHARES INVESTMENTS FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund

We have audited the accompanying statement of assets and liabilities, including
the Statement of Investments, of the Mutual Shares Investments Fund, series of
Templeton Variable Products Series Fund (the Trust) as of December 31, 1998, and
the related statement of operations, the statement of changes in net assets, and
the financial highlights for the period from May 1, 1998 to December 31, 1998.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mutual Shares Investments Fund, series of Templeton Variable Products Series
Fund as of December 31, 1998, the results of its operations, the changes in its
net assets and the financial highlights for the period indicated, in conformity
with generally accepted accounting principles.

McGladrey & Pullen, LLP

New York, New York
January 28, 1999

MS-16

PAGE

TEMPLETON ASSET ALLOCATION FUND

Investment Goal: Templeton Asset Allocation Fund seeks a high level of total
return through a flexible policy of investing in stocks of companies in any
nation, debt obligations of companies and governments of any nation, and money
market instruments. The Fund's assets are allocated among different investments
among these three market segments depending upon worldwide market and economic
conditions.

During the 12 months under review, global financial markets experienced
unprecedented volatility and mixed results. Many investors learned the negative
implications of global corporate interdependence, as Japan failed to stimulate
its economy, Russia suspended its debt repayments and the Asian contagion
reinfected Latin America. However, European markets generally performed well, a
result we attribute to tight fiscal policies and EMU-driven interest rate
convergence, while U.S. securities markets rose considerably due largely to
benign inflation and low interest rates.

The Fund benefited from its high European exposure (39.6% of total net assets at
the end of the reporting period), as many European companies cut costs, reduced
debt burdens and repurchased shares. Our largest European country weighting was
France, whose equity market appreciated 42.8% during the year.(1) Europe's
financial sector performed especially well, with Banque National de Paris,
AXA-UAP, and Zurich Allied AG ranking among the Fund's top performers.

Although trading at historically high valuations, domestic equities were
considered by many investors as a "safe haven" from economic turmoil abroad, and
the unmanaged Standard & Poor's(R) 500 Stock Index posted a total return of
28.6% for the fiscal year.(2) Many of our U.S. holdings, including Lucent
Technologies Inc. and Ford Motor Co., performed well.

In Asia, bad corporate debts and political instability helped send many equity
markets tumbling. Although it continued to falter, Japan's economy showed some
signs of improvement. Small steps by the Japanese government, such as allowing
insolvent banks to fail, could bode well for future economic restructuring
throughout Japan. Our exposure to Asian stocks increased from 5.6% of total net
assets to 10.3%, and we expect that, if Japan offers investment opportunities,
our Asian exposure could continue to rise in the coming year.

PORTFOLIO BREAKDOWN
TEMPLETON ASSET ALLOCATION FUND
BASED ON TOTAL NET ASSETS
12/31/98

[This chart shows in pie format the portfolio breakdown of Templeton Asset
Allocation Fund's securities on December 31, 1998, based on total net assets.]

Stocks 87.1%
Fixed-Income Securities 9.1%
Short-Term Investments & Other Net Assets 3.8%

GEOGRAPHIC DISTRIBUTION
TEMPLETON ASSET ALLOCATION FUND
BASED ON TOTAL NET ASSETS
12/31/98

[This chart shows in bar format the geographich distribution breakdown of the
Fund's securities on December 31, 1998, based on total net assets.]

Europe 39.6%
North America 21.1%
Asia 10.3%
Latin America 9.4%
Australia/New Zealand 5.6%
Middle East/Africa 1.1%
Fixed-Income Securities 9.1%
Short-Term Investments & Other Net Assets 3.8%

1. Source: Bloomberg. Market return is measured in U.S. dollars and includes
reinvested dividends.

2. Source: Standard & Poor's. Market return is measured in U.S. dollars and
includes reinvested dividends. One cannot invest directly in an index.

TA-1

PAGE

TOP 10 EQUITY HOLDINGS
TEMPLETON ASSET ALLOCATION FUND
12/31/98

[This following table shows the top 10 investment holdings ofTempleton Asset
Allocation Fund's securities on December 31, 1998, based on total net assets.]

<TABLE>
<CAPTION>
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
- --------- ----------
<S> <C>
Lucent Technologies Inc.
Telecommunications, U.S. 3.2%

AXA-UAP
Financial Services, France 2.3%

Alcatel SA
Electrical & Electronics,
France 2.2%

Merita AS
Banking, Finland 2.2%

Zurich Allied AG
Insurance, Switzerland 2.1%

3Com Corp.
Data Processing &
Reproduction, U.S. 2.0%

Autoliv Inc.
Automobiles, Sweden 2.0%

ING Groep NV
Financial Services,
Netherlands 1.9%

Philips Electronics NV
Electrical & Electronics,
Netherlands 1.9%

YPF Sociedad Anonima, ADR
Energy Sources,
Argentina 1.8%
</TABLE>

For a complete list of portfolio holdings, please see the Fund's Statement of
Investments.

Latin American stock markets also performed poorly in 1998. Although many fell
in excess of 20% in U.S.-dollar terms, we believed the downturn in Latin
American equities to be short term, and viewed it as an opportunity to find
bargains throughout the region. For example, we initiated a position in Compania
Anonima Nacional Telefonos de Venezuela, ADR and established a position in Gener
SA, ADR.

With regard to fixed-income markets, slow economic growth and tame inflation in
the U.S. helped propel domestic bond prices higher in 1998. European debt
securities also fared well, as government efforts to meet European Monetary
Union membership standards contributed to lower interest rates. However, bond
prices in many developing-market countries experienced major declines which were
widely attributed to the Asian economic malaise.

Please remember, this discussion reflects our views, opinions and portfolio
holdings as of December 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which may affect our
strategies and the Fund's portfolio composition. Although past performance is
not predictive of future results, these insights may help you understand our
investment and management philosophy.

TA-2

PAGE

It is also important to remember that investments in foreign securities involve
special risks including changes in currency values, market price swings, and
economic, social and political developments in the countries where the
portfolios are invested. Developing markets involve similar but heightened risks
related to their smaller size and lesser liquidity. These risks are discussed in
the prospectus.

We thank you for investing in Templeton Asset Allocation Fund and welcome your
comments or suggestions.

Sincerely,

/s/ Gary R. Clemons
Gary R. Clemons
Portfolio Manager
Templeton Asset Allocation Fund

/s/ Thomas J. Dickson
Thomas J. Dickson
Portfolio Manager
Templeton Asset Allocation Fund

IMPORTANT NOTE:

Beginning January 1, 1999, the fixed income portion of the Fund's portfolio will
be managed by a team of Templeton Global Bond Managers, a division of Templeton
Investment Counsel, Inc.

TA-3

PAGE

TEMPLETON ASSET
ALLOCATION FUND
CLASS 1

PERFORMANCE SUMMARY AS OF 12/31/98

TOTAL RETURN INDEX COMPARISON
$10,000 INVESTMENT (1/1/89 - 12/31/98)

The J.P. Morgan Global Government Bond Index includes only actively traded
fixed-rated bonds with a remaining maturity of one year or longer and is an
aggregate of government securities issued in 13 countries, and includes
reinvested interest. The Morgan Stanley Capital International(R) (MSCI) World
Index includes approximately 1,500 companies representing the stock markets of
22 countries and includes reinvested dividends. The Consumer Price Index (CPI)
is a commonly used measure of inflation. The Fund's performance differs from an
index's because an index is not managed, does not contain cash (the Fund
generally carries a certain percentage of cash at any given time), and includes
no sales charges or management expenses. Of course, one cannot invest directly
in an index, nor is an index representative of the Fund's portfolio. Sources for
the indices are MSCI, J.P. Morgan and Standard & Poor's Micropal.

[This following line graph hypothetically compares teh performance of Templeton
Asset Allocation Fund Class 1 shares to that of the MSCI World Index, the JP
Morgan Global Government Bond Index and the Consumer Price Index (CPI), based on
a $10,000 investment from 1/1/89 - 12/31/98].

[LINE GRAPH]

<TABLE>
<CAPTION>
Total Return Index Comparison
<S> <C> <C> <C> <C>
Templeton Asset Allocation MSCI World JP Morgan CPI
Fund-Class I Index Global
Government Bond
Index
-------------------------------------------------------------------------------
1/1/89 $10,000 $10,000 $10,000 $10,000
1/31/89 $10,272 $10,364 $9,901 $10,051
2/28/89 $10,156 $10,300 $9,885 $10,091
3/31/89 $10,263 $10,236 $9,801 $10,149
4/30/89 $10,487 $10,474 $9,962 $10,216
5/31/89 $10,487 $10,218 $9,855 $10,274
6/30/89 $10,429 $10,105 $10,079 $10,299
7/31/89 $10,994 $11,248 $10,480 $10,324
8/31/89 $11,091 $10,978 $10,170 $10,341
9/30/89 $11,043 $11,290 $10,331 $10,373
10/31/89 $10,672 $10,915 $10,464 $10,424
11/30/89 $10,857 $11,353 $10,557 $10,448
12/31/89 $11,325 $11,719 $10,680 $10,464
1/31/90 $11,043 $11,174 $10,521 $10,572
2/28/90 $11,062 $10,697 $10,407 $10,622
3/31/90 $11,221 $10,053 $10,343 $10,680
4/30/90 $10,831 $9,909 $10,303 $10,697
5/31/90 $11,500 $10,955 $10,632 $10,722
6/30/90 $11,590 $10,879 $10,825 $10,780
7/31/90 $11,760 $10,980 $11,143 $10,821
8/31/90 $10,901 $9,954 $11,056 $10,920
9/30/90 $10,022 $8,906 $11,159 $11,012
10/31/90 $9,932 $9,739 $11,600 $11,078
11/30/90 $10,222 $9,581 $11,804 $11,102
12/31/90 $10,421 $9,784 $11,936 $11,102
1/31/91 $10,921 $10,143 $12,206 $11,169
2/28/91 $11,620 $11,084 $12,218 $11,186
3/31/91 $11,480 $10,759 $11,837 $11,202
4/30/91 $11,614 $10,845 $11,980 $11,218
5/31/91 $11,934 $11,093 $11,990 $11,251
6/30/91 $11,428 $10,410 $11,830 $11,285
7/31/91 $12,089 $10,903 $12,080 $11,302
8/31/91 $12,368 $10,870 $12,331 $11,334
9/30/91 $12,471 $11,157 $12,780 $11,385
10/31/91 $12,564 $11,340 $12,907 $11,401
11/30/91 $12,254 $10,848 $13,117 $11,434
12/31/91 $13,307 $11,640 $13,780 $11,443
1/31/92 $13,194 $11,426 $13,510 $11,459
2/29/92 $13,555 $11,230 $13,471 $11,501
3/31/92 $13,391 $10,704 $13,346 $11,559
4/30/92 $13,732 $10,854 $13,457 $11,575
5/31/92 $14,308 $11,288 $13,839 $11,592
6/30/92 $14,265 $10,912 $14,217 $11,633
7/31/92 $14,436 $10,942 $14,530 $11,659
8/31/92 $14,265 $11,210 $14,917 $11,691
9/30/92 $14,212 $11,109 $14,902 $11,724
10/31/92 $14,105 $10,811 $14,530 $11,766
11/30/92 $14,212 $11,006 $14,272 $11,782
12/31/92 $14,382 $11,097 $14,407 $11,775
1/31/93 $14,574 $11,136 $14,652 $11,833
2/28/93 $14,915 $11,402 $14,888 $11,874
3/31/93 $15,224 $12,065 $15,116 $11,916
4/30/93 $15,520 $12,626 $15,392 $11,949
5/31/93 $15,783 $12,920 $15,489 $11,965
6/30/93 $15,914 $12,813 $15,502 $11,982
7/31/93 $16,167 $13,079 $15,509 $11,982
8/31/93 $16,934 $13,681 $15,968 $12,015
9/30/93 $16,945 $13,430 $16,136 $12,040
10/31/93 $17,515 $13,802 $16,128 $12,090
11/30/93 $17,175 $13,024 $16,010 $12,098
12/31/93 $18,139 $13,663 $16,174 $12,098
1/31/94 $19,016 $14,567 $16,327 $12,132
2/28/94 $18,304 $14,381 $16,148 $12,174
3/31/94 $17,501 $13,763 $16,074 $12,215
4/30/94 $17,658 $14,191 $16,061 $12,232
5/31/94 $17,781 $14,230 $15,928 $12,239
6/30/94 $17,299 $14,193 $16,117 $12,281
7/31/94 $17,994 $14,465 $16,269 $12,313
8/31/94 $18,499 $14,904 $16,227 $12,364
9/30/94 $18,118 $14,515 $16,307 $12,397
10/31/94 $18,308 $14,930 $16,551 $12,406
11/30/94 $17,725 $14,285 $16,343 $12,422
12/31/94 $17,602 $14,426 $16,381 $12,422
1/31/95 $17,411 $14,213 $16,712 $12,471
2/28/95 $17,804 $14,423 $17,143 $12,521
3/31/95 $18,080 $15,120 $18,015 $12,562
4/30/95 $18,667 $15,650 $18,302 $12,604
5/31/95 $19,358 $15,787 $18,813 $12,629
6/30/95 $19,704 $15,785 $18,931 $12,654
7/31/95 $20,441 $16,578 $19,020 $12,653
8/31/95 $20,268 $16,212 $18,492 $12,688
9/30/95 $20,936 $16,687 $18,908 $12,711
10/31/95 $20,521 $16,428 $19,093 $12,753
11/30/95 $21,155 $17,001 $19,306 $12,744
12/31/95 $21,569 $17,502 $19,545 $12,736
1/31/96 $22,122 $17,821 $19,344 $12,811
2/29/96 $22,306 $17,932 $19,232 $12,852
3/31/96 $22,513 $18,235 $19,202 $12,918
4/30/96 $23,060 $18,666 $19,131 $12,968
5/31/96 $23,377 $18,686 $19,150 $12,993
6/30/96 $23,340 $18,784 $19,318 $13,001
7/31/96 $22,732 $18,124 $19,673 $13,026
8/31/96 $23,291 $18,336 $19,755 $13,051
9/30/96 $23,754 $19,057 $19,864 $13,092
10/31/96 $24,046 $19,193 $20,258 $13,134
11/30/96 $25,469 $20,272 $20,547 $13,159
12/31/96 $25,639 $19,951 $20,404 $13,159
1/31/97 $26,612 $20,194 $19,894 $13,200
2/28/97 $26,875 $20,430 $19,756 $13,240
3/31/97 $26,597 $20,030 $19,606 $13,273
4/30/97 $26,889 $20,688 $19,496 $13,289
5/31/97 $28,413 $21,969 $19,956 $13,281
6/30/97 $29,566 $23,067 $20,183 $13,296
7/31/97 $31,302 $24,134 $20,109 $13,312
8/31/97 $29,831 $22,523 $20,084 $13,338
9/30/97 $31,898 $23,750 $20,530 $13,371
10/31/97 $29,499 $22,504 $20,965 $13,404
11/30/97 $29,592 $22,905 $20,713 $13,396
12/31/97 $29,619 $23,188 $20,690 $13,380
1/31/98 $29,446 $23,838 $20,898 $13,404
2/28/98 $31,209 $25,455 $21,053 $13,431
3/31/98 $33,075 $26,533 $20,895 $13,458
4/30/98 $33,692 $26,796 $21,216 $13,482
5/31/98 $32,724 $26,465 $21,308 $13,507
6/30/98 $32,331 $27,096 $21,367 $13,523
7/31/98 $32,878 $27,057 $21,425 $13,539
8/31/98 $26,943 $23,452 $22,017 $13,555
9/30/98 $26,423 $23,871 $23,167 $13,572
10/31/98 $29,482 $26,034 $23,686 $13,604
11/30/98 $31,208 $27,586 $23,418 $13,604
12/31/98 $31,517 $28,938 $23,859 $13,596
</TABLE>

EXPENSES: Performance reflects the Fund's Class 1 operating expenses, but does
not include any Contract fees, expenses or sales charges. If they had been
included, performance would be lower. These charges and deductions, particularly
for variable life policies, can have a significant effect on Contract values and
insurance benefits. See the Contract prospectus for a complete description of
these expenses, including sales charges. Past expense reductions by the
Investment Manager increased returns.

Past performance cannot predict or guarantee future results.

TA-4

PAGE

TEMPLETON ASSET
ALLOCATION FUND
CLASS 1

PERFORMANCE

TEMPLETON ASSET ALLOCATION FUND - CLASS 1
PERIODS ENDED 12/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (8/31/88)
------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return 6.41% 73.75% 215.17% 224.00%

Average Annual Total Return 6.41% 11.68% 12.17% 12.03%

Value of $10,000 Investment $10,641 $17,375 $31,517 $32,400

12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------------------------------------------------------------------------------------------
One-Year Total Return - 2.96% 22.48% 18.93% 15.52% 6.41%
</TABLE>

Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the Fund invests. Emerging
markets involve heightened risks related to the same factors, in addition to
those associated with their relatively small size and lesser liquidity. You may
have a gain or loss when you sell your shares.

Past performance cannot predict or guarantee future results. TA-5

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Financial Highlights

<TABLE>
<CAPTION>
CLASS 1
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.................... $22.35 $21.08 $18.72 $15.69 $16.55
--------------------------------------------------------------------
Income from investment operations:
Net investment income................................ .69 .67 .63 .57 .44
Net realized and unrealized gains (losses)........... .75 2.44 2.76 2.87 (.92)
--------------------------------------------------------------------
Total from investment operations...................... 1.44 3.11 3.39 3.44 (.48)
--------------------------------------------------------------------
Less distributions from:
Net investment income................................ (.66) (.63) (.58) (.41) (.31)
Net realized gains................................... (.67) (1.21) (.45) -- (.07)
--------------------------------------------------------------------
Total distributions................................... (1.33) (1.84) (1.03) (.41) (.38)
--------------------------------------------------------------------
Net asset value, end of year.......................... $22.46 $22.35 $21.08 $18.72 $15.69
--------------------------------------------------------------------
--------------------------------------------------------------------
Total Return*......................................... 6.41% 15.52% 18.93% 22.48% (2.96)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)....................... $692,163 $735,568 $556,027 $406,123 $288,172
Ratios to average net assets:
Expenses............................................. .78% .74% .64% .66% .75%
Net investment income................................ 2.88% 3.32% 3.56% 3.73% 4.02%
Portfolio turnover rate............................... 43.18% 45.27% 57.50% 43.02% 51.36%
</TABLE>

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
CLASS 2
-----------------------
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997+
-----------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $22.32 $20.40
-----------------------
Income from investment operations:
Net investment income...................................... .63 .16
Net realized and unrealized gains.......................... .74 1.76
-----------------------
Total from investment operations............................ 1.37 1.92
-----------------------
Less distributions from:
Net investment income...................................... (.64) --
Net realized gains......................................... (.67) --
-----------------------
Total distributions......................................... (1.31) --
-----------------------
Net asset value, end of year................................ $22.38 $22.32
-----------------------
-----------------------
Total Return*............................................... 6.10% 9.41%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $15,763 $9,665
Ratios to average net assets:
Expenses................................................... 1.03% 1.03%**
Net investment income...................................... 2.61% 1.97%**
Portfolio turnover rate..................................... 43.18% 45.27%
</TABLE>

*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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. TOTAL
RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
+FOR THE PERIOD MAY 1, 1997 (EFFECTIVE DATE) TO DECEMBER 31, 1997.
See Notes to Financial Statements.
TA- 7

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
---------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 82.9%
AEROSPACE & MILITARY TECHNOLOGY .5%
Rolls-Royce Plc. ........................................... United Kingdom 770,000 $ 3,183,512
------------
APPLIANCES & HOUSEHOLD DURABLES 1.0%
Sony Corp. ................................................. Japan 92,400 6,741,596
------------
AUTOMOBILES 5.1%
Autoliv Inc. ............................................... Sweden 246,900 9,181,594
Autoliv Inc., SDR........................................... Sweden 129,000 4,631,128
Fiat SpA.................................................... Italy 2,361,700 8,201,074
Ford Motor Co. ............................................. United States 84,000 4,929,750
General Motors Corp. ....................................... United States 40,000 2,862,500
Volvo AB, B................................................. Sweden 260,000 5,966,098
------------
35,772,144
------------
BANKING 8.5%
*Bangkok Bank Public Co. Ltd., fgn. ........................ Thailand 3,634,600 7,502,271
Bankinter SA................................................ Spain 237,750 8,775,381
Banque Nationale de Paris................................... France 148,200 12,208,951
Canadian Imperial Bank of Commerce.......................... Canada 140,000 3,463,542
Credit Suisse Group......................................... Switzerland 15,250 2,387,150
Den Norske Bank............................................. Norway 2,178,900 7,521,337
Foreningssparbanken AB, A................................... Sweden 113,800 2,948,259
Merita AS................................................... Finland 2,453,000 15,599,518
------------
60,406,409
------------
BROADCASTING & PUBLISHING .2%
South China Morning Post Ltd. .............................. Hong Kong 2,821,000 1,447,414
------------
BUSINESS & PUBLIC SERVICES .6%
Laidlaw Inc. ............................................... Canada 65,600 660,100
Waste Management Inc. ...................................... United States 72,500 3,380,313
------------
4,040,413
------------
CHEMICALS 2.4%
Akzo Nobel NV............................................... Netherlands 98,800 4,501,199
DSM NV, Br. ................................................ Netherlands 25,000 2,377,844
Rhone-Poulenc SA, A......................................... France 201,800 10,389,474
------------
17,268,517
------------
DATA PROCESSING & REPRODUCTION 2.8%
*3Com Corp. ................................................ United States 320,800 14,375,850
*Newbridge Networks Corp. .................................. Canada 180,000 5,467,500
------------
19,843,350
------------
ELECTRICAL & ELECTRONICS 6.5%
Alcatel SA.................................................. France 92,119 11,279,474
Alcatel SA, ADR............................................. France 185,739 4,538,985
*Applied Materials Inc. .................................... United States 261,000 11,141,437
Motorola Inc. .............................................. United States 94,000 5,739,875
Philips Electronics NV...................................... Netherlands 199,100 13,367,400
------------
46,067,171
------------
ELECTRONIC COMPONENTS & INSTRUMENTS 1.2%
Intel Corp. ................................................ United States 72,000 8,536,500
------------
ENERGY SOURCES 3.1%
Devon Energy Corp. ......................................... United States 141,148 4,331,479
*Ranger Oil Ltd. ........................................... Canada 1,153,490 5,118,612
YPF Sociedad Anonima, ADR................................... Argentina 451,400 12,610,988
------------
22,061,079
------------
</TABLE>

TA- 8

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
---------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FINANCIAL SERVICES 4.2%
AXA-UAP..................................................... France 112,700 $ 16,341,520
ING Groep NV................................................ Netherlands 222,100 13,550,621
------------
29,892,141
------------
FOREST PRODUCTS & PAPER 1.2%
Assidomaen AB............................................... Sweden 90,000 1,421,205
Carter Holt Harvey Ltd. .................................... New Zealand 293,020 263,140
International Paper Co. .................................... United States 50,000 2,240,625
Stora Enso OY, R............................................ Finland 225,000 2,266,264
Stora Kopparbergs Bergslags AB, B........................... Sweden 225,000 2,498,211
------------
8,689,445
------------
HEALTH & PERSONAL CARE 3.5%
Aetna Inc. ................................................. United States 16,700 1,313,037
Medeva Plc. ................................................ United Kingdom 4,572,675 8,064,280
Ono Pharmaceutical Co Ltd. ................................. Japan 247,000 7,576,418
Teva Pharmaceutical Industries Ltd., ADR.................... Israel 197,200 8,023,575
------------
24,977,310
------------
INDUSTRIAL COMPONENTS 2.2%
BTR Plc. ................................................... United Kingdom 3,540,550 7,245,448
Goodyear Tire & Rubber Co. ................................. United States 60,000 3,026,250
Granges AB.................................................. Sweden 183,200 2,644,329
Madeco Manufacturera de Cobre SA, ADR....................... Chile 162,500 1,360,937
SKF AB, B................................................... Sweden 117,500 1,369,852
------------
15,646,816
------------
INSURANCE 5.1%
Allstate Corp. ............................................. United States 80,000 3,090,000
Exel Ltd. .................................................. Bermuda 138,800 10,410,000
Reinsurance Australia Corp. Ltd. ........................... Australia 2,860,000 4,387,208
Torchmark Corp. ............................................ United States 90,000 3,178,125
Zurich Allied AG............................................ Switzerland 20,400 15,105,060
------------
36,170,393
------------
MACHINERY & ENGINEERING .6%
*Gradall Industries Inc. ................................... United States 314,000 4,513,750
------------
MERCHANDISING .7%
Dairy Farm International Holdings Ltd. ..................... Hong Kong 1,000,000 1,150,000
David Jones Ltd. ........................................... Australia 1,473,400 1,626,678
Sears Roebuck & Co. ........................................ United States 42,000 1,785,000
------------
4,561,678
------------
METALS & MINING 2.2%
British Steel Plc., ADR..................................... United Kingdom 589,300 8,618,512
Minorco SA, ADR............................................. Luxembourg 352,950 5,360,428
Reynolds Metals Co. ........................................ United States 22,000 1,159,125
------------
15,138,065
------------
MISC MATERIALS & COMMODITIES 1.0%
Agrium Inc. ................................................ Canada 517,000 4,491,437
Unitor ASA.................................................. Norway 286,000 2,777,792
------------
7,269,229
------------
</TABLE>

TA- 9

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
---------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTI-INDUSTRY 3.1%
Alfa SA de CV, A............................................ Mexico 1,150,000 $ 3,238,372
Cheung Kong Holdings Ltd. .................................. Hong Kong 600,000 4,317,661
Hicom Holdings Bhd.......................................... Malaysia 2,264,600 751,655
Hutchison Whampoa Ltd. ..................................... Hong Kong 444,000 3,137,759
Jardine Matheson Holdings Ltd. ............................. Hong Kong 220,800 569,664
Jardine Strategic Holdings Ltd. ............................ Hong Kong 168,750 244,687
Swire Pacific Ltd., A....................................... Hong Kong 2,200,000 9,853,819
------------
22,113,617
------------
REAL ESTATE .1%
New World Development Co. Ltd. ............................. Hong Kong 303,543 764,024
------------
TELECOMMUNICATIONS 16.5%
AT&T Corp. ................................................. United States 121,000 9,105,250
*Cable & Wireless Optus Ltd. ............................... Australia 2,768,640 5,824,640
Compania Anonima Nacional Telefonos de Venezuela, ADR....... Venezuela 314,500 5,602,031
*Embratel Participacoes SA.................................. Brazil 22,228,000 193,167
Hong Kong Telecommunications Ltd. .......................... Hong Kong 6,600,000 11,543,451
Lucent Technologies Inc. ................................... United States 204,428 22,487,080
Northern Telecom, Ltd. ..................................... Canada 90,000 4,511,250
PT Indosat, ADR............................................. Indonesia 159,400 1,942,687
*Swisscom AG................................................ Switzerland 21,630 9,055,151
*Tele Celular Sul Participacoes SA.......................... Brazil 1,560,999 1,447
*Tele Leste Celular Participacoes SA........................ Brazil 22,228,000 8,830
*Tele Sudeste Celular Participacoes SA...................... Brazil 22,228,000 62,549
Telecom Italia SpA.......................................... Italy 477,000 4,069,830
Telecom Italia SpA, di Risp................................. Italy 1,200,000 7,541,563
Telecomunicacoes Brasileiras SA (Telebras).................. Brazil 22,228,000 1,840
*Telecomunicacoes Brasileiras SA (Telebras), ADR............ Brazil 45,600 3,314,550
Telefonica de Argentina SA, B, ADR.......................... Argentina 315,000 8,800,313
Telefonica Del Peru SA, B, ADR.............................. Peru 131,800 1,672,213
Telefonica SA............................................... Spain 260,000 11,578,345
*Telefonica SA, rts. ....................................... Spain 260,000 231,200
Telefonos de Mexico SA (Telmex), L, ADR..................... Mexico 180,900 8,807,569
*Telesp Celular Participacoes SA............................ Brazil 22,228,000 95,664
*Telesp Participacoes SA.................................... Brazil 22,228,000 285,151
------------
116,735,771
------------
TEXTILES & APPAREL .5%
*Fruit of the Loom Inc., A.................................. United States 160,000 2,210,000
Nike Inc., B................................................ United States 40,000 1,622,500
------------
3,832,500
------------
TRANSPORTATION 5.3%
Air New Zealand Ltd., B..................................... New Zealand 2,564,000 4,036,217
*Fritz Companies Inc. ...................................... United States 350,000 3,784,375
Great Eastern Shipping Co. Ltd. ............................ India 7,453,970 4,043,039
Hitachi Zosen Corp. ........................................ Japan 210,000 290,426
Koninklijke Nedlloyd Groep NV............................... Netherlands 50,000 679,384
Kvaerner ASA, B............................................. Norway 215,000 3,527,366
Mayne Nickless Ltd., A...................................... Australia 1,730,400 6,421,114
Peninsular & Oriental Steam Navigation Co. ................. United Kingdom 580,000 6,851,343
Qantas Airways Ltd., 144A, ADR.............................. Australia 376,000 7,661,000
------------
37,294,264
------------
</TABLE>

TA- 10

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
---------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL & GAS 4.8%
BG Plc. .................................................... United Kingdom 779,629 $ 4,925,782
*Centrica Plc. ............................................. United Kingdom 3,200,000 6,428,750
Endesa SA, ADR.............................................. Spain 88,000 2,376,000
Endesa SA, Br. ............................................. Spain 122,000 3,237,363
Gener SA, ADR............................................... Chile 287,050 4,592,800
Hong Kong Electric Holdings Ltd. ........................... Hong Kong 2,001,500 6,071,219
Iberdrola SA, Br. .......................................... Spain 85,000 1,592,675
Korea Electric Power Corp. ................................. South Korea 196,000 4,857,215
------------
34,081,804
------------
TOTAL COMMON STOCKS (COST $496,157,881)..................... 587,048,912
------------
PREFERRED STOCKS 4.2%
Banco Bradesco SA, pfd. .................................... Brazil 767,000,000 4,253,176
*Banco Bradesco SA, rts., pfd. ............................. Brazil 31,791,491 18,103
Cia Vale do Rio Doce, A, ADR, pfd. ......................... Brazil 278,500 3,572,729
*Embratel Participacoes SA, pfd. ........................... Brazil 23,981,336 327,492
Moebel Walther AG, pfd. .................................... Germany 119,092 4,039,804
National Australia Cap Sec Plc., cvt., pfd. ................ Australia 159,874 4,456,488
News Corp. Ltd., pfd. ...................................... Australia 850,000 5,176,982
Petroleo Brasileiro SA, pfd. ............................... Brazil 36,000,000 4,081,937
SBC Communications Inc., cvt., pfd. ........................ Mexico 50,000 2,225,000
*Tele Leste Celular Participacoes SA, pfd. ................. Brazil 40,981,336 23,743
*Tele Sudeste Celular Participacoes SA, pfd. ............... Brazil 40,981,336 172,981
Telecomunicacoes Brasileiras SA (Telebras), pfd. ........... Brazil 40,981,336 4,749
*Telesp Celular Participacoes SA, pfd. ..................... Brazil 40,981,336 301,870
*Telesp Participacoes SA, pfd. ............................. Brazil 40,981,336 932,743
------------
TOTAL PREFERRED STOCKS (COST $36,843,679)................... 29,587,797
------------
<CAPTION>
PRINCIPAL
AMOUNT**
--------
<S> <C> <C> <C>
BONDS 9.1%
Buoni Poliennali del Tesoro:
10.50%, 7/15/00........................................... Italy 2,615,000,000ITL 1,741,280
7.75%, 11/01/06........................................... Italy 2,440,000,000ITL 1,845,232
Essar Steel Ltd., FRN, 8.40%, 7/20/99, Reg S................ India 445,000 322,625
Federal Republic of Germany, Series 118, 5.25%, 2/21/01..... Germany 1,390,000DEM 870,586
Government of Australia, 6.75%, 11/15/06.................... Australia 5,105,000AUD 3,497,435
Government of Canada:
7.25%, 6/01/03............................................ Canada 1,330,000CAD 949,210
7.50%, 12/01/03........................................... Canada 1,330,000CAD 966,978
10.25%, 2/01/04........................................... Canada 1,330,000CAD 1,074,763
9.00%, 12/01/04........................................... Canada 1,330,000CAD 1,049,124
8.75%, 12/01/05........................................... Canada 1,330,000CAD 1,061,238
7.00%, 12/01/06........................................... Canada 860,000CAD 637,010
10.25%, 3/15/14........................................... Canada 1,330,000CAD 1,338,616
8.00%, 6/01/23............................................ Canada 1,330,000CAD 1,196,004
9.00%, 6/01/25............................................ Canada 475,000CAD 473,936
Government of New Zealand, 6.50%, 2/15/00................... New Zealand 6,180,000NZD 3,315,129
Hypothekenbank In Essen AG, Series 502, 5.25%, 1/22/08...... Germany 9,455,000DEM 6,078,539
Kingdom of Belgium, 6.25%, 3/28/07.......................... Belgium 89,805,000BEF 3,031,078
Kingdom of Denmark:
9.00%, 11/15/00........................................... Denmark 70,000DKK 12,002
8.00%, 5/15/03............................................ Denmark 18,210,000DKK 3,322,692
Kingdom of Sweden, 10.25%, 5/05/03.......................... Sweden 20,000,000SEK 3,108,667
Republic of Argentina, 10.95%, 11/01/99..................... Argentina 1,025,000 1,045,500
Republic of Panama, 8.875%, 9/30/27......................... Panama 960,000 907,200
Republic of Peru, FRN, 4.00%, 3/07/17....................... Peru 1,560,000 986,700
Republic of Turkey, 9.875%, 2/23/05......................... Turkey 1,130,000 995,046
Republic of Venezuela, 144A, 9.125%, 6/18/07................ Venezuela 1,540,000 1,081,850
</TABLE>

TA- 11

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT**
--------
<S> <C> <C> <C>
BONDS (CONT.)
Treuhandanstalt, 7.50%, 9/09/04............................. Germany 1,000,000DEM $ 719,380
United Kingdom, 6.50%, 12/07/03............................. United Kingdom 2,795,000GBP 5,093,080
United Mexican States:
9.75%, 2/06/01............................................ Mexico 2,895,000 2,970,993
6.25%, 12/31/19........................................... Mexico 5,050,000 3,942,156
U.S. Treasury Bond, 5.25%, 11/15/28......................... United States 5,000,000 5,126,565
U.S. Treasury Note, 4.625%, 11/30/00........................ United States 5,890,000 5,895,525
------------
TOTAL BONDS (COST $63,725,935).............................. 64,656,139
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST
$596,727,495)............................................. 681,292,848
------------
(A)REPURCHASE AGREEMENT (COST $23,311,000) 3.3%
Morgan Stanley Inc., 4.65%, 1/04/99 (Maturity Value
$23,323,044) Collateralized by U.S. Treasury Notes &
Bonds..................................................... United States 23,311,000 23,311,000
------------
TOTAL INVESTMENTS (COST $620,038,495) 99.5%................. 704,603,848
NET EQUITY IN FORWARD CONTRACTS............................. (6,062)
OTHER ASSETS, LESS LIABILITIES .5%.......................... 3,327,597
------------
TOTAL NET ASSETS 100.0%..................................... $707,925,383
------------
------------
</TABLE>

CURRENCY ABBREVIATIONS:

<TABLE>
<S> <C>
AUD -- Australian Dollar
BEF -- Belgian Franc
CAD -- Canadian Dollar
DEM -- Deutsche Mark
DKK -- Danish Krone
GBP -- British Pound
ITL -- Italian Lira
NZD -- New Zealand Dollar
SEK -- Swedish Krona
</TABLE>

*NON INCOME PRODUCING.
**SECURITIES TRADED IN U.S. DOLLARS UNLESS OTHERWISE INDICATED.
(A)AT DECEMBER 31, 1998, ALL REPURCHASE AGREEMENTS HELD BY THE FUND HAD BEEN
ENTERED INTO ON THAT DATE.
See Notes to Financial Statements.
TA- 12

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $596,727,495).... $681,292,848
Repurchase agreement, at value and cost.................... 23,311,000
Cash....................................................... 404,257
Receivables:
Investment securities sold................................ 1,634,628
Dividends and interest.................................... 4,288,909
Unrealized gain on forward exchange contracts (Note 6)..... 13,093
------------
Total assets........................................... 710,944,735
------------
Liabilities:
Payables:
Investment securities purchased........................... 648,495
Fund shares redeemed...................................... 1,666,453
To affiliates............................................. 419,752
Unrealized loss on forward exchange contracts (Note 6)..... 19,155
Accrued expenses........................................... 265,497
------------
Total liabilities...................................... 3,019,352
------------
Net assets, at value........................................ $707,925,383
============
Net assets consist of:
Undistributed net investment income........................ $ 21,118,700
Net unrealized appreciation................................ 84,587,550
Accumulated net realized gain.............................. 77,721,110
Beneficial shares.......................................... 524,498,023
------------
Net assets, at value........................................ $707,925,383
============
CLASS 1:
Net asset value per share ($692,162,661 / 30,821,329 shares
outstanding)............................................. $22.46
============
CLASS 2:
Net asset value per share ($15,762,722 / 704,340 shares
outstanding).............................................. $22.38
============
</TABLE>

See Notes to Financial Statements.
TA- 13

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $1,825,334)
Dividends.................................................. $ 16,501,479
Interest................................................... 10,800,065
------------
Total investment income............................... $ 27,301,544
Expenses:
Management fees (Note 3)................................... 4,500,289
Administrative fees (Note 3)............................... 715,727
Distribution fees - Class 2 (Note 3)....................... 32,593
Custodian fees............................................. 330,000
Reports to shareholders.................................... 201,000
Professional fees.......................................... 36,900
Trustees' fees and expenses................................ 19,000
Other...................................................... 10,552
------------
Total expenses........................................ 5,846,061
------------
Net investment income........................... 21,455,483
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... 82,526,902
Foreign currency transactions............................. (3,778,566)
------------
Net realized gain..................................... 78,748,336
Net unrealized depreciation on:
Investments............................................... (55,891,009)
Translation of assets and liabilities denominated in
foreign currencies...................................... (649,958)
------------
Net unrealized depreciation........................... (56,540,967)
------------
Net realized and unrealized gain............................ 22,207,369
------------
Net increase in net assets resulting from operations........ $ 43,662,852
------------
------------
</TABLE>

See Notes to Financial Statements.
TA- 14

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Financial Statements (continued)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 21,455,483 $ 22,545,488
Net realized gain from investments and foreign currency
transactions............................................. 78,748,336 20,904,466
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies....................................... (56,540,967) 45,084,450
------------------------------
Net increase in net assets resulting from operations... 43,662,852 88,534,404
Distributions to shareholders from:
Net investment income:
Class 1.................................................. (21,506,765) (17,068,780)
Class 2.................................................. (313,012) --
Net realized gains:
Class 1.................................................. (21,669,695) (32,390,362)
Class 2.................................................. (324,175) --
Fund share transactions (Note 2):
Class 1.................................................. (43,165,375) 140,290,555
Class 2.................................................. 6,008,335 9,840,237
------------------------------
Net increase (decrease) in net assets.................. (37,307,835) 189,206,054
Net assets:
Beginning of year.......................................... 745,233,218 556,027,164
------------------------------
End of year................................................ $707,925,383 $745,233,218
------------------------------
------------------------------
Undistributed net investment income included in net assets:
End of year................................................ $ 21,118,700 $ 21,482,994
------------------------------
------------------------------
</TABLE>

See Notes to Financial Statements.
TA- 15

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Templeton Asset Allocation Fund (the Fund) is a separate, diversified series of
Templeton Variable Products Series Fund (the Trust), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks a high level of total return through a flexible policy of investing in
stocks of companies in any nation, debt obligations of companies and governments
of any nation, and money market instruments. The following summarizes the Fund's
significant accounting policies.

a. SECURITY VALUATION:

b. FOREIGN CURRENCY TRANSLATION:

Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.

c. INCOME TAXES:

No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.

d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

e. INDEXED SECURITIES:

The Fund may invest in debt instruments in which the principal and/or interest
is dependent on other factors such as yield curves, currency exchange rates or
commodity prices. The Fund's objective in holding these securities, commonly
called indexed securities

TA- 16

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)

e. INDEXED SECURITIES (CONT.)
or structured notes, is to tailor the Fund's investments to the specific risk
and returns it wishes to assume while avoiding unwanted risk or change in the
Fund's exposure to a particular foreign exchange rate or the spread between two
foreign exchange rates.

f. FOREIGN EXCHANGE CONTRACTS:

The Fund may enter into forward exchange contracts to hedge against foreign
exchange risks. These contracts are valued daily and the Fund's equity therein
is included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.

g. ACCOUNTING ESTIMATES:

2. BENEFICIAL SHARES

At December 31, 1998, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 1 SHARES:
Shares sold................................................. 1,101,798 $ 24,979,341 5,703,031 $125,783,146
Shares issued on reinvestment of distributions.............. 1,918,954 43,176,460 2,407,943 49,459,142
Shares redeemed............................................. (5,108,135) (111,321,176) (1,580,128) (34,951,733)
--------------------------------------------------------------
Net increase (decrease)..................................... (2,087,383) $ (43,165,375) 6,530,846 $140,290,555
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997*
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 2 SHARES:
Shares sold................................................. 359,493 $ 7,948,841 453,139 $ 10,300,271
Shares issued on reinvestment of distributions.............. 28,357 637,187 -- --
Shares redeemed............................................. (116,620) (2,577,693) (20,029) (460,034)
--------------------------------------------------------------
Net increase................................................ 271,230 $ 6,008,335 433,110 $ 9,840,237
--------------------------------------------------------------
--------------------------------------------------------------
*Effective date of Class 2 shares was May 1, 1997.
</TABLE>

TA- 17

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Notes to Financial Statements (continued)

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Certain officers of the Trust are also officers or directors of Templeton
Investment Counsel, Inc. (TICI), Franklin Templeton Services, Inc. (FT Services)
and Franklin/Templeton Distributors, Inc. (Distributors), the Fund's investment
manager, administrative manager and principal underwriter, respectively.

The Fund pays an investment management fee to TICI based on the average daily
net assets of the Fund as follows:

<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.65% First $200 million
0.585% Over $200 million, up to and including $1.3 billion
0.52% Over $1.3 billion
</TABLE>

The Fund pays its allocated share of an administrative fee to FT Services based
on the Trust's aggregate average daily net assets as follows:

The Fund reimburses Distributors up to 0.25% per year of its average daily net
assets of Class 2 shares, for costs incurred in marketing the Fund's Class 2
shares.

Legal fees of $14,237 were paid to a law firm in which a partner is an officer
of the Fund.

4. INCOME TAXES

At December 31, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $620,041,046 was as follows:

<TABLE>
<S> <C>
Unrealized appreciation..................................... $172,790,405
Unrealized depreciation..................................... (88,227,603)
------------
Net unrealized appreciation................................. $ 84,562,802
------------
------------
</TABLE>

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1998 aggregated $313,373,692 and $384,649,580, respectively.

6. OFF-BALANCE SHEET RISK

The Fund has been a party to financial instruments with off-balance-sheet risk,
primarily forward exchange contracts, in order to minimize the impact on the
Fund from adverse changes in the relationship between the U.S. dollar and
foreign currencies and interest rates. These instruments involve market risk in
excess of the amount recognized in the Statement of Assets and Liabilities. Some
of these risks have been minimized by offsetting contracts. Risks arise from the
possible inability of counterparties to meet the terms of their contracts,
future movement in currency values and interest rates and contract positions
that are not exact offsets. The contract amount indicates the extent of the
Fund's involvement in such contracts.

TA- 18

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Notes to Financial Statements (continued)

6. OFF-BALANCE SHEET RISK (CONT.)
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Fund's net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract.

As of December 31, 1998, the Fund had the following forward exchange contracts
outstanding:

<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
NGE FOR DATE GAIN/(LOSS
CONTRACTS TO SELL: ---------------------------------------------
- -----------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
1,100,000 British Pound............................................... U.S. $1,841,400 1/29/99 U.S. $ 13,093
---------- --------
----------
Unrealized gain on forward exchange contracts.................... 13,093
--------
CONTRACTS TO SELL:
- -----------------------------------------------------------------------
1,855,000 British Pound............................................... U.S. $3,064,460 1/25/99 (19,155)
---------- --------
----------
Unrealized loss on forward exchange contracts.................... (19,155)
--------
Net unrealized loss on forward exchange contracts.............. U.S. $ (6,062)
--------
--------
</TABLE>

TA- 19

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund

We have audited the accompanying statement of assets and liabilities, including
the Statement of Investments, of the Templeton Asset Allocation Fund, series of
Templeton Variable Products Series Fund (the Trust) as of December 31, 1998, and
the related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and the
financial highlights for the periods indicated in the accompanying financial
statements. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Templeton Asset Allocation Fund, series of Templeton Variable Products Series
Fund as of December 31, 1998, the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles.

McGladrey & Pullen, LLP

New York, New York
January 28, 1999

TA- 20

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON ASSET ALLOCATION FUND
Tax Designation

Under Section 852(b)(3)(C) of the Internal Revenue Code, the Templeton Asset
Allocation Fund hereby designates $77,305,831 as a capital gain dividend for the
fiscal year ended December 31, 1998.

Under Section 854(b)(2) of the Internal Revenue Code, the Templeton Asset
Allocation Fund hereby designates 4.41% of the ordinary income dividends as
income qualifying for the dividends received deduction for the fiscal year ended
December 31, 1998.

TA- 21

PAGE

This page intentionally left blank.

PAGE

TEMPLETON BOND FUND

Investment Goal: Templeton Bond Fund seeks high current income. The Fund seeks
to achieve its objective through a flexible policy of investing primarily in
debt securities of companies, governments and government agencies of various
nations throughout the world.

For global bond investors, the year under review was marked by falling raw
materials and commodities prices, rising bond prices in the world's major
developed markets, and periodic but persistent crises in developing-market
countries. The U.S. economy continued to expand for the sixth consecutive year,
and unemployment fell to levels not seen since the early 1970s. Inflation
remained tame, and the 10-year U.S. Treasury bond yield declined from 5.75% on
December 31, 1997 to 4.65% at the end of the fiscal year.(1)

During the reporting period, European economies began to emerge from a sluggish
growth environment. Those of Finland, Spain, and the Netherlands grew relatively
rapidly, as low, long-term interest rates finally began to stimulate economic
activity. By the end of the fiscal year, accelerating growth had spread to
Germany, France, and Italy. Many continental European markets also benefited
from a convergence in interest rates in countries seeking European Monetary
Union membership.

Japan, where banks generally were hamstrung by non-performing loans, presented a
different picture. The Japanese government struggled to restructure the economy,
but failed, in our view, and Japan remained in a recession throughout the fiscal
year. Reduced demand for products from other Asian markets and the yen's
persistent weakness put substantial pressure on the economies of the region's
developing-market countries.

During the second half of the reporting period, Russia experienced an economic
meltdown due largely to its precarious debt financing. To establish at least a
semblance of stability, the Russian government devalued the ruble and declared a
moratorium on debt service. In addition to having a negative impact on debt
instruments of other emerging-market countries, including those of Latin
America, Russia's problems also apparently affected developed economies that
were dependent on commodity exports or trade with emerging economies. For
example, Canada, Australia

GEOGRAPHIC DISTRIBUTION
TEMPLETON BOND FUND
BASED ON TOTAL NET ASSETS
12/31/98

[This chart shows in pie format the geographic distribution of Templeton Bond
Fund's portfolio holdings on December 31, 1998, based on total net assets.]

[Pie Chart]

North America 43.4%
Europe 34.7%
Australia/New Zealand 7.7%
Latin America 7.7%
Asia 0.4%
Short-Term Investments & Other Net Assets 6.1%

1. Source: Bloomberg.

TB-1

PAGE

PORTFOLIO BREAKDOWN
TEMPLETON BOND FUND
12/31/98

[The following table shows the portfolio breakdown of Templeton Bond
Fund's as of December 31, 1998, based on total net assets.]

% OF TOTAL
NET ASSETS
----------
Government Bonds 83.5%
Corporate Bonds 10.4%
Short-Term Investments
& Other Net Assets 6.1%

For a complete list of portfolio holdings, please see the Fund's Statement of
Investments.

and New Zealand experienced rising interest rates and moderate currency declines
relative to the U.S. dollar.

During the 12 months under review, we attempted to maximize the Fund's return by
allocating about 80-90% of total net assets to intermediate- and long-term bonds
in developed markets, and about 10-20% to what we believed to be the highest
quality and most liquid bonds available in developing markets. We increased our
North American allocation from 36.1% of total net assets to 43.4% and increased
our European exposure from 33.7% to 34.7%. Specifically, we augmented the Fund's
holdings in Germany, Belgium, and the United Kingdom, while decreasing our
positions in Italy and Sweden. This combination appeared to offer the
possibility of higher long-term returns with modestly higher short-term
volatility. However, our allocation to emerging-market bonds did hamper the
Fund's performance as these bonds generally underperformed higher-quality bonds
from developed markets.

In 1998, we reduced our use of foreign currency hedging because we felt the U.S.
dollar would fall in value against other currencies. Our hedging activities were
undertaken in an effort to minimize the loss of value which could arise from the
decline in the Fund's holdings of non-U.S. dollar denominated bonds. At the end
of the period, the Fund's net U.S. dollar exposure was 50.3%, down from 72.2% on
December 31, 1997.

Looking forward, we believe global economic growth may decline modestly and
global inflation may be quite benign in the near future. This would be an
excellent environment for high-quality bonds and contributes to our positive
intermediate-term outlook for the Fund. However, significant risks still exist
for global bond investors. If economic instability occurs in Latin America, U.S.
exports and economic growth could be depressed, which, in turn, may adversely
affect European economic performance.

Please remember, this discussion reflects our views, opinions and portfolio
holdings as of December 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which may affect our
strategies and the Fund's portfolio composition. Although past performance is
not predictive of future results, these insights may help you understand our
investment and management philosophy.

TB-2

PAGE

It is important to remember that the Fund may invest in lower-rated "junk
bonds," which have higher credit risks. Foreign securities investments involve
special risks including changes in currency values, market price swings, and
economic, social, and political developments in the countries where the
portfolios are invested. Developing markets involve similar but heightened risks
related to their smaller size and lesser liquidity. These risks are discussed in
the prospectus.

We thank you for investing in the Templeton Bond Fund and welcome your comments
or suggestions.

Sincerely,

/s/ Thomas J. Dickson
Thomas J. Dickson
Portfolio Manager
Templeton Bond Fund

IMPORTANT NOTE:

Beginning January 1, 1999, the Fund will be managed by a team of Templeton
Global Bond Managers, a division of Templeton Investment Counsel, Inc.

TB-3

PAGE

TEMPLETON BOND FUND
CLASS 1

PERFORMANCE SUMMARY AS OF 12/31/98

TOTAL RETURN INDEX COMPARISON
$10,000 INVESTMENT (1/1/89 - 12/31/98)

The J.P. Morgan Global Government Bond Index includes only actively traded
fixed-rated bonds with a remaining maturity of one year or longer. It is an
aggregate of government securities issued in 13 countries and includes
reinvested interest. The Consumer Price Index (CPI) is a commonly used measure
of inflation. The Fund's performance differs from an index's because an index is
not managed, does not contain cash (the Fund generally carries a certain
percentage of cash at any given time), and includes no sales charges or
management expenses. Of course, one cannot invest directly in an index, nor is
an index representative of the Fund's portfolio. Sources for indices are J.P.
Morgan and Standard & Poor's Micropal.

[The following line graph hypothetically compares the performance of Templeton
Bond Fund Class 1 shares to that of the JP Morgan Global Government Bond Index
and the Consumer Price Index (CPI), based on a $10,000 investment from 1/1/89 -
12/31/98.]

[GRAPH]

<TABLE>
<CAPTION>
Total Return Index Comparison
<S> <C> <C>
Templeton Bond Fund-Class I JP Morgan CPI
Global
Government Bond
Index
---------------------------------------------------------------
1/1/89 $10,000 $10,000 $10,000
1/31/89 $10,049 $9,901 $10,051
2/28/89 $10,020 $9,885 $10,091
3/31/89 $10,174 $9,801 $10,149
4/30/89 $10,234 $9,962 $10,216
5/31/89 $10,264 $9,855 $10,274
6/30/89 $10,364 $10,079 $10,299
7/31/89 $10,485 $10,480 $10,324
8/31/89 $10,505 $10,170 $10,341
9/30/89 $10,535 $10,331 $10,373
10/31/89 $10,635 $10,464 $10,424
11/30/89 $10,725 $10,557 $10,448
12/31/89 $10,765 $10,680 $10,464
1/31/90 $10,671 $10,521 $10,572
2/28/90 $10,682 $10,407 $10,622
3/31/90 $10,692 $10,343 $10,680
4/30/90 $10,588 $10,303 $10,697
5/31/90 $10,849 $10,632 $10,722
6/30/90 $10,995 $10,825 $10,780
7/31/90 $11,110 $11,143 $10,821
8/31/90 $10,985 $11,056 $10,920
9/30/90 $11,047 $11,159 $11,012
10/31/90 $11,183 $11,600 $11,078
11/30/90 $11,350 $11,804 $11,102
12/31/90 $11,446 $11,936 $11,102
1/31/91 $11,623 $12,206 $11,169
2/28/91 $11,679 $12,218 $11,186
3/31/91 $11,745 $11,837 $11,202
4/30/91 $11,834 $11,980 $11,218
5/31/91 $11,911 $11,990 $11,251
6/30/91 $11,845 $11,830 $11,285
7/31/91 $11,978 $12,080 $11,302
8/31/91 $12,299 $12,331 $11,334
9/30/91 $12,576 $12,780 $11,385
10/31/91 $12,753 $12,907 $11,401
11/30/91 $12,909 $13,117 $11,434
12/31/91 $13,262 $13,780 $11,443
1/31/92 $12,949 $13,510 $11,459
2/29/92 $12,973 $13,471 $11,501
3/31/92 $12,852 $13,346 $11,559
4/30/92 $12,900 $13,457 $11,575
5/31/92 $13,202 $13,839 $11,592
6/30/92 $13,516 $14,217 $11,633
7/31/92 $13,914 $14,530 $11,659
8/31/92 $14,035 $14,917 $11,691
9/30/92 $13,986 $14,902 $11,724
10/31/92 $13,878 $14,530 $11,766
11/30/92 $13,793 $14,272 $11,782
12/31/92 $13,996 $14,407 $11,775
1/31/93 $14,278 $14,652 $11,833
2/28/93 $14,650 $14,888 $11,874
3/31/93 $14,663 $15,116 $11,916
4/30/93 $14,727 $15,392 $11,949
5/31/93 $14,740 $15,489 $11,965
6/30/93 $14,971 $15,502 $11,982
7/31/93 $15,202 $15,509 $11,982
8/31/93 $15,446 $15,968 $12,015
9/30/93 $15,382 $16,136 $12,040
10/31/93 $15,536 $16,128 $12,090
11/30/93 $15,318 $16,010 $12,098
12/31/93 $15,600 $16,174 $12,098
1/31/94 $15,909 $16,327 $12,132
2/28/94 $15,408 $16,148 $12,174
3/31/94 $14,894 $16,074 $12,215
4/30/94 $14,825 $16,061 $12,232
5/31/94 $14,743 $15,928 $12,239
6/30/94 $14,661 $16,117 $12,281
7/31/94 $14,743 $16,269 $12,313
8/31/94 $14,771 $16,227 $12,364
9/30/94 $14,771 $16,307 $12,397
10/31/94 $14,948 $16,551 $12,406
11/30/94 $14,853 $16,343 $12,422
12/31/94 $14,839 $16,381 $12,422
1/31/95 $14,921 $16,712 $12,471
2/28/95 $15,201 $17,143 $12,521
3/31/95 $15,459 $18,015 $12,562
4/30/95 $15,761 $18,302 $12,604
5/31/95 $16,163 $18,813 $12,629
6/30/95 $16,220 $18,931 $12,654
7/31/95 $16,278 $19,020 $12,653
8/31/95 $16,163 $18,492 $12,688
9/30/95 $16,421 $18,908 $12,711
10/31/95 $16,694 $19,093 $12,753
11/30/95 $16,794 $19,306 $12,744
12/31/95 $17,053 $19,545 $12,736
1/31/96 $16,952 $19,344 $12,811
2/29/96 $16,867 $19,232 $12,852
3/31/96 $16,915 $19,202 $12,918
4/30/96 $17,011 $19,131 $12,968
5/31/96 $17,091 $19,150 $12,993
6/30/96 $17,300 $19,318 $13,001
7/31/96 $17,364 $19,673 $13,026
8/31/96 $17,589 $19,755 $13,051
9/30/96 $17,813 $19,864 $13,092
10/31/96 $18,182 $20,258 $13,134
11/30/96 $18,632 $20,547 $13,159
12/31/96 $18,664 $20,404 $13,159
1/31/97 $18,439 $19,894 $13,200
2/28/97 $18,388 $19,756 $13,240
3/31/97 $18,301 $19,606 $13,273
4/30/97 $18,422 $19,496 $13,289
5/31/97 $18,526 $19,956 $13,281
6/30/97 $18,734 $20,183 $13,296
7/31/97 $18,838 $20,109 $13,312
8/31/97 $18,786 $20,084 $13,338
9/30/97 $19,132 $20,530 $13,371
10/31/97 $18,993 $20,965 $13,404
11/30/97 $19,011 $20,713 $13,396
12/31/97 $19,132 $20,690 $13,380
1/31/98 $19,339 $20,898 $13,404
2/28/98 $19,512 $21,053 $13,431
3/31/98 $19,596 $20,895 $13,458
4/30/98 $19,652 $21,216 $13,482
5/31/98 $19,633 $21,308 $13,507
6/30/98 $19,633 $21,367 $13,523
7/31/98 $19,689 $21,425 $13,539
8/31/98 $18,929 $22,017 $13,555
9/30/98 $19,800 $23,167 $13,572
10/31/98 $20,244 $23,686 $13,604
11/30/98 $20,411 $23,418 $13,604
12/31/98 $20,504 $23,859 $13,596
</TABLE>

EXPENSES: Performance reflects the Fund's Class 1 operating expenses, but does
not include any Contract fees, expenses or sales charges. If they had been
included, performance would be lower. These charges and deductions, particularly
for variable life policies, can have a significant effect on Contract values and
insurance benefits. See the Contract prospectus for a complete description of
these expenses, including sales charges. Past expense reductions by the
Investment Manager increased returns.

PERFORMANCE

TEMPLETON BOND FUND - CLASS 1
PERIODS ENDED 12/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (8/31/88)
------ ------ ------- ---------
<S> <C> <C> <C> <C>
Cumulative Total Return 7.17% 31.43% 105.04% 108.93%

Average Annual Total Return 7.17% 5.62% 7.45% 7.38%

Value of $10,000 Investment $10,717 $13,143 $20,504 $20,893
</TABLE>

TB-4 Past performance cannot predict or guarantee of future results.

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
Financial Highlights

<TABLE>
<CAPTION>
CLASS 1
---------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year......................... $11.06 $11.63 $11.88 $10.86 $12.15
---------------------------------------------------------------
Income from investment operations:
Net investment income..................................... .79 .80 .85 .80 .71
Net realized and unrealized gains (losses)................ (.03) (.53) .14 .76 (1.28)
---------------------------------------------------------------
Total from investment operations........................... .76 .27 .99 1.56 (.57)
---------------------------------------------------------------
Less distributions from:
Net investment income..................................... (.75) (.84) (1.24) (.54) (.55)
Net realized gains........................................ -- -- -- -- (.17)
---------------------------------------------------------------
Total distributions........................................ (.75) (.84) (1.24) (.54) (.72)
---------------------------------------------------------------
Net asset value, end of year............................... $11.07 $11.06 $11.63 $11.88 $10.86
---------------------------------------------------------------
---------------------------------------------------------------
Total Return*.............................................. 7.17% 2.51% 9.45% 14.92% (4.88)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................ $30,207 $31,826 $34,046 $32,910 $29,343
Ratios to average net assets:
Expenses.................................................. .73% .68% .68% .78% .90%
Net investment income..................................... 6.83% 6.90% 7.35% 7.14% 6.80%
Portfolio turnover rate.................................... 89.86% 154.23% 141.19% 188.11% 203.91%
</TABLE>

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT* VALUE
<S> <C> <C>
LONG TERM SECURITIES 93.9%
ARGENTINA 1.2%
Republic of Argentina, 10.95%, 11/01/99..................... $ 350,000 $ 357,000
-----------
AUSTRALIA 4.0%
Government of Australia, 6.75%, 11/15/06.................... 1,785,000 AUD 1,222,903
-----------
BELGIUM 3.8%
Kingdom of Belgium, 6.25%, 3/28/07.......................... 33,820,000 BEF 1,141,485
-----------
BRAZIL .3%
Government of Brazil, FRN, 6.188%, 4/15/09.................. 170,000 94,031
-----------
CANADA 7.4%
Government of Canada:
9.00%, 12/01/04........................................... 1,850,000 CAD 1,459,308
10.25%, 3/15/14........................................... 415,000 CAD 417,688
9.00%, 6/01/25............................................ 345,000 CAD 344,227
-----------
2,221,223
-----------
DENMARK 2.1%
Kingdom of Denmark:
9.00%, 11/15/00........................................... 880,000 DKK 150,877
8.00%, 5/15/03............................................ 2,570,000 DKK 468,936
-----------
619,813
-----------
GERMANY 8.7%
Hypothekenbank In Essen AG, 5.25%, 1/22/08, Series 502...... 1,830,000 DEM 1,176,491
Treuhandanstalt, 7.50%, 9/09/04............................. 2,000,000 DEM 1,438,761
-----------
2,615,252
-----------
INDIA .1%
Essar Steel Ltd., FRN, 8.40%, 7/20/99, Reg S................ 50,000 36,250
-----------
ITALY 6.9%
Buoni Poliennali del Tesoro:
10.50%, 7/15/00........................................... 1,185,000,000 ITL 789,070
7.75%, 11/01/06........................................... 1,700,000,000 ITL 1,285,612
-----------
2,074,682
-----------
MEXICO 4.5%
United Mexican States:
9.75%, 2/06/01............................................ 530,000 543,913
11.375%, 9/15/16.......................................... 175,000 182,000
6.25%, 12/31/19........................................... 800,000 624,500
-----------
1,350,413
-----------
NEW ZEALAND 3.7%
Government of New Zealand:
6.50%, 2/15/00............................................ 1,015,000 NZD 544,475
7.00%, 7/15/09............................................ 990,000 NZD 586,854
-----------
1,131,329
-----------
NORWAY 2.0%
Statkraft SF, 7.50% 11/10/99................................ 1,000,000 DEM 617,195
-----------
PANAMA .5%
Republic of Panama, 8.875%, 9/30/27......................... 170,000 160,650
-----------
PERU .5%
Republic of Peru, FRN, 4.00%, 3/07/17....................... 235,000 148,637
-----------
SWEDEN 3.0%
Sweden Kingdom, 10.25%, 5/05/03............................. 5,900,000 SEK 917,057
-----------
TURKEY .3%
Republic of Turkey, 9.875%, 2/23/05......................... 100,000 88,057
-----------
</TABLE>

TB- 6

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT* VALUE
<S> <C> <C>
LONG TERM SECURITIES (CONT.)
UNITED KINGDOM 8.2%
United Kingdom:
6.50%, 12/07/03........................................... 820,000 GBP $ 1,494,213
7.50%, 12/07/06........................................... 500,000 GBP 996,589
-----------
2,490,802
-----------
UNITED STATES 36.0%
Fannie Mae, 6.875%, 6/07/02................................. 475,000 GBP 831,847
Ford Motor Credit Corp., 8.21%, 3/16/99..................... 1,300,000 1,307,194
U.S. Treasury Bond, 5.25%, 11/15/28......................... 4,395,000 4,506,251
U.S. Treasury Notes:
4.625%, 11/30/00.......................................... 2,550,000 2,552,392
7.25%, 8/15/04............................................ 1,072,000 1,206,000
6.125%, 11/15/27.......................................... 412,000 461,569
-----------
10,865,253
-----------
VENEZUELA .7%
Republic of Venezuela, 144A, 9.125%, 6/18/07................ 300,000 210,750
-----------
TOTAL LONG TERM SECURITIES (COST $27,810,904)............... 28,362,782
-----------
SHORT TERM INVESTMENTS 4.5%
Federal Farm Credit Banks, 5.04% to 5.09% with maturities to
1/28/99................................................... 425,000 423,664
Federal Home Loan Bank, 5.05%, 1/22/99...................... 270,000 269,293
Federal Home Loan Mortgage Corp., 5.04% to 5.147% with
maturities to 2/24/99..................................... 611,000 607,539
U.S. Treasury Bills, 4.37%, 3/04/99......................... 60,000 59,573
-----------
TOTAL SHORT TERM INVESTMENTS (COST $1,359,364).............. 1,360,069
-----------
TOTAL INVESTMENTS (COST $29,170,268) 98.4%.................. 29,722,851
NET EQUITY IN FORWARD CONTRACTS............................. (1,035)
OTHER ASSETS, LESS LIABILITIES 1.6%......................... 485,071
-----------
TOTAL NET ASSETS 100.0%..................................... $30,206,887
-----------
-----------
</TABLE>

CURRENCY ABBREVIATIONS:

<TABLE>
<S> <C>
AUD -- Australian Dollar
BEF -- Belgian Franc
CAD -- Canadian Dollar
DEM -- German Mark
DKK -- Danish Krone
GBP -- British Pound
ITL -- Italian Lira
NZD -- New Zealand Dollar
SEK -- Swedish Krone
</TABLE>

*SECURITIES TRADED IN U.S. DOLLARS UNLESS OTHERWISE INDICATED.
See Notes to Financial Statements.
TB- 7

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $29,170,268)..... $29,722,851
Cash....................................................... 29,771
Receivables:
Fund shares sold.......................................... 39
Interest.................................................. 495,437
Unrealized gain on forward exchange contracts (Note 6)..... 2,321
-----------
Total assets........................................... 30,250,419
-----------
Liabilities:
Payables:
Fund shares redeemed...................................... 1,189
To affiliates............................................. 15,307
Unrealized loss on forward exchange contracts (Note 6)..... 3,356
Accrued expenses........................................... 23,680
-----------
Total liabilities...................................... 43,532
-----------
Net assets, at value........................................ $30,206,887
===========
Net assets consist of:
Undistributed net investment income........................ $ 1,116,147
Net unrealized appreciation................................ 557,346
Accumulated net realized loss.............................. (2,227,746)
Beneficial shares.......................................... 30,761,140
-----------
Net assets, at value........................................ $30,206,887
===========
CLASS 1:
Net asset value per share ($30,206,887 / 2,728,741 shares
outstanding).............................................. $11.07
===========
</TABLE>

See Notes to Financial Statements.
TB- 8

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<S> <C> <C>
Interest Income............................................. $ 2,301,159
Expenses:
Management fees (Note 3)................................... $ 152,272
Administrative fees (Note 3)............................... 29,088
Custodian fees............................................. 10,000
Reports to shareholders.................................... 11,600
Registration and filing fees............................... 1,900
Professional fees.......................................... 17,300
Other...................................................... 271
---------
Total expenses........................................ 222,431
-----------
Net investment income........................... 2,078,728
-----------
Realized and unrealized losses:
Net realized loss from:
Investments............................................... (534,364)
Foreign currency transactions............................. (470,084)
---------
Net realized loss..................................... (1,004,448)
Net unrealized appreciation on:
Investments............................................... 993,306
Translation of assets and liabilities denominated in
foreign currencies....................................... 21,110
---------
Net unrealized appreciation........................... 1,014,416
-----------
Net realized and unrealized gain............................ 9,968
-----------
Net increase in net assets resulting from operations........ $ 2,088,696
-----------
-----------
</TABLE>

See Notes to Financial Statements.
TB- 9

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
Financial Statements (continued)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 2,078,728 $ 2,268,900
Net realized gain (loss) from investments and foreign
currency transactions.................................... (1,004,448) 28,170
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies....................................... 1,014,416 (1,501,377)
----------------------------
Net increase in net assets resulting from operations... 2,088,696 795,693
Distributions to shareholders from:
Net investment income - Class 1........................... (2,063,703) (2,415,770)
Fund share transactions - Class 1 (Note 2)................. (1,644,280) (599,630)
----------------------------
Net decrease in net assets............................. (1,619,287) (2,219,707)
Net assets:
Beginning of year.......................................... 31,826,174 34,045,881
----------------------------
End of year................................................ $30,206,887 $31,826,174
----------------------------
----------------------------
Undistributed net investment income included in net assets:
End of year................................................ $ 1,116,147 $ 2,029,360
----------------------------
----------------------------
</TABLE>

See Notes to Financial Statements.
TB- 10

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Templeton Bond Fund (the Fund) is a separate, diversified series of Templeton
Variable Products Series Fund (the Trust), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks high
current income through a flexible policy of investing primarily in debt
securities of companies, governments and government agencies of various nations
throughout the world. The following summarizes the Fund's significant accounting
policies.

a. SECURITY VALUATION:

b. FOREIGN CURRENCY TRANSLATION:

Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.

c. INCOME TAXES:

No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.

d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

e. INDEXED SECURITIES:

TB- 11

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)

e. INDEXED SECURITIES (CONT.)
structured notes, is to tailor the Fund's investments to the specific risk and
returns it wishes to assume while avoiding unwanted risk or change in the Fund's
exposure to a particular foreign exchange rate or the spread between two foreign
exchange rates.

f. FOREIGN EXCHANGE CONTRACTS:

g. ACCOUNTING ESTIMATES:

2. BENEFICIAL SHARES

At December 31, 1998, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's Class 1 shares were as follows:

<TABLE>
<CAPTION>
----------------YEAR-ENDED-DECEMBER-31,----------------
-------------------------------------------------------
---------1998----------------------------1997----------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 1 SHARES:
Shares sold................................................. 371,187 $ 3,983,652 419,880 $ 4,620,322
Shares issued on reinvestment of distributions.............. 195,983 2,063,703 225,352 2,415,770
Shares redeemed............................................. (716,054) (7,691,635) (695,358) (7,635,722)
-------------------------------------------------------
Net decrease................................................ (148,884) $(1,644,280) (50,126) $ (599,630)
-------------------------------------------------------
-------------------------------------------------------
</TABLE>

As of December 31, 1998, there were no transactions in the Fund's Class 2
shares.

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

The Fund pays an investment management fee to TICI based on the average daily
net assets of the Fund as follows:

<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.50% First $200 million
0.45% Over $200 million, up to and including $1.3 billion
0.40% Over $1.3 billion
</TABLE>

TB- 12

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
Notes to Financial Statements (continued)

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
The Fund pays its allocated share of an administrative fee to FT Services based
on the Trust's aggregate average daily net assets as follows:

Legal fees of $544 were paid to a law firm in which a partner is an officer of
the Fund.

4. INCOME TAXES

At December 31, 1998, the Fund had tax basis capital losses which may be carried
over to offset future capital gains. Such losses expire as follows:

Capital loss carryovers expiring in:

<TABLE>
<S> <C>
Unrealized appreciation..................................... $1,154,978
Unrealized depreciation..................................... (602,395)
----------
Net unrealized appreciation................................. $ 552,583
----------
----------
</TABLE>

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1998 aggregated $25,606,779 and $29,168,557, respectively.

6. OFF-BALANCE SHEET RISK

A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Fund's net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract.

TB- 13

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
Notes to Financial Statements (continued)

6. OFF-BALANCE SHEET RISK (CONT.)
As of December 31, 1998, the Fund had the following forward exchange contracts
outstanding:

<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
EXCHANGE FOR DATE GAIN/(LOSS)
CONTRACTS TO SELL: ---------------------------------------------
- ---------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
195,000 British Pound............................................... U.S. $326,430 1/29/99 U.S. $ 2,321
-------- -------
--------
Unrealized gain on forward exchange contracts................... 2,321
-------
CONTRACTS TO SELL:
- --------------
325,000 British Pound............................................... U.S. $536,900 1/25/99 (3,356)
-------- -------
--------
Unrealized loss on forward exchange contracts................... (3,356)
-------
Net unrealized loss on forward exchange contracts............ U.S. $(1,035)
-------
-------
</TABLE>

TB- 14

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON BOND FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund

We have audited the accompanying statement of assets and liabilities, including
the Statement of Investments, of the Templeton Bond Fund, series of Templeton
Variable Products Series Fund (the Trust) as of December 31, 1998, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Templeton Bond Fund, series of Templeton Variable Products Series Fund as of
December 31, 1998, the results of its operations, the changes in its net assets
and the financial highlights for the periods indicated, in conformity with
generally accepted accounting principles.

McGladrey & Pullen, LLP

New York, New York
January 28, 1999

TB- 15

PAGE

This page intentionally left blank.

PAGE

TEMPLETON DEVELOPING MARKETS FUND

Investment Goal: Templeton Developing Markets Fund seeks long-term capital
appreciation. The Fund seeks to achieve this objective by investing primarily in
equity securities of issuers in countries having developing markets.

This annual report of Templeton Developing Markets Fund covers the 12 months
ended December 31, 1998. During this period, Asia's financial turmoil, coupled
with Russia's economic meltdown, contributed to major stock market declines in
developing countries.

In early 1998, signs of economic stability surfaced in Asia, as the
International Monetary Fund (IMF) introduced aid packages to many nations,
allowing them to restructure their long-term debt. After receiving the promise
of IMF aid, the Indonesian government started implementing the reforms required
to ensure the aid's arrival. However, when food and fuel subsidies were removed,
soaring prices sent many Indonesians protesting in the streets, and President
Suharto was forced to resign in May. Shortly after, the Japanese yen began to
fall against the U.S. dollar, reducing Japan's demand for regional imports. But
the U.S. and Japanese governments intervened to stabilize the yen in June, and
many long-suffering Asian stock markets rebounded.

Emerging markets were subjected to another crisis in late summer when Russia's
central bank suspended repayment of foreign debt and devalued the ruble.
Political chaos ensued, and Russian banks purchased U.S. dollars to the point
that ruble trading was temporarily halted. Initially, Russia's catastrophe had a
negative effect on the world's economy, especially emerging market equities, and
contributed to a major U.S. stock market correction, but it did have at least
one positive effect. It prompted the international banking community to address
complaints regarding the economies of Malaysia and Brazil.

Latin America also had its share of problems. Commodity prices, the driving
force of many Latin American economies, generally continued to decline during
the first half of 1998 due in part to lack of demand from Asia. Some Asian
countries' currency devaluations added to the region's woes as the risk grew of
cheaper Asian exports

GEOGRAPHIC DISTRIBUTION
TEMPLETON DEVELOPING MARKETS FUND
BASED ON TOTAL NET ASSETS
12/31/98

[This chart shows in pie format the geographic distribution of Templeton
Developing Markets Fund's portfolio holdings on December 31, 1998, based on
total net assets.]

Asia 52.8%
Latin America 29.5%
Middle East/Africa 9.4%
Europe 6.3%
New Zealand 0.1%
Short-Term Investments & Other Net Assets 1.9%

TD-1

PAGE

TOP 10 COUNTRIES
REPRESENTED IN THE FUND
TEMPLETON DEVELOPING MARKETS FUND
12/31/98

[This table shows the top 10 country allocations for Templeton Developing
Markets Fund's as of December 31, 1998, based on total net assets.]

% OF TOTAL
COUNTRY NET ASSETS
- ------- ----------
South Korea 11.8%
Brazil 10.8%
Singapore 9.1%
Mexico 7.6%
Thailand 7.5%
South Africa 7.5%
Hong Kong 6.0%
Argentina 4.3%
Indonesia 4.3%
Philippines 3.8%

being substituted for Latin American export products, and most Latin American
stock markets experienced significant losses. However, the Asian crisis
apparently gave Latin American governments a glimpse of the possible future if
reforms were not undertaken. Some privatization efforts were accelerated during
the period, and in certain cases reforms were introduced to boost government
income to compensate for dwindling tax revenues. Towards the period's end, most
major Latin American markets, in our opinion, were striking a precarious balance
between negative factors abroad and more positive events at home.

On December 31, 1998, the Fund owned investments in 33 countries, with South
Korea being our largest country holding (11.8% of total net assets). Our largest
regional holdings were Asia (52.8%), followed by Latin America (29.5%), Middle
East/Africa (9.4%), and Europe (6.3%). Only 1.9% of the Fund's total net assets
were held in short-term investments and other net assets, down from 24.9% on
December 31, 1997. This reflected a major restructuring of the Fund's holdings
during the first half of the year, and the exceptional buying opportunities that
we found later in the year.

Looking forward, we are optimistic about developing markets' long-term prospects
if their governments institute needed reforms. In the past, investors have
generally tolerated unfair business practices and abuse of minority shareholder
rights in emerging markets. But after the economic and political turmoil of 1997
and 1998, many investors in foreign securities are not prepared to endure such
conditions. In our opinion, governments that institute reforms that create fair
and equitable markets may gain a substantial increase of investment within their
borders. Although short-term corrections remain potential risks, we believe
competition between foreign and domestic investors may increase demand and drive
equity prices higher in the long term.

Please remember, this discussion reflects our views, opinions and portfolio
holdings as of December 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which may affect our
strategies and the Fund's portfolio composition. Although past performance is
not predictive of future results, these insights may help you understand our
investment and management philosophy.

TD-2

PAGE

Of course, investing in emerging markets involves special considerations, which
may include risks related to market and currency volatility, adverse social,
economic and political developments and the relatively small size and lesser
liquidity of these markets. Investing in any emerging market means accepting a
certain amount of volatility and, in some cases, severe market corrections.
While short-term volatility can be disconcerting, declines of as much as 40% to
50% are not unusual in emerging markets. For example, while the Hong Kong equity
market has increased 1,049% in the last 15 years, it has suffered five quarterly
declines of more than 20% during that time.(1) These special risks and other
considerations are discussed in the Fund's prospectus.

We thank you for investing in Templeton Developing Markets Fund, and welcome
your comments or suggestions.

Sincerely,

/s/ Dr. J. Mark Mobius
Dr. J. Mark Mobius
Portfolio Manager
Templeton Developing Markets Fund

TOP 10 HOLDINGS
TEMPLETON DEVELOPING MARKETS FUND
12/31/98

[This following table shows the top 10 investment holdings of Templeton
Developing Markets Fund's on December 31, 1998, based on total net assets.]

<TABLE>
<CAPTION>
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
- --------- ----------
<S> <C>
Hana Bank
Banking, South Korea 2.9%

Telecomunicacoes
Brasileiras SA (Telebras)
Telecommunications, Brazil 2.6%

Cemex SA, B
Building Materials
& Components, Mexico 2.1%

Telefonos de Mexico SA
(Telmex), L, ADR
Telecommunications, Mexico 1.8%

Thai Farmers Bank
Public Co. Ltd.
Banking, Thailand 1.7%

Investimentos Itau SA, pfd.
Multi-Industry, Brazil 1.5%

Public Bank Bhd.
Banking, Malaysia 1.4%

Korea Electric Power Corp.
Utilities Electrical & Gas,
South Korea 1.4%

Compania De
Telecomunicaciones
De Chile SA, ADR
Telecommunications, Chile 1.4%

Belle Corp.
Real Estate, Philippines 1.4%
</TABLE>

For a complete list of portfolio holdings, please see the Fund's Statement of
Investments.

(1). Source: Bloomberg. Based on quarterly percentage price change over 15 years
ended December 31, 1998. Market return is measured in local currency.

TD-3

PAGE

TEMPLETON DEVELOPING MARKETS FUND
CLASS 1

PERFORMANCE SUMMARY AS OF 12/31/98

TOTAL RETURN INDEX COMPARISON
$10,000 INVESTMENT (3/4/96 - 12/31/98)

The Morgan Stanley Capital International (MSCI) World Index includes
approximately 1,500 companies representing the stock markets of 22 countries
including some developed countries, such as the U.S., Canada, United Kingdom and
Japan, in which the Fund is not allowed to invest. The International Finance
Corporation's (IFC) Investable Composite Index was designed to reflect the
performance of emerging market investments and includes approximately 2,000
companies that foreigners can buy in 30 countries. The MSCI Emerging Markets
Free Index covers 27 emerging markets and takes into account local market
restrictions on share ownership by foreigners. The Consumer Price Index (CPI) is
a commonly used measure of inflation. Indices include reinvested dividends. The
Fund's performance differs from an index's because an index is not managed, does
not contain cash (the Fund generally carries a certain percentage of cash at any
given time), and includes no sales charges or management expenses. Of course,
one cannot invest directly in an index, nor is an index representative of the
Fund's portfolio. Sources for indices are MSCI and Standard & Poor's Micropal.

[The following line graph hypothetically compares the performane of Templeton
Developing Markets Fund Class 1 shares to that of the MSCI World Index, the IFC
Investable Composite Index, the MSCI Emerging Markets Free Index and the
Consumer Price Index (CPI), based on a $10,000 investment from 3/4/96 -
12/31/98.]

[LINE GRAPH]

<TABLE>
<CAPTION>
Total Return Index Comparison
<S> <C> <C> <C> <C> <C>
Templeton Developing Markets MSCI World Index IFC Investable MSCI Emerging CPI
Fund-Class I Composite Index Markets Free
Index
--------------------------------------------------------------------------------------------------------
3/4/96 $10,000 $10,000 $10,000 $10,000 $10,000
3/31/96 $10,020 $10,169 $10,144 $9,974 $10,052
4/30/96 $9,980 $10,409 $10,550 $10,373 $10,091
5/31/96 $10,010 $10,420 $10,461 $10,326 $10,110
6/30/96 $9,800 $10,475 $10,584 $10,391 $10,116
7/31/96 $9,250 $10,107 $9,889 $9,681 $10,136
8/31/96 $9,250 $10,225 $10,195 $9,928 $10,155
9/30/96 $9,370 $10,627 $10,346 $10,014 $10,187
10/31/96 $9,140 $10,703 $10,123 $9,747 $10,219
11/30/96 $9,460 $11,305 $10,273 $9,911 $10,239
12/31/96 $9,430 $11,126 $10,318 $9,955 $10,239
1/31/97 $10,110 $11,261 $11,047 $10,635 $10,271
2/28/97 $10,349 $11,393 $11,587 $11,090 $10,302
3/31/97 $10,138 $11,170 $11,302 $10,799 $10,327
4/30/97 $9,896 $11,537 $11,109 $10,818 $10,340
5/31/97 $9,816 $12,251 $11,487 $11,127 $10,334
6/30/97 $9,987 $12,864 $11,983 $11,723 $10,346
7/31/97 $10,369 $13,458 $12,104 $11,898 $10,358
8/31/97 $9,373 $12,560 $10,558 $10,384 $10,378
9/30/97 $9,614 $13,244 $10,893 $10,672 $10,404
10/31/97 $7,873 $12,549 $9,110 $8,920 $10,430
11/30/97 $7,077 $12,773 $8,674 $8,595 $10,424
12/31/97 $6,675 $12,931 $8,797 $8,802 $10,411
1/31/98 $6,262 $13,293 $8,218 $8,112 $10,430
2/28/98 $6,977 $14,195 $9,056 $8,958 $10,451
3/31/98 $7,139 $14,796 $9,411 $9,347 $10,472
4/30/98 $6,902 $14,943 $9,436 $9,245 $10,491
5/31/98 $5,822 $14,758 $8,259 $7,978 $10,510
6/30/98 $5,113 $15,110 $7,417 $7,141 $10,522
7/31/98 $5,143 $15,088 $7,710 $7,368 $10,535
8/31/98 $3,950 $13,078 $5,543 $5,238 $10,547
9/30/98 $4,166 $13,312 $5,806 $5,570 $10,560
10/31/98 $4,763 $14,518 $6,478 $6,156 $10,585
11/30/98 $5,370 $15,383 $6,965 $6,668 $10,585
12/31/98 $5,277 $16,137 $6,859 $6,572 $10,579

</TABLE>

EXPENSES: Performance reflects the Fund's Class 1 operating expenses, but does
not include any Contract fees, expenses or sales charges. If they had been
included, performance would be lower. These charges and deductions, particularly
for variable life policies, can have a significant effect on Contract values and
insurance benefits. See the Contract prospectus for a complete description of
these expenses, including sales charges. Past expense reductions by the
Investment Manager increased returns.

INDEX CHANGE: We are replacing the MSCI World Index with the MSCI Emerging
Markets Free Index because we believe the composition of this index provides for
a more appropriate comparison to the Fund's current and past portfolio. As
previously noted, the MSCI World Index includes the stock markets of a number of
developed countries in which the Fund does not invest.

TD-4 Past performance cannot predict or guarantee future results.

PAGE

TEMPLETON DEVELOPING MARKETS FUND
CLASS 1

PERFORMANCE

TEMPLETON DEVELOPING MARKETS FUND - CLASS 1
PERIODS ENDED 12/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (3/4/96)
------ ---------
<S> <C> <C>
Cumulative Total Return -20.94% -47.23%

Average Annual Total Return -20.94% -20.25%

Value of $10,000 Investment $7,906 $5,277

12/31/97 12/31/98
-------- --------
One-Year Total Return -29.22% -20.94%
</TABLE>

Past performance cannot predict or guarantee future results. TD-5

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Financial Highlights

<TABLE>
<CAPTION>
CLASS 1
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996+
-------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $6.63 $9.43 $10.00
-------------------------------------
Income from investment operations:
Net investment income...................................... .07 .09 .05
Net realized and unrealized losses......................... (1.42) (2.82) (.62)
-------------------------------------
Total from investment operations............................ (1.35) (2.73) (.57)
-------------------------------------
Less distributions from:
Net investment income...................................... (.09) (.04) --
Net realized gains......................................... (.06) (.03) --
-------------------------------------
Total distributions......................................... (.15) (.07) --
-------------------------------------
Net asset value, end of year................................ $5.13 $6.63 $9.43
-------------------------------------
-------------------------------------
Total Return*............................................... (20.94)% (29.22)% (5.70)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $180,684 $163,459 $72,245
Ratios to average net assets:
Expenses................................................... 1.66% 1.58% 1.70%**
Expenses, excluding waiver and payments by affiliate....... 1.66% 1.58% 1.78%**
Net investment income...................................... 1.67% 1.63% 1.52%**
Portfolio turnover rate..................................... 23.22% 23.82% 9.95%
</TABLE>

*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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. TOTAL
RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
+FOR THE PERIOD MARCH 4, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996.
TD- 6

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
CLASS 2
-------------------------
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997+
-------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $6.62 $9.85
-------------------------
Income from investment operations:
Net investment income...................................... .07 .04
Net realized and unrealized losses......................... (1.42) (3.27)
-------------------------
Total from investment operations............................ (1.35) (3.23)
-------------------------
Less distributions from:
Net investment income...................................... (.09) --
Net realized gains......................................... (.06) --
-------------------------
Total distributions......................................... (.15) --
-------------------------
Net asset value, end of year................................ $5.12 $6.62
-------------------------
-------------------------
Total Return*............................................... (21.03)% (32.79)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $17,287 $9,569
Ratios to average net assets:
Expenses................................................... 1.91% 1.77%**
Net investment income...................................... 1.44% 1.48%**
Portfolio turnover rate..................................... 23.22% 23.82%
</TABLE>

*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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. TOTAL
RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
+FOR THE PERIOD MAY 1, 1997 (EFFECTIVE DATE) TO DECEMBER 31, 1997.
See Notes to Financial Statements.
TD- 7

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998

<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
LONG TERM SECURITIES 98.1%
ARGENTINA 4.3%
Aluar Aluminio Argentino SA, B........................ Misc Materials & Commodities 8,400 $ 21,019
Astra Cia Argentina de Petroleo SA.................... Energy Sources 70,000 82,674
*Atanor Cia Nacional Para la Industria Quimica SA,
D................................................... Chemicals 161,169 91,949
Banco de Galicia y Buenos Aires SA, B................. Banking 81,205 357,624
Banco Frances SA...................................... Banking 36,000 255,830
*Buenos Aires Embotelladora SA (BAESA), B, ADR........ Beverages & Tobacco 29,000 290
*Capex SA, A.......................................... Utilities Electrical & Gas 25,000 143,379
Central Costanera SA, B............................... Utilities Electrical & Gas 35,860 87,936
Juan Minetti SA....................................... Building Materials & Components 15,300 42,113
Molinos Rio de la Plata SA, B......................... Food & Household Products 62,018 145,874
Nobleza Piccardo Sdad Industrial Comercial y
Financial........................................... Beverages & Tobacco 53,451 181,897
Perez Companc SA, B................................... Energy Sources 129,000 546,162
Quilmes Industrial SA, ADR............................ Beverages & Tobacco 107,500 1,001,094
Siderca SA, A......................................... Metals & Mining 276,000 314,923
*Sociedad Comercial del Plata Cadelplata Come......... Multi-Industry 513,950 362,661
Telecom Argentina Stet-France SA, ADR................. Telecommunications 18,800 517,000
Telefonica de Argentina SA, B, ADR.................... Telecommunications 31,830 889,251
Transportadora de Gas del Sur SA, B................... Utilities Electrical & Gas 321,515 637,173
Transportadora de Gas del Sur SA, B, ADR.............. Utilities Electrical & Gas 82,800 838,350
YPF Sociedad Anonima, ADR............................. Energy Sources 71,834 2,006,862
------------
8,524,061
------------
BOTSWANA .2%
Sechaba Brewery Holding Ltd. ......................... Beverages & Tobacco 326,700 377,723
------------
BRAZIL 10.8%
Aracruz Celulose SA, ADR.............................. Forest Products & Paper 267,200 2,137,600
Banco Bradesco SA BBD................................. Banking 156,249,544 817,295
Banco Bradesco SA BBD, pfd. .......................... Banking 178,686,488 990,854
*Banco Bradesco SA BBD, pfd., rts. ................... Banking 7,406,401 4,217
*Banco Bradesco SA BBD, rts. ......................... Banking 6,890,900 1,757
Banco do Brasil SA.................................... Banking 39,204,000 217,394
Banco do Brazil SA, pfd. ............................. Banking 13,743,000 92,132
Brasmotor SA, pfd. ................................... Multi-Industry 1,613,000 160,199
Centrais Eletricas Brasileiras SA (Electrobras)....... Utilities Electrical & Gas 31,898,000 549,123
Centrais Eletricas Brasileiras SA (Electrobras), ADR,
pfd. ............................................... Utilities Electrical & Gas 17,300 166,091
Centrais Eletricas Brasileiras SA (Electrobras), B,
pfd. ............................................... Utilities Electrical & Gas 99,568,000 1,911,837
*Centrais Geradoras Do Sul Do Brasil SA, B, pfd. ..... Utilities Electrical & Gas 161,900,000 200,993
Cia Cervejaria Brahma, pfd. .......................... Beverages & Tobacco 458,000 200,144
Cia Energetica de Minas Gerais Cemig, ADR, pfd. ...... Utilities Electrical & Gas 31,150 592,965
Cia Energetica de Minas Gerais Cemig, Br., pfd. ...... Utilities Electrical & Gas 44,619,000 849,358
Cia Vale do Rio Doce, A, pfd. ........................ Metals & Mining 78,800 1,010,883
*Companhia Energetica do Ceara, pfd. ................. Utilities Electrical & Gas 26,333,000 65,383
Companhia Paranaense De Energia-Copel, ADR............ Utilities Electrical & Gas 15,000 106,875
Companhia Siderurgica Nacional Sid Nacional CSN....... Metals & Mining 66,679,000 1,490,034
Copene-Petroquimica do Nordeste SA, A, pfd. .......... Chemicals 1,176,000 134,318
Duratex SA, pfd. ..................................... Forest Products & Paper 13,429,000 366,776
Investimentos Itau SA, pfd. .......................... Multi-Industry 5,271,000 2,922,880
*Mannesmann SA........................................ Machinery & Engineering 2,794,000 173,433
Petroleo Brasileiro SA, pfd. ......................... Energy Sources 3,772,000 427,696
Souza Cruz SA......................................... Beverages & Tobacco 42,000 271,136
*Telecomunicacoes Brasileiras SA (Telebras) unit...... Telecommunications 21,802,000 974,391
*Telecomunicacoes Brasileiras SA (Telebras) unit,
pfd. ............................................... Telecommunications 54,633,000 4,006,194
*Telecomunicacoes Brasileiras SA (Telebras), ADR...... Telecommunications 1,480 107,578
Unibanco Uniao de Bamncos Brasileiros SA, unit........ Banking 7,111,000 247,186
Vale do Rio Doce, ADR, A, pfd. ....................... Metals & Mining 9,950 127,643
------------
21,324,365
------------
</TABLE>

TD- 8

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
CHILE 3.2%
Cia Cervecerias Unidas SA, ADR........................ Beverages & Tobacco 7,500 $ 144,375
Compania De Telecomunicaciones De Chile SA, ADR....... Telecommunications 132,064 2,732,074
Empresa Nacional de Electricidad SA, ADR.............. Electrical & Electronics 149,800 1,703,975
Enersis SA, ADR....................................... Utilities Electrical & Gas 53,100 1,370,644
Madeco Manufacturera de Cobre SA, ADR................. Industrial Components 5,600 46,900
Masisa SA, ADR........................................ Forest Products & Paper 3,500 22,313
Quinenco SA, ADR...................................... Multi-Industry 30,900 247,200
Sociedad Quimica y Minera de Chile SA, ADR............ Chemicals 1,000 33,688
------------
6,301,169
------------
CHINA .7%
Beijing Datang Power Generation Co. Ltd., H........... Multi-Industry 5,000 1,501
China Resources Enterprises Ltd. ..................... Multi-Industry 184,000 287,379
Chiwan Wharf Holdings Ltd., B......................... Transportation 174,000 17,968
Guangshen Railway Co. Ltd., H......................... Transportation 2,636,000 306,225
Guangshen Railway Co. Ltd., H, ADR.................... Transportation 23,400 140,400
*Luoyang Glass Co. Ltd., H............................ Misc Materials & Commodities 835,000 26,729
Shandong Huaneng Power Development Co. Ltd., ADR...... Utilities Electrical & Gas 22,500 102,656
*Shanghai Jin Jiang Tower Co. Ltd., B................. Leisure & Tourism 18,240 1,605
*Shanghai New Asia Group Co. Ltd., B.................. Food & Household Products 34,502 4,416
Shanghai Petrochemical Co. Ltd., H.................... Chemicals 4,404,000 397,922
*Shanghai Tyre & Rubber Co. Ltd., B................... Industrial Components 545,600 54,560
*Shanghai Vacuum Electron Devices Co. Ltd., B......... Appliances & Household Durables 70,400 8,166
Yanzhou Coal Mining Company Ltd. ..................... Energy Sources 512,000 85,914
------------
1,435,441
------------
CROATIA
Pliva D D, GDR, Reg S................................. Health & Personal Care 4,600 76,360
------------
CZECH REPUBLIC 1.8%
*CEZ AS............................................... Utilities Electrical & Gas 94,900 2,097,337
*Komercni Banka AS.................................... Banking 7,950 97,684
*Komercni Banka AS, GDR............................... Banking 47,800 198,370
*SPT Telecom AS....................................... Telecommunications 71,540 1,091,050
Tabak AS.............................................. Beverages & Tobacco 260 72,638
Unipetrol............................................. Chemicals 15,862 28,522
------------
3,585,601
------------
GHANA .8%
Ashanti Goldfields Co. Ltd., GDR, Reg S............... Metals & Mining 175,959 1,649,616
------------
HONG KONG 6.0%
CDL Hotel International Ltd. ......................... Leisure & Tourism 60,447 15,527
Cheung Kong Holdings Ltd. ............................ Multi-Industry 176,000 1,266,514
China Overseas Land & Investment Ltd. ................ Real Estate 691,000 92,761
Citic Pacific Ltd. ................................... Multi-Industry 489,000 1,054,090
Cross Harbour Tunnel Co. Ltd. ........................ Transportation 61,000 54,329
Dairy Farm International Holdings Ltd. ............... Merchandising 504,370 580,026
Dickson Concepts (International) Ltd. ................ Merchandising 9,000 6,970
Golden Resources Development International Ltd. ...... Food & Household Products 2,278,000 117,616
Goldlion Holdings Ltd. ............................... Textiles & Apparel 152,000 11,576
Hang Lung Development Co. Ltd. ....................... Real Estate 758,000 812,082
Hong Kong & Shanghai Hotels Ltd. ..................... Leisure & Tourism 966,000 685,792
Hong Kong Electric Holdings Ltd. ..................... Utilities Electrical & Gas 219,900 667,030
HSBC Holdings PLC..................................... Banking 73,848 1,839,706
Hutchison Whampoa Ltd. ............................... Multi-Industry 55,000 388,686
IMC Holdings Ltd. .................................... Transportation 393,000 38,046
Jardine Matheson Holdings Ltd. ....................... Multi-Industry 259,385 669,213
Jardine Strategic Holdings Ltd. ...................... Multi-Industry 33,000 47,850
</TABLE>

TD- 9

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
HONG KONG (CONT.)
Lai Sun Development Co. Ltd. ......................... Real Estate 274,000 $ 34,660
Lai Sun Garment International Ltd. ................... Multi-Industry 202,000 36,764
New World Development Co. Ltd. ....................... Real Estate 868,000 2,184,775
Ng Fung Hong Ltd. .................................... Food & Household Products 45,000 40,369
*Semi-Tech Co. Ltd. .................................. Appliances & Household Durables 280,217 11,574
Sun Hung Kai Properties Ltd. ......................... Real Estate 127,617 930,699
Wheelock and Company Ltd. ............................ Multi-Industry 484,890 388,050
------------
11,974,705
------------
HUNGARY 2.0%
Borsodchem RT......................................... Chemicals 12,969 337,334
Borsodchem RT, GDR, 144A.............................. Chemicals 11,000 286,275
Borsodchem RT, GDR, Reg S............................. Chemicals 8,900 231,623
*Danubius Hotel and SpA RT............................ Leisure & Tourism 7,400 155,015
Egis RT............................................... Multi-Industry 6,720 152,944
Fotex First Hungarian American Photo Service Co. ..... Multi-Industry 45,385 23,821
Gedeon Richter Ltd. .................................. Health & Personal Care 23,110 984,855
Graboplast Textil Es Muborgyarto RT................... Textiles & Apparel 7,300 55,777
Inter-Europa Bank RT.................................. Banking 3,695 178,490
Mol Magyar Olay-Es Gazipari RT........................ Energy Sources 16,520 453,102
OTP Bank.............................................. Banking 600 30,070
Pannonplast Plastic Industries Plc. .................. Industrial Components 1,060 30,009
Tiszai Vegyi Kombinat RT.............................. Chemicals 43,962 592,163
Tiszai Vegyi Kombinat RT, GDR, 144A................... Chemicals 21,000 284,550
Tiszai Vegyi Kombinat RT, GDR, Reg S.................. Chemicals 9,600 130,080
Zwack Unicum Ltd. .................................... Beverages & Tobacco 100 2,578
------------
3,928,686
------------
INDIA 2.1%
Andhra Valley Power Supply Co. Ltd. .................. Utilities Electrical & Gas 28,950 50,412
Arvind Mills Ltd. .................................... Textiles & Apparel 119,500 108,684
Bajaj Auto Ltd. ...................................... Automobiles 11,550 141,670
*Bharat Petroleum Corp. Ltd. ......................... Energy Sources 29,400 161,333
Bombay Dyeing & Manufacturing Co. Ltd. ............... Chemicals 270,300 368,595
Cummins India Ltd. ................................... Machinery & Engineering 5,000 36,180
Grasim Industries Ltd. ............................... Multi-Industry 25,000 106,068
Great Eastern Shipping Co. Ltd. ...................... Transportation 117,000 63,461
Gujarat Ambuja Cements Ltd. .......................... Building Materials & Components 1,200 7,345
Gujarat Ambuja Cements Ltd., GDR, Reg S............... Building Materials & Components 10,400 68,640
Gujarat Industries Power Ltd. ........................ Energy Equipment & Services 20,000 11,648
Gujarat Narmada Valley Fertilizers Co. Ltd., GDR...... Chemicals 9,000 19,350
Hindalco Industries Inc., GDR, Reg S.................. Metals & Mining 5,000 58,625
Hindustan Organic Chemicals Ltd. ..................... Chemicals 20,400 3,792
Hindustan Petroleum Corporation Ltd. ................. Energy Sources 38,100 210,778
*Hotel Leela Venture Ltd. ............................ Leisure & Tourism 2,000 1,831
ICICI Ltd. ........................................... Financial Services 246,500 272,914
India Cements Ltd., GDR............................... Building Materials & Components 109,590 82,192
Indian Aluminium Co. Ltd. ............................ Metals & Mining 29,000 62,031
Indian Petrochemicals Corp. Ltd. ..................... Chemicals 194,600 262,390
*Indian Rayon & Industries Ltd. ...................... Multi-Industry 1,120 2,965
Indian Rayon & Industries Ltd., GDR................... Multi-Industry 28,669 72,389
Indo Gulf Corp. Ltd. ................................. Chemicals 800 526
Indo Gulf Corp. Ltd., GDR............................. Chemicals 7,150 4,469
Industrial Development Bank of India.................. Banking 77,800 66,731
Larsen and Toubro Ltd. ............................... Multi-Industry 53,600 202,437
Larsen and Toubro Ltd., GDR, Reg S.................... Multi-Industry 5,000 38,375
Madras Cements Ltd. .................................. Building Materials & Components 65 6,211
Mahanagar Telephone Nigam Ltd. ....................... Telecommunications 55,300 238,397
National Aluminium Co. Ltd. .......................... Metals & Mining 305,800 135,643
</TABLE>

TD- 10

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
INDIA (CONT.)
Oriental Bank of Commerce............................. Banking 179,100 $ 157,411
Reliance Industries Ltd., GDR......................... Chemicals 18,300 102,480
Satyam Computers Services Ltd. ....................... Data Processing & Reproduction 2,800 47,934
Steel Authority of India Ltd. ........................ Metals & Mining 400 53
Sterlite Industries Ltd. ............................. Metals & Mining 465 1,588
Tata Chemicals Ltd. .................................. Chemicals 69,800 166,385
Tata Engineering & Locomotive Co. Telco............... Machinery & Engineering 95,500 366,303
Tata Engineering & Locomotive Co. Telco, GDR.......... Machinery & Engineering 24,400 97,600
*Tata Hydro-Electric Power Company.................... Utilities Electrical & Gas 51,700 96,840
Tata Iron & Steel Co., Ltd. .......................... Metals & Mining 11,300 31,217
Thermax Ltd. ......................................... Energy Equipment & Services 7,400 24,901
Titan Industries Ltd. ................................ Recreation & Other Consumer Goods 69,600 155,590
Videsh Sanchar Nigam Ltd., GDR........................ Telecommunications 7,600 93,100
------------
4,207,484
------------
INDONESIA 4.3%
*Asia Pulp & Paper Co. Ltd., ADR...................... Forest Products & Paper 102,700 840,856
*PT Barito Pacific Timber TBK......................... Forest Products & Paper 1,774,000 78,101
*PT BDNI Capital Corp., fgn. ......................... Financial Services 9,000 198
*PT Charoen Pokphand Indonesia........................ Food & Household Products 1,453,500 27,425
*PT Ciputra Development............................... Real Estate 2,430,000 38,208
PT Gudang Garamm...................................... Beverages & Tobacco 320,000 468,931
*PT Indah Kiat Pulp & Paper Corp. TBK................. Forest Products & Paper 2,259,250 618,097
*PT Indah Kiat Pulp & Paper Corp. TBK, wts. .......... Forest Products & Paper 146,800 19,943
*PT Indocement Tunggal Prakarsa....................... Building Materials & Components 1,743,500 696,303
*PT Indofoods Sukses Makmurr.......................... Food & Household Products 1,210,685 616,764
PT Indosat............................................ Telecommunications 232,000 304,226
*PT Jakarta International Hotel & Development......... Real Estate 11,764,000 332,943
*PT Kalbe Farma....................................... Health & Personal Care 1,163,500 58,541
PT Lippo Life Insurance............................... Insurance 4,738,500 193,712
*PT Modern Photo Film Co. ............................ Multi-Industry 1,526,500 98,406
*PT Pakuwon Jati...................................... Real Estate 1,700,000 16,038
*PT Semen Cibinong.................................... Building Materials & Components 35,534,500 1,340,925
PT Semen Gresik (Persero)............................. Building Materials & Components 415,000 433,270
*PT Sinar Mas Agro Resources & Technology Corp. ...... Food & Household Products 482,800 103,240
*PT Sumalindo Lestari Jaya............................ Forest Products & Paper 146,000 7,346
PT Tancho Indonesia................................... Health & Personal Care 63,000 10,005
PT Telekomunikasi Indonesia (Persero), B.............. Telecommunications 658,500 223,642
*PT Tempo Scan Pacific................................ Health & Personal Care 10,325,000 551,965
PT Timah.............................................. Metals & Mining 1,289,500 871,832
*PT Tjiwi Kimia TBK................................... Forest Products & Paper 1,346,454 351,433
*PT Tjiwi Kimia TBK, wts. ............................ Forest Products & Paper 79,645 9,317
*PT Ultra Jaya Milk................................... Food & Household Products 2,740,000 215,409
*PT United Tractors................................... Machinery & Engineering 46,000 2,893
------------
8,529,969
------------
JORDAN .4%
Jordan Cement Factories Ltd. ......................... Building Materials & Components 17,000 74,017
*Zara Investment Holdings Company Ltd. ............... Leisure & Tourism 350,000 747,191
------------
821,208
------------
KAZAKHSTAN .1%
*Kazkommertsbank, ADR, 144A........................... Banking 33,460 117,110
------------
KENYA .4%
Kenya Airways Ltd. ................................... Transportation 5,418,381 714,849
------------
</TABLE>

TD- 11

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TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
MALAYSIA 3.8%
AMMB Holdings Bhd. ................................... Financial Services 453,600 $ 426,895
Boustead Holdings Bhd. ............................... Food & Household Products 403,000 252,285
Cement Industries of Malaysia Bhd. ................... Building Materials & Components 495,000 232,929
Cosway Corporation Bhd. .............................. Appliances & Household Durables 70,000 22,205
Edaran Otomobil Nasional Bhd. ........................ Automobiles 3,000 3,781
Federal Flour Mills Bhd. ............................. Food & Household Products 35,000 27,351
Genting Bhd. ......................................... Leisure & Tourism 263,600 456,846
Golden Hope Plantations Bhd. ......................... Misc Materials & Commodities 37,000 31,868
Hong Leong Industries Bhd. ........................... Multi-Industry 206,800 103,829
*Hong Leong Industries Bhd., wts. .................... Multi-Industry 19,500 2,048
Hong Leong Properties Bhd. ........................... Real Estate 467,000 77,502
Island & Peninsula Bhd. .............................. Real Estate 447,000 285,464
Kian Joo Can Factory Bhd. ............................ Industrial Components 85,000 99,995
*Leader Universal Holdings Bhd. ...................... Industrial Components 1,452,000 320,277
Malayawata Steel Bhd. ................................ Metals & Mining 563,000 115,906
Malaysian Airlines System Bhd. ....................... Transportation 246,000 107,490
Malaysian International Shipping Corp., fgn. ......... Transportation 76,000 79,828
*MBF Capital Bhd. .................................... Financial Services 490,000 88,010
Oriental Holdings Bhd. ............................... Automobiles 47,000 57,760
Perlis Plantations Bhd. .............................. Multi-Industry 146,000 119,616
Perusahaan Otomobil Nasional Bhd. .................... Automobiles 141,000 170,317
Public Bank Bhd. ..................................... Banking 4,347,400 1,826,543
Public Bank Bhd., fgn. ............................... Banking 2,660,000 1,033,769
Renong Bhd. .......................................... Multi-Industry 1,334,000 257,818
Resorts World Bhd. ................................... Leisure & Tourism 596,000 548,391
Shangri La Hotels (Malaysia) Bhd. .................... Leisure & Tourism 53,000 14,140
Tanjong Plc. ......................................... Recreation & Other Consumer Goods 241,000 273,389
Technology Resources Industries Bhd. ................. Multi-Industry 437,000 181,768
YTL Corp. Bhd. ....................................... Construction & Housing 203,000 210,665
------------
7,428,685
------------
MEXICO 7.6%
Alfa SA de CV, A...................................... Multi-Industry 236,500 665,978
*Altos Hornos de Mexico SA............................ Metals & Mining 297,700 267,298
Cemex SA.............................................. Building Materials & Components 616,990 1,331,925
Cemex SA, B........................................... Building Materials & Components 1,147,500 2,883,253
*Cifra SA de CV, C.................................... Merchandising 233,500 288,038
*Cifra SA de CV, V.................................... Merchandising 404,500 490,799
Coca Cola Femsa SA de CV, L, ADR...................... Beverages & Tobacco 60,700 804,275
Cydea SA de CV, A..................................... Multi-Industry 31,000 28,210
DESC SA de CV DESC, B................................. Multi-Industry 295,000 252,942
*Grupo Financiero Banamex Accival SA de CV, B......... Banking 1,082,500 1,422,902
*Grupo Financiero Banamex Accival SA de CV, L......... Banking 1,020,000 1,175,733
Grupo Financiero Bancomer SA de CV, B................. Banking 350,000 75,025
Grupo Financiero Bancomer SA de CV, L................. Banking 3,751,000 530,981
*Grupo Financiero Serfin SA de CV, B.................. Banking 2,385,000 212,214
*Grupo Industrial Maseca SA de CV, B.................. Food & Household Products 109,000 88,170
Hylsamex SA de CV, partn. ctf., B..................... Metals & Mining 5,000 6,218
Panamerican Beverages Inc., A......................... Food & Household Products 30,000 654,375
Telefonos de Mexico SA (Telmex), L, ADR............... Telecommunications 75,100 3,656,431
Vitro SA De CV........................................ Food & Household Products 157,500 230,915
------------
15,065,682
------------
NEW ZEALAND .1%
Brierley Investments Ltd. ............................ Multi-Industry 713,000 161,956
------------
PAKISTAN .8%
*Bank of Punjab....................................... Banking 124,822 25,466
*DG Khan Cement Co. .................................. Building Materials & Components 2,258,000 163,393
</TABLE>

TD- 12

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TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
PAKISTAN (CONT.)
Engro Chemical Pakistan Ltd. ......................... Chemicals 132,112 $ 238,864
Fauji Fertilizer Co. Ltd. ............................ Chemicals 37,000 34,062
National Development Leasing Corp. ................... Financial Services 3,558,291 257,484
*Pakistan Electron Ltd. .............................. Appliances & Household Durables 556,500 39,151
*Pakistan International Airlines Corp., A............. Transportation 774,600 63,058
Pakistan Telecommunications Corp., A.................. Telecommunications 1,109,000 423,538
Pakistan Telecommunications Corp., GDR................ Telecommunications 1,000 34,500
*Pakland Cement Co. Ltd. ............................. Building Materials & Components 1,397,800 118,005
*Union Bank Ltd. ..................................... Banking 1,287,000 284,563
------------
1,682,084
------------
PERU 1.0%
Banco Wiese Ltd., ADR................................. Multi-Industry 14,500 27,188
Telefonica Del Peru SA, B, ADR........................ Telecommunications 154,200 1,956,413
------------
1,983,601
------------
PHILIPPINES 3.8%
*A Soriano Corp. ..................................... Multi-Industry 6,456,500 137,761
Ayala Corp. .......................................... Multi-Industry 368,200 130,148
Bank of Philippine Islands............................ Banking 45,000 95,437
*Belle Corp. ......................................... Real Estate 48,777,000 2,683,362
*Digital Telecommunications Philippines Inc. ......... Telecommunications 15,191,000 370,988
*Filinvest Development Corp. ......................... Real Estate 2,639,000 86,836
*Keppel Philippine Holdings Inc., B................... Machinery & Engineering 19,425,186 349,553
Manila Electric Co., B................................ Utilities Electrical & Gas 40 129
*Metro Pacific Corp. MDI.............................. Multi-Industry 497,000 18,142
*Petron Corp. ........................................ Energy Sources 1,389,000 151,754
*Philex Mining Corp., B............................... Metals & Mining 9,487,500 75,607
Philippine Commercial International Bank Inc. ........ Banking 283,060 1,178,810
Philippine Long Distance Telephone Co., ADR........... Telecommunications 20,100 521,344
*Philippine National Bank............................. Banking 701,931 1,082,670
RFM Corp. ............................................ Food & Household Products 1,587,636 244,880
San Miguel Corp., B................................... Food & Household Products 103,000 198,586
*Southeast Asia Cement Holdings Inc. ................. Building Materials & Components 16,381,240 202,134
------------
7,528,141
------------
POLAND 1.5%
Bank Handlowy W Warszawie SA, GDR, Reg S.............. Banking 6,700 86,765
Bank Przemyslowo-Handlowy SA.......................... Banking 3,550 210,370
Bank Rozwoju Eksportu SA.............................. Banking 5,748 132,646
Bank Slaski SA W Katowicach........................... Banking 3,200 165,926
Big Bank Gdanski SA, G................................ Banking 658,950 591,365
Big Bank Gdanski SA, GDR, Reg S....................... Banking 23,966 324,739
Farm Food SA.......................................... Food & Household Products 4,811 16,037
Gorazdze SA........................................... Building Materials & Components 1,578 26,525
Huta Olawa SA......................................... Metals & Mining 78,107 117,939
*Impexmetal SA........................................ Metals & Mining 93,892 358,448
Lentex SA............................................. Building Materials & Components 19,090 70,704
Przedsiebiorstwo Cukiernicze Jutrzenka SA............. Food & Household Products 71,000 279,145
*Rolimpex SA.......................................... Wholesale & International Trade 39,117 63,523
Warta SA.............................................. Insurance 14,709 301,723
Wielkopolski Bank Kredytowy SA........................ Banking 38,500 242,407
------------
2,988,262
------------
RUSSIA .5%
Aeroflot-Russia International Airlines................ Transportation 4,800 115,200
*Arkhangelsk Telecom, pfd. ........................... Telecommunications 260,000 9,074
*Chelyabenergo........................................ Utilities Electrical & Gas 20,000 800
</TABLE>

TD- 13

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TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
RUSSIA (CONT.)
Irkutskenergo......................................... Utilities Electrical & Gas 680,800 $ 30,466
Irkutskenergo, ADR.................................... Utilities Electrical & Gas 7,000 15,663
*JSC Gorkovsky Augomobile Plant....................... Automobiles 1,270 23,178
*Kamaz, B............................................. Automobiles 121,186 27,255
Krasnoyarsk Aluminum Plant............................ Metals & Mining 5,748 20,118
Lukoil Holdings, ADR.................................. Energy Sources 3,320 53,784
Mosenergo............................................. Utilities Electrical & Gas 5,937,200 118,744
Mosenergo, ADR........................................ Utilities Electrical & Gas 3,000 5,625
*Murmansk Sea Shipping................................ Transportation 3,000 357
Norilsk Nickel........................................ Metals & Mining 31,700 16,880
Norilsk Nickel, pfd. ................................. Metals & Mining 10,000 3,250
*Novorosissk Sea Shipping............................. Transportation 28,000 2,100
Novorosissk Sea Shipping., pfd. ...................... Transportation 224,000 3,651
Primorsk Sea Shipping................................. Transportation 36,050 21,540
Red October........................................... Food & Household Products 3,000 19,650
Rostelecom............................................ Telecommunications 153,000 111,690
Rostelecom, ADR....................................... Telecommunications 11,600 48,575
Rostelecom, pfd. ..................................... Telecommunications 257,300 74,617
Saint Petersburg City Telephone Network, pfd., A...... Telecommunications 53,000 8,745
Tsum Trade House...................................... Merchandising 317,500 47,625
Unified Energy Systems................................ Utilities Electrical & Gas 3,400,000 103,700
Unified Energy Systems, ADR........................... Utilities Electrical & Gas 11,000 33,759
Unified Energy Systems, pfd. ......................... Utilities Electrical & Gas 200,000 2,750
*Uralmash Zavody...................................... Machinery & Engineering 15,032 8,621
*Vimpel Communications, ADR........................... Telecommunications 5,200 67,275
------------
994,692
------------
SINGAPORE 9.1%
Acer Computer International Ltd. ..................... Electrical & Electronics 195,000 97,500
Acma Ltd. ............................................ Electrical & Electronics 294,000 129,182
City Developments Ltd. ............................... Real Estate 277,000 1,200,333
Cycle & Carriage Ltd. ................................ Automobiles 186,000 636,909
Delgro Corp. ......................................... Transportation 50,500 65,497
First Capital Corp. Ltd. ............................. Real Estate 504,000 336,000
Fraser and Neave Ltd. ................................ Beverages & Tobacco 412,000 1,203,539
Hai Sun Hup Group Ltd. ............................... Transportation 714,000 179,582
*Hai Sun Hup Group Ltd., wts. ........................ Transportation 82,600 6,007
Hind Hotels International Ltd. ....................... Leisure & Tourism 32,000 21,915
Hong Leong Finance Ltd., fgn. ........................ Financial Services 541,000 1,036,097
Hour Glass Ltd. ...................................... Merchandising 1,199,000 199,833
*Inchcape Marketing Services Ltd. .................... Broadcasting & Publishing 153,000 83,455
Inchcape Motors Ltd. ................................. Wholesale & International Trade 143,000 165,533
Isetan (Singapore) Ltd. .............................. Merchandising 49,000 44,545
Jurong Shipyard Ltd. ................................. Machinery & Engineering 194,000 852,424
Keppel Corp., Ltd. ................................... Transportation 745,000 1,995,697
MCL Land Ltd. ........................................ Real Estate 605,000 436,333
Metro Holdings Ltd. .................................. Wholesale & International Trade 39,000 36,636
Natsteel Ltd. ........................................ Metals & Mining 1,229,000 1,348,176
*Neptune Orient Lines Ltd. ........................... Transportation 317,000 101,824
*Osprey Maritime Ltd. ................................ Transportation 267,000 82,527
Osprey Maritime Ltd., 2.50%, cvt., pfd. .............. Transportation 69,660 21,109
Overseas Chinese Banking Corp. Ltd., fgn. ............ Banking 335,000 2,273,939
Overseas Union Enterprise Ltd. ....................... Leisure & Tourism 120,400 239,341
Overseas Union Trust, fgn. ........................... Financial Services 200,000 218,182
Robinson & Co., Ltd. ................................. Merchandising 20,200 45,297
Sembawang Resources Ltd. ............................. Building Materials & Components 8,000 6,255
*Sembcorp Industries Ltd. ............................ Multi-Industry 1,367,925 1,558,605
Singapore Petroleum Company, fgn. .................... Chemicals 133,000 54,812
Tibs Holdings Ltd. ................................... Transportation 71,500 44,200
</TABLE>

TD- 14

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TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
-------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
SINGAPORE (CONT.)
Times Publishing Ltd. ................................ Broadcasting & Publishing 26,000 $ 40,655
United Industrial Corporation Ltd. ................... Real Estate 1,565,000 626,000
United Overseas Bank Ltd., fgn. ...................... Banking 391,000 2,511,879
United Overseas Land Ltd. ............................ Real Estate 109,000 73,988
WBL Corp. Ltd. ....................................... Multi-Industry 87,000 55,891
------------
18,029,697
------------
SLOVAK REPUBLIC .2%
Nafta Gbely AS........................................ Utilities Electrical & Gas 6,695 58,178
Slovakofarma AS....................................... Health & Personal Care 629 30,404
Slovnaft AS........................................... Chemicals 11,000 197,149
Vychodoslovenske Zeleziarne AS........................ Metals & Mining 22,857 111,104
------------
396,835
------------
SLOVENIA .2%
Blagovno Trgovinski Center, GDR, 144A................. Real Estate 50,000 271,250
Blagovno Trgovinski Center, GDR, Reg S................ Real Estate 13,000 70,525
------------
341,775
------------
SOUTH AFRICA 7.5%
Aeci Ltd. ............................................ Chemicals 63,600 81,085
*Allied Electronics Ltd., pfd. ....................... Electrical & Electronics 12,882 10,730
Amalgamated Banks of South Africa Ltd. ............... Banking 35,800 169,788
Anglo American Industrial Corp. Ltd. ................. Multi-Industry 71,779 1,092,044
Anglo American Corp of South Africa Ltd. ............. Metals & Mining 44,400 1,251,374
Anglogold Ltd. ....................................... Metals & Mining 500 19,481
Anglovaal Industried Ltd. ............................ Multi-Industry 168,840 213,821
Barlow Ltd. .......................................... Multi-Industry 173,000 664,621
CG Smith Ltd. ........................................ Multi-Industry 344,800 782,471
De Beers/Centenary Linked Units....................... Misc Materials & Commodities 102,500 1,306,787
*Del Monte Royal Foods Ltd. .......................... Food & Household Products 1,411,300 374,252
Dunlop Africa Ltd. ................................... Industrial Components 256,200 78,392
Edgars Stores Ltd. ................................... Textiles & Apparel 14,794 44,638
Irvin & Johnson Ltd. ................................. Food & Household Products 1,138,200 386,962
Iscor Ltd. ........................................... Metals & Mining 2,859,390 515,227
Kersaf Investments Ltd. .............................. Leisure & Tourism 204,367 623,584
Liberty Life Association of Africa Ltd. .............. Insurance 63,500 874,336
Malbak Ltd. .......................................... Multi-Industry 104,075 46,883
McCarthy Retail Ltd. ................................. Multi-Industry 302,692 47,852
**McCarthy Retail Ltd., zero cpn., cvt., 9/30/03...... Multi-Industry 11,833ZAR 6,839
Nedcor Ltd. .......................................... Financial Services 2,800 47,692
Palabora Mining Co. Ltd. ............................. Metals & Mining 29,500 162,977
Polifin Ltd. ......................................... Chemicals 13,600 11,559
Power Technologies Ltd. .............................. Utilities Electrical & Gas 12,882 7,883
*Rainbow Chicken Ltd. ................................ Food & Household Products 533,285 23,570
Rembrandt Group Ltd. ................................. Multi-Industry 185,100 1,132,736
Reunert Ltd. ......................................... Electrical & Electronics 160,500 223,722
Sappi Ltd. ........................................... Forest Products & Paper 253,173 979,080
Sasol Ltd. ........................................... Energy Sources 250,500 947,452
South African Breweries Ltd. ......................... Beverages & Tobacco 99,379 1,674,125
Sun International (South Africa) Ltd. ................ Leisure & Tourism 1,718,937 283,434
Tongaat-Hulett Group Ltd. ............................ Multi-Industry 92,402 604,730
Toyota South Africa Limited........................... Automobiles 26,200 60,125
Voltex Holdings Ltd. ................................. Electrical & Electronics 27,381 9,309
------------
14,759,561
------------
</TABLE>

TD- 15

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
---------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
SOUTH AFRICA (CONT.)
SOUTH KOREA 11.8%
Asia Cement Manufacturing Co. Ltd. ................... Building Materials & Components 61,820 $ 699,170
*Boram Bank Co. Ltd. ................................. Banking 54,300 135,694
BYC Co. Ltd. ......................................... Textiles & Apparel 1,190 45,522
Cheil Jedang Corp. ................................... Food & Household Products 1,300 59,135
*Cho Hung Bank Co. Ltd. .............................. Banking 64,000 63,867
Cho Hung Bank Co. Ltd., GDR 144A...................... Banking 90,000 85,500
*Cho Hung Bank Co. Ltd., GDR, Reg S................... Banking 94,000 89,300
*Daegu Bank Co. Ltd. ................................. Banking 143,655 513,694
Daewoo Electric Components Co. Ltd. .................. Electronic Components &
Instruments 45,000 187,110
*Daewoo Electronics Co. .............................. Electrical & Electronics 78,200 367,426
Dongbu Steel Co. Ltd. ................................ Metals & Mining 10,000 60,707
Dongkuk Steel Mill Co. Ltd. .......................... Metals & Mining 17,700 125,114
Hae In Co. Ltd. ...................................... Merchandising 430,000 2,503,118
Hana Bank............................................. Banking 420,126 4,646,716
Hana Bank, GDR, Reg S................................. Banking 88,073 1,107,518
*Hotel Shilla Co. .................................... Leisure & Tourism 326,107 1,925,455
Kolon International Corp. ............................ Wholesale & International Trade 358,000 1,220,624
Korea Electric Power Corp. ........................... Utilities Electrical & Gas 115,200 2,854,852
*Kyong Nam Bank....................................... Banking 402,460 1,104,464
Kyung Dong Boiler Co. Ltd. ........................... Energy Equipment & Services 15,460 154,279
LG Electronics Inc. .................................. Electrical & Electronics 20,976 254,677
LG Industrial Systems Ltd. ........................... Electrical & Electronics 15,000 86,694
Moon Bae Steel Co. Ltd. .............................. Metals & Mining 21,360 195,393
Saehan Precision Co. Ltd. ............................ Electrical & Electronics 73,112 1,155,200
Samsung Display Devices Ltd. ......................... Electrical & Electronics 17,267 851,504
Samsung Electronics Co. Ltd. ......................... Electrical & Electronics 15,225 1,021,753
*Samsung Heavy Industries Co. Ltd. ................... Machinery & Engineering 142,477 810,430
Seah Steel Corp. ..................................... Metals & Mining 32,760 280,605
Shin Poong Paper Manufacturing Co. Ltd. .............. Forest Products & Paper 6,701 55,447
Shin Young Wocoal Inc. ............................... Textiles & Apparel 1,610 59,178
Ssangyong Oil Refining Co. Ltd. ...................... Chemicals 15,270 292,067
*Tong Yang Merchant Bank.............................. Financial Services 67,797 385,639
------------
23,397,852
------------
SRI LANKA .1%
National Development Bank of Sri Lanka................ Banking 118,000 220,722
Sampath Bank Ltd. .................................... Banking 91,100 65,566
------------
286,288
------------
THAILAND 7.5%
Advanced Info Service Public Co. Ltd., fgn. .......... Telecommunications 31,900 189,635
Ayudhya Insurance Public Co. Ltd., fgn. .............. Insurance 3,900 13,685
*Bangkok Bank Public Co. Ltd. ........................ Banking 1,249,687 1,788,461
*Bangkok Bank Public Co. Ltd., fgn. .................. Banking 25,000 51,603
*Bangkok Expressway Public Co. Ltd., fgn. ............ Transportation 129,000 129,586
Bangkok Insurance Public Co. Ltd. .................... Insurance 32,000 118,894
Bangkok Insurance Public Co. Ltd., fgn. .............. Insurance 4,900 23,634
BEC World Public Co Ltd., fgn. ....................... Telecommunications 23,000 126,600
*Charoen Pokphand Feedmill Public Co. Ltd. ........... Food & Household Products 351,300 427,825
*Charoen Pokphand Feedmill Public Co. Ltd., fgn. ..... Food & Household Products 146,700 179,666
*Hana Microelectronics Co. Ltd., fgn. ................ Electrical & Electronics 86,200 208,768
Industrial Finance Corp. of Thailand, fgn. ........... Financial Services 1,486,500 613,665
*Italian-Thai Development Public Co. Ltd., fgn. ...... Construction & Housing 101,100 203,118
*Jasmine International Public Co. Ltd., fgn. ......... Telecommunications 678,000 169,803
*Land and House Public Co. Ltd. ...................... Real Estate 484,978 306,990
*Land and House Public Co. Ltd., fgn. ................ Real Estate 184,278 124,255
*Regional Container Lines Public Co. Ltd. ............ Transportation 349 183
Regional Container Lines Public Co. Ltd., fgn. ....... Transportation 231,451 114,659
</TABLE>

TD- 16

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
THAILAND (CONT.)
Saha Pathanapibul Public Co. Ltd., fgn. .............. Food & Household Products 430,500 $ 438,379
*Saha Union Public Co. Ltd. .......................... Multi-Industry 560,100 227,370
Saha Union Public Co. Ltd., fgn. ..................... Multi-Industry 27,200 11,416
*Sanyo Universal Electric Public Co Ltd., fgn. ....... Appliances & Household Durables 109,800 20,398
*Serm Suk Public Co. Ltd. ............................ Food & Household Products 31,100 158,774
*Serm Suk Public Co. Ltd., fgn. ...................... Food & Household Products 4,900 27,241
*SG Asia Credit Public Co. Ltd. ...................... Financial Services 7,000 2,312
*SG Asia Credit Public Co. Ltd., fgn. ................ Financial Services 1,000 330
*Shinawatra Computer & Comm. Public Co. Ltd. ......... Electrical & Electronics 900 2,972
*Shinawatra Computer & Comm. Public Co. Ltd., fgn. ... Electrical & Electronics 5,700 19,609
*Siam Cement Public Co. Ltd. ......................... Building Materials & Components 22,750 350,626
*Siam Cement Public Co. Ltd., fgn. ................... Building Materials & Components 84,950 1,926,484
*Siam Commercial Bank Ltd., fgn. ..................... Banking 915,497 548,013
*Siam Commercial Bank Ltd., loc. ..................... Banking 47,204 22,735
Siam Makro Public Company Ltd., fgn. ................. Merchandising 307,900 601,649
*Thai Airways International Public Co. Ltd., fgn. .... Transportation 516,000 667,456
*Thai Engine Manufacturing Public Company Ltd. ....... Machinery & Engineering 83,000 20,787
*Thai Farmers Bank Public Co. Ltd. ................... Banking 1,322,008 1,946,537
*Thai Farmers Bank Public Co. Ltd., fgn. ............. Banking 772,025 1,359,835
*Thai Military Bank Ltd., fgn. ....................... Banking 755,300 201,635
*Thai Petrochemical Industry Public Co. Ltd., fgn. ... Chemicals 795,120 131,298
*Thai Plastic and Chemical Co. Ltd., fgn. ............ Chemicals 2,200 3,875
Thai Rayon Public Co. Ltd. ........................... Textiles & Apparel 34,900 34,338
Thai Rayon Public Co. Ltd., fgn. ..................... Textiles & Apparel 100 98
*Thai Telephone & Telecommunication Public Co.
Ltd.,fgn. .......................................... Telecommunications 866,500 128,777
Thai Wacoal Public Co. Ltd., fgn. .................... Textiles & Apparel 31,100 36,805
*Tipco Asphalt Public Co. Ltd., fgn. ................. Building Materials & Components 97,400 158,156
*Total Access Communication Public Co. Ltd. .......... Telecommunications 481,200 827,664
*United Communications Industries, fgn. .............. Telecommunications 307,500 165,027
------------
14,831,626
------------
TURKEY 2.8%
Akbank................................................ Banking 88,530,776 1,796,439
Alarko Sanayii ve Ticaret SA.......................... Appliances & Household Durables 1,550,249 70,041
*Alcatel Teletas...................................... Telecommunications 1,603,000 67,342
*Anadolu Anonim Turk Sigorta Sirketi, Br. ............ Insurance 17,000 197
Arcelik AS, Br. ...................................... Appliances & Household Durables 11,012,000 317,721
Beko Elektronik AS.................................... Appliances & Household Durables 1,204,000 15,842
Borusan AS............................................ Industrial Components 24,821,000 676,793
Erciyas Biracilik..................................... Food & Household Products 3,216,000 214,128
*Eregli Demir ve Celik Fabrikalari AS................. Metals & Mining 3,452,000 142,283
Haci Omer Sabanci Holding AS, ADR, 144A............... Multi-Industry 47,900 179,625
Izocam Ticaret ve Sanayii AS, Br. .................... Building Materials & Components 68,336,000 649,994
Kartonsan Karton San VE TIC AS........................ Forest Products & Paper 3,034,000 105,815
*Netas Northern Electric Telekomunic Asyon AS......... Electrical & Electronics 2,226,200 40,938
Petkim Petrokimya Holding AS.......................... Chemicals 222,000 100,301
Tat Konserve Sanayii AS............................... Food & Household Products 2,235,296 79,731
*Tofas Turk Otomobil Fabrikasi AS..................... Automobiles 19,267,500 174,104
Turk Demir Dokum, Br. ................................ Appliances & Household Durables 31,943,996 354,483
*Turkiye Garanti Bankasi AS........................... Banking 18,279,108 452,052
*Turkiye Is Bankasi AS, C............................. Banking 3,047,000 79,218
------------
5,517,047
------------
VENEZUELA 2.6%
Ceramica Carabobo CA, A, ADR.......................... Building Materials & Components 7,364 6,196
Compania Anonima Nacional Telefonos de Venezuela,
ADR................................................. Telecommunications 109,600 1,952,250
Electricidad de Caracas SAICA SACA.................... Utilities Electrical & Gas 6,077,363 2,623,632
Mavesa SA, ADR........................................ Food & Household Products 102,100 382,875
Siderurgica Venezolana Sivensa Saica Services, A,
ADR................................................. Metals & Mining 15,900 74,429
</TABLE>

TD- 17

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
INDUSTRY SHARES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
VENEZUELA (CONT.)
Venezolana de Cementos-Vencemos SA, #1................ Building Materials & Components 94,000 $ 61,611
Venezolana de Cementos-Vencemos SA, #2................ Building Materials & Components 10,400 6,909
------------
5,107,902
------------
ZIMBABWE .1%
Delta Corp. .......................................... Multi-Industry 238,250 51,856
*TA Holdings.......................................... Multi-Industry 5,428,000 94,806
Zimbabwe Sun Ltd. .................................... Multi-Industry 1,354,854 76,453
------------
223,115
------------
TOTAL LONG TERM SECURITIES (COST $283,337,523)........ 194,293,148
------------
PRINCIPAL
AMOUNT**
-----------
SHORT TERM INVESTMENTS 2.1%
Den Danske Bank, 4.50%, 1/04/99, Time Deposit......... $ 1,188,000 1,188,000
Fannie Mae, 5.53%, 3/11/99............................ 1,000,000 1,001,530
Federal Farm Credit Banks, 4.90%, 3/01/99............. 1,950,000 1,949,665
Federal Home Loan Mortgage Corp., 4.92%, 2/17/99...... 60,000 59,628
------------
TOTAL SHORT TERM INVESTMENTS (COST $4,196,336)........ 4,198,823
------------
TOTAL INVESTMENTS (COST $287,533,859) 100.2%.......... 198,491,971
OTHER ASSETS, LESS LIABILITIES (.2%).................. (521,229)
------------
TOTAL NET ASSETS 100.0%............................... $197,970,742
------------
------------
</TABLE>

CURRENCY ABBREVIATION:

<TABLE>
<S> <C>
ZAR -- South African Rand
</TABLE>

*NON-INCOME PRODUCING.
**SECURITIES TRADED IN U.S. DOLLARS UNLESS OTHERWISE INDICATED.
See Notes to Financial Statements.
TD- 18

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $287,533,859).... $198,491,971
Receivables:
Investment securities sold................................ 253,451
Fund shares sold.......................................... 53,381
Dividends and interest.................................... 757,200
------------
Total assets........................................... 199,556,003
------------
Liabilities:
Payables:
Investment securities purchased........................... 72,137
Fund shares redeemed...................................... 1,076,302
To affiliates............................................. 244,136
Funds advanced by custodian................................ 108,629
Accrued expenses........................................... 84,057
------------
Total liabilities...................................... 1,585,261
------------
Net assets, at value........................................ $197,970,742
============
Net assets consist of:
Undistributed net investment income........................ $ 2,509,738
Net unrealized depreciation................................ (89,041,888)
Accumulated net realized loss.............................. (30,182,087)
Beneficial shares.......................................... 314,684,979
------------
Net assets, at value........................................ $197,970,742
============
CLASS 1:
Net asset value per share ($180,683,971 divided by
35,201,636 shares outstanding)........................... $5.13
============
CLASS 2:
Net asset value per share ($17,286,771 divided by 3,379,025
shares outstanding)...................................... $5.12
============
</TABLE>

See Notes to Financial Statements.
TD- 19

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $422,818)
Dividends.................................................. $ 4,090,258
Interest................................................... 1,927,642
------------
Total investment income............................... $ 6,017,900
Expenses:
Management fees (Note 3)................................... 2,255,183
Administrative fees (Note 3)............................... 172,848
Distribution fees - Class 2 (Note 3)....................... 33,388
Custodian fees............................................. 476,000
Reports to shareholders.................................... 55,574
Registration and filing fees............................... 2,500
Professional fees.......................................... 29,100
Trustees' fees and expenses................................ 5,000
------------
Total expenses........................................ 3,029,593
------------
Net investment income........................... 2,988,307
------------
Realized and unrealized losses:
Net realized loss from:
Investments............................................... (24,377,039)
Foreign currency transactions............................. (428,784)
------------
Net realized loss..................................... (24,805,823)
Net unrealized depreciation on investments............ (20,073,422)
------------
Net realized and unrealized loss............................ (44,879,245)
------------
Net decrease in net assets resulting from operations........ $(41,890,938)
------------
------------
</TABLE>

See Notes to Financial Statements.
TD- 20

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Financial Statements (continued)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 2,988,307 $ 2,418,652
Net realized loss from investments and foreign currency (24,805,823) (3,846,233)
transactions.............................................
Net unrealized depreciation on investments................ (20,073,422) (67,576,957)
------------------------------
Net decrease in net assets resulting from operations... (41,890,938) (69,004,538)
Distributions to shareholders from:
Net investment income:
Class 1.................................................. (2,577,815) (397,958)
Class 2.................................................. (175,034) --
Net realized gains:
Class 1.................................................. (1,492,419) (298,468)
Class 2.................................................. (107,443) --
Fund share transactions (Note 2):
Class 1.................................................. 60,604,424 157,129,181
Class 2.................................................. 10,581,714 13,354,870
------------------------------
Net increase in net assets............................. 24,942,489 100,783,087
Net assets:
Beginning of year.......................................... 173,028,253 72,245,166
------------------------------
End of year................................................ $197,970,742 $173,028,253
------------------------------
------------------------------
Undistributed net investment income included in net assets:
End of year................................................ $ 2,509,738 $ 2,681,614
------------------------------
------------------------------
</TABLE>

See Notes to Financial Statements.
TD- 21

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Templeton Developing Markets Fund (the Fund) is a separate, diversified series
of Templeton Variable Products Series Fund (the Trust), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks long-term capital appreciation by investing primarily in equity securities
of issuers in countries having developing markets. The following summarizes the
Fund's significant accounting policies.

a. SECURITY VALUATION:

b. FOREIGN CURRENCY TRANSLATION:

Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.

Certain countries in which the Fund invests have imposed restrictions on the
repatriation of their currencies. Other countries have previously instituted
currency exchange controls in the past during periods of serious imbalance in
their balance of payments or upon the occurrence of other destabilizing events.
Exchange control regulations may restrict the Fund's ability to convert
investment income, capital, or the proceeds of securities into U.S. dollars. As
of December 31, 1998, the Fund has investments with a value of approximately $7
million in countries with restrictions on the repatriation of their currencies
or formal exchange controls currently in place.

c. INCOME TAXES:

No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.

d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

TD- 22

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)

d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)

e. ACCOUNTING ESTIMATES:

2. BENEFICIAL SHARES

At December 31, 1998, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:

<TABLE>
<CAPTION>
-------------------YEAR-ENDED-DECEMBER-31,-------------------
-----------1998-------------------------------1997-----------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 1 SHARES:
Shares sold................................................. 11,021,993 $ 62,483,672 17,460,410 $161,550,248
Shares issued on reinvestment of distributions.............. 591,604 4,070,234 66,963 696,426
Shares redeemed............................................. (1,052,335) (5,949,482) (547,862) (5,117,493)
-------------------------------------------------------------
Net increase................................................ 10,561,262 $ 60,604,424 16,979,511 $157,129,181
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-------------------YEAR-ENDED-DECEMBER-31,-------------------
-----------1998------------------------------1997*-----------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 2 SHARES:
Shares sold................................................. 4,365,526 $ 23,618,013 1,574,880 $ 14,398,499
Shares issued on reinvestment of distributions.............. 41,058 282,477 -- --
Shares redeemed............................................. (2,472,343) (13,318,776) (130,096) (1,043,629)
-------------------------------------------------------------
Net increase................................................ 1,934,241 $ 10,581,714 1,444,784 $ 13,354,870
-------------------------------------------------------------
-------------------------------------------------------------
*Effective date of Class 2 shares was May 1, 1997.
</TABLE>

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Certain officers of the Trust are also officers or directors of Templeton Assets
Management Ltd. (TAML), Franklin Templeton Services, Inc. (FT Services) and
Franklin/Templeton Distributors, Inc. (Distributors), the Fund's investment
manager, administrative manager and principal underwriter, respectively.

TD- 23

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
Notes to Financial Statements (continued)

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)

The Fund pays an investment management fee to TAML of 1.25% per year of the
average daily net assets of the Fund. The Fund pays its allocated share of an
administrative fee to FT Services based on the Trust's aggregate average daily
net assets as follows:

The Fund reimburses Distributors up to 0.25% per year of its average daily net
assets of Class 2 shares, for costs incurred in marketing the Fund's Class 2
shares.

Legal fees of $9,087 were paid to a law firm in which a partner is an officer of
the Fund.

4. INCOME TAXES

At December 31, 1998, the net unrealized depreciation based on the cost of
investments for income tax purposes of $293,955,327 was as follows:

<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 12,171,870
Unrealized depreciation..................................... (107,635,226)
-------------
Net unrealized depreciation................................. $ (95,463,356)
-------------
-------------
</TABLE>

Net investment income and net realized gains differ for financial statement and
tax purposes primarily due to differing treatments of passive foreign investment
companies, wash sales and losses realized subsequent to October 31 on the sales
of securities and foreign currencies.

At December 31, 1998, the Fund had tax basis capital losses of $22,600,000 which
may be carried over to offset future capital gains. Such losses expire December
31, 2006.

At December 31, 1998, the Fund had deferred capital and currency losses
occurring subsequent to October 31, 1998 of $1,500,000. For tax purposes, such
losses will be reflected in the year ending December 31, 1999.

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1998 aggregated $143,995,562 and $34,177,876, respectively.

TD- 24

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund

We have audited the accompanying statement of assets and liabilities, including
the Statement of Investments, of the Templeton Developing Markets Fund, series
of Templeton Variable Products Series Fund (the Trust) as of December 31, 1998,
and the related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then ended and
the financial highlights for periods indicated in the accompanying financial
statements. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Templeton Developing Markets Fund, series of Templeton Variable Products Series
Fund as of December 31, 1998, the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles.

McGladrey & Pullen, LLP

New York, New York
January 28, 1999

TD- 25

PAGE

This page intentionally left blank.

PAGE

TEMPLETON INTERNATIONAL FUND

Investment Goal: Templeton International Fund seeks long-term capital growth
through a flexible policy of investing in stocks and debt obligations of
companies and governments outside the United States.

Tremendous volatility and a dramatic regional divergence in stock market
performance marked 1998. While many European markets turned in 20%+ returns,
many stock markets in Asia and Latin America suffered substantial stock declines
as several countries experienced economic contractions. The economic slowdown in
Asia negatively impacted the price of numerous raw materials, from oil to
metals, helping to drag down growth in countries dependent on exports of those
materials, particularly Mexico, Brazil, Chile and Russia. While some of our Hong
Kong investments performed well, Latin America continued to lag and negatively
affected the Fund's 1998 performance. Our exposure to Latin America and cyclical
industries were the main reasons behind the poor short-term performance of the
Fund versus the MSCI EAFE Index.

During the reporting period, Europe continued to outperform most world markets
due largely, we think, to tight fiscal policies, export-led economic recoveries
(aided by the strong US dollar) and lower interest rates as governments moved
towards meeting the January 1999 European Union convergence criteria. Many
European companies responded to global competition by aggressively reducing
costs, selling off unproductive assets and improving returns on invested
capital. Reflecting the trends discussed above, the ten most significant
contributors to the Fund's performance this year are all European holdings.
Beneficiaries of lower interest rates included banks and financial services
companies (AXA-UAP, Skandia, Julius Baer Holding and Zurich Allied AG). We took
advantage of this strength and reduced our holdings of financial stocks we
believed to be fully valued. We redeployed some of the funds into the UK, which
we believe offers some of the best value in the world on a normalized basis.

While Europe turned in strong performance, the majority of emerging markets
continued to struggle, held back by a number of factors including dependence on
commodity exports, political instability or economic worries. Our
emerging-market exposure hurt performance in 1998 but we continue to find
compelling value and are focusing on companies which we feel have strong balance
sheets, solid management teams and healthy growth prospects. Our investments in
these markets are concentrated among the telecommunications providers such as
Telefonos de Mexico SA (Telmex),

GEOGRAPHIC DISTRIBUTION
TEMPLETON INTERNATIONAL FUND
BASED ON TOTAL NET ASSETS
12/31/98

[This chart shows in pie format the geographic distribution of Templeton
International Fund's portfolio holdings on December 31, 1998, based on total
net assets.]

[PIE CHART]

Europe 58.6%
Asia 12.5%
Latin America 9.2%
North America 5.9%
Australia/New Zealand 4.4%
Middle East/Africa 1.2%
Short-Term Investments & Other Net Assets 8.2%

TI-1

PAGE

TOP 10 HOLDINGS
TEMPLETON INTERNATIONAL FUND
12/31/98

[This chart shows the top 10 holdings of Templeton International Fund
on December 31, 1998, based on total net assets.]

<TABLE>
<CAPTION>
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
- --------- ----------
<S> <C>
AXA-UAP
Financial Services, France 3.0%

Zurich Allied AG
Insurance, Switzerland 2.7%

Merita AS
Banking, Finland 2.1%

Telecom Italia SpA, di Risp
Telecommunications, Italy 1.7%

Bank Austria AG, 144A
Banking, Austria 1.7%

Newbridge Networks Corp.
Data Processing &
Reproduction, Canada 1.7%

Scor SA
Insurance, France 1.6%

Alcatel SA
Electrical & Electronics,
France 1.5%

Banque Nationale de Paris
Banking, France 1.5%

National Westminster Bank Plc.
Banking, United Kingdom 1.5%
</TABLE>

For a complete list of portfolio holdings, please see the Fund's Statement of
Investments.

Telefonica de Argentina SA and Telecomunicacoes Brasileiras SA (Telebras), Oil
and Gas (YPF Sociedad Anonima, Perez Companc SA) and consumer goods (Panamerican
Beverages Inc.). Our Asian holdings are dominated by Hong Kong, trailed by small
positions in Japan and South Korea. We remained significantly underweighted in
Japanese stocks due to high valuations and our belief the Japanese economy may
take some time to recover. During the year, many Asian countries implemented
economic and stock market reforms, which appeared to have stabilized the region,
and in the case of South Korea, led to an apparent recovery. However, we took a
cautious approach to the region and focused on higher quality stocks. At the end
of the reporting period the Fund's Asian weighting was just over 12% of total
assets.

During the 12 months under review, we continued to scour the globe looking for
out-of-favor securities trading at what we felt were depressed levels relative
to long-term "normalized" earnings. To us, "normalized" represents what a
company can earn in the middle of a typical economic cycle and requires us to
forecast earnings and cash flow for five years. We purchase stocks we feel are
cheap on a five-year basis and, on average, hold them for the same period.
Consistent with our low-turnover approach, we made only slight adjustments to
our country weightings during the reporting period. Our European exposure
declined from 59.3% of total net assets to 58.6%, while our Asian position
increased from 8.1% to 12.5% and our Latin American holdings fell from 10.5% to
9.2%.

Our security purchases in 1998 were not focused in a particular region or
sector. We invested primarily in shares of companies struggling with near-term
earnings shortfalls such as retailer Safeway Plc. and automotive component
supplier Autoliv Inc. We also bought stock in Shell Transport & Trading Co. Plc.
which owns approximately 40% of the Royal Dutch/Shell Group of companies, and
added to our holdings of Newbridge Networks Corp.

Looking forward, we remain positively disposed towards international markets in
the long term, but are concerned with short-term valuations. By purchasing
out-of-favor securities trading at low valuations and maintaining a diversified
Fund, we are attempting to reduce volatility while positioning the Fund for
strong, long-term performance.

Please remember, this discussion reflects our views, opinions and portfolio
holdings as of December 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which may affect our
strategies and the Fund's portfolio composition. Although past performance is
not predictive of future results, these insights may help you understand our
investment and management philosophy.

TI-2

PAGE

It is important to remember that investments in foreign securities involve
special risks including changes in currency values, market price swings, and
economic, social, and political developments in the countries where the
portfolios are invested. Developing markets involve similar but higher risks
related to their smaller size and lesser liquidity. Small-company securities may
have greater price swings than mid- or large-company securities.
These risks are discussed in the prospectus.

We thank you for investing in Templeton International Fund and welcome your
comments or suggestions.

Sincerely,

/s/ Peter A. Nori
Peter A. Nori
Portfolio Manager
Templeton International Fund

TI-3

PAGE

TEMPLETON
INTERNATIONAL FUND
CLASS 1

PERFORMANCE SUMMARY AS OF 12/31/98

TOTAL RETURN INDEX COMPARISON
$10,000 INVESTMENT (5/1/92 - 12/31/98)

The Morgan Stanley Capital International(R) Europe, Australasia (MSCI EAFE)
Index includes approximately 1,000 companies representing the stock markets of
21 countries, and includes reinvested dividends. The Consumer Price Index (CPI)
is a commonly used measure of inflation. The Fund's performance differs from an
index's because an index is not managed, does not contain cash (the Fund
generally carries a certain percentage of cash at any given time), and includes
no sales charges or management expenses. Of course one cannot invest directly in
an index, nor is an index representative of the Fund's portfolio. Sources for
indices are Standard & Poor's Micropal and MSCI.

The following line graph hypothetically compares the performance of Templeton
International Fund Class 1 shares to that of the MSCI EAFE Index and the
Consumer Price Index (CPI), based on a $10,000 investment from 5/1/92 -
12/31/98.

[LINE GRAPH]

<TABLE>
<CAPTION>
Total Return Index Comparison

<S> <C> <C> <C>
Templeton International
Fund-Class I MSCI EAFE Index CPI
-----------------------------------------------------------------------
5/1/92 $10,000 $10,000 $10,000
5/31/92 $9,960 $10,649 $10,013
6/30/92 $9,720 $10,147 $10,049
7/31/92 $9,570 $9,891 $10,071
8/31/92 $9,470 $10,514 $10,099
9/30/92 $9,270 $10,310 $10,127
10/31/92 $9,170 $9,773 $10,163
11/30/92 $9,250 $9,868 $10,177
12/31/92 $9,390 $9,921 $10,171
1/31/93 $9,440 $9,923 $10,221
2/28/93 $9,740 $10,226 $10,257
3/31/93 $10,040 $11,120 $10,293
4/30/93 $10,370 $12,178 $10,321
5/31/93 $10,640 $12,439 $10,336
6/30/93 $10,580 $12,248 $10,350
7/31/93 $10,770 $12,679 $10,350
8/31/93 $11,610 $13,366 $10,379
9/30/93 $11,570 $13,069 $10,400
10/31/93 $12,460 $13,475 $10,443
11/30/93 $12,510 $12,300 $10,450
12/31/93 $13,830 $13,190 $10,450
1/31/94 $14,610 $14,308 $10,479
2/28/94 $14,040 $14,272 $10,515
3/31/94 $13,328 $13,660 $10,551
4/30/94 $13,461 $14,242 $10,566
5/31/94 $13,543 $14,164 $10,572
6/30/94 $13,113 $14,367 $10,608
7/31/94 $13,880 $14,509 $10,636
8/31/94 $14,402 $14,855 $10,680
9/30/94 $14,105 $14,390 $10,708
10/31/94 $14,290 $14,873 $10,716
11/30/94 $13,666 $14,162 $10,730
12/31/94 $13,522 $14,253 $10,730
1/31/95 $13,164 $13,710 $10,772
2/28/95 $13,338 $13,674 $10,815
3/31/95 $13,338 $14,530 $10,851
4/30/95 $13,990 $15,080 $10,887
5/31/95 $14,425 $14,905 $10,909
6/30/95 $14,611 $14,647 $10,930
7/31/95 $15,335 $15,563 $10,930
8/31/95 $14,953 $14,973 $10,959
9/30/95 $15,335 $15,269 $10,980
10/31/95 $14,963 $14,863 $11,016
11/30/95 $15,232 $15,280 $11,008
12/31/95 $15,656 $15,900 $11,001
1/31/96 $16,122 $15,969 $11,066
2/29/96 $16,349 $16,027 $11,102
3/31/96 $16,391 $16,371 $11,159
4/30/96 $16,993 $16,851 $11,202
5/31/96 $17,225 $16,546 $11,223
6/30/96 $17,362 $16,642 $11,230
7/31/96 $16,740 $16,160 $11,252
8/31/96 $17,331 $16,200 $11,273
9/30/96 $17,668 $16,634 $11,309
10/31/96 $18,017 $16,468 $11,345
11/30/96 $18,967 $17,128 $11,366
12/31/96 $19,421 $16,911 $11,366
1/31/97 $19,684 $16,323 $11,402
2/28/97 $19,926 $16,594 $11,436
3/31/97 $20,080 $16,658 $11,465
4/30/97 $20,080 $16,751 $11,479
5/31/97 $20,968 $17,845 $11,472
6/30/97 $22,218 $18,833 $11,485
7/31/97 $23,183 $19,141 $11,499
8/31/97 $22,076 $17,716 $11,521
9/30/97 $23,896 $18,712 $11,550
10/31/97 $21,999 $17,278 $11,579
11/30/97 $21,889 $17,106 $11,572
12/31/97 $22,131 $17,260 $11,558
1/31/98 $22,295 $18,053 $11,579
2/28/98 $23,995 $19,215 $11,602
3/31/98 $25,610 $19,811 $11,625
4/30/98 $25,961 $19,973 $11,646
5/31/98 $25,622 $19,880 $11,667
6/30/98 $25,318 $20,035 $11,681
7/31/98 $25,540 $20,243 $11,695
8/31/98 $21,845 $17,739 $11,709
9/30/98 $21,131 $17,200 $11,723
10/31/98 $22,815 $18,998 $11,751
11/30/98 $24,113 $19,976 $11,751
12/31/98 $24,195 $20,769 $11,744
</TABLE>

EXPENSES: Performance reflects the Fund's Class 1 operating expenses, but does
not include any Contract fees, expenses, or sales charges. If they had been
included, performance would be lower. These charges and deductions, particularly
for variable life policies, can have a significant effect on Contract values and
insurance benefits. See the Contract prospectus for a complete description of
these expenses, including sales charges.

Performance

TEMPLETON INTERNATIONAL FUND - CLASS 1
PERIODS ENDED 12/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR (5/1/92)
------ ------ ---------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return 9.33% 74.95% 141.95%

Average Annual Total Return 9.33% 11.84% 14.17%

Value of $10,000 Investment $10,933 $17,495 $24,195

12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ---------------------------------------------------------------------------------
One-Year Total Return -2.22% 15.78% 24.04% 13.95% 9.33%
</TABLE>

TI-4 Past performance cannot predict or guarantee future results.

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Financial Highlights

<TABLE>
<CAPTION>
CLASS 1
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.................... $20.18 $18.40 $15.13 $13.22 $13.83
--------------------------------------------------------------------
Income from investment operations:
Net investment income................................ .60 .49 .43 .23 .12
Net realized and unrealized gains (losses)........... 1.29 2.01 3.15 1.83 (.42)
--------------------------------------------------------------------
Total from investment operations...................... 1.89 2.50 3.58 2.06 (.30)
--------------------------------------------------------------------
Less distributions from:
Net investment income................................ (.49) (.51) (.24) (.10) (.08)
Net realized gains................................... (.89) (.21) (.07) (.05) (.23)
--------------------------------------------------------------------
Total distributions................................... (1.38) (.72) (.31) (.15) (.31)
--------------------------------------------------------------------
Net asset value, end of year.......................... $20.69 $20.18 $18.40 $15.13 $13.22
--------------------------------------------------------------------
--------------------------------------------------------------------
Total Return*......................................... 9.33% 13.95% 24.04% 15.78% (2.22)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)....................... $980,470 $938,410 $682,984 $353,141 $150,090
Ratios to average net assets:
Expenses............................................. .86% .81% .65% .71% .83%
Net investment income................................ 2.81% 2.70% 3.23% 2.36% 1.89%
Portfolio turnover rate............................... 29.56% 16.63% 9.46% 5.19% 6.32%
</TABLE>

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
CLASS 2
-----------------------
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997+
-----------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $20.14 $18.40
-----------------------
Income from investment operations:
Net investment income...................................... .59 .07
Net realized and unrealized gains.......................... 1.25 1.67
-----------------------
Total from investment operations............................ 1.84 1.74
-----------------------
Less distributions from:
Net investment income...................................... (.48) --
Net realized gains......................................... (.89) --
-----------------------
Total distributions......................................... (1.37) --
-----------------------
Net asset value, end of year................................ $20.61 $20.14
-----------------------
-----------------------
Total Return*............................................... 9.08% 9.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $39,886 $17,606
Ratios to average net assets:
Expenses................................................... 1.11% 1.13%**
Net investment income...................................... 2.69% 1.14%**
Portfolio turnover rate..................................... 29.56% 16.63%
</TABLE>

*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE CONTRACT LEVEL FOR COSTS 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. TOTAL
RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
+FOR THE PERIOD MAY 1, 1997 (EFFECTIVE DATE) TO DECEMBER 31, 1997.
See Notes to Financial Statements.
TI- 6

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
---------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 89.8%
AEROSPACE & MILITARY TECHNOLOGY .1%
Hong Kong Aircraft Engineering Co. Ltd. .................... Hong Kong 1,069,000 $ 1,462,635
--------------
APPLIANCES & HOUSEHOLD DURABLES 1.3%
Sony Corp. ................................................. Japan 175,100 12,775,470
--------------
AUTOMOBILES 4.8%
Autoliv Inc. ............................................... Sweden 48,550 1,805,453
Autoliv Inc., SDR........................................... Sweden 358,450 12,868,434
Fiat SpA.................................................... Italy 2,552,500 8,863,632
Volkswagen AG............................................... Germany 156,000 12,625,360
Volvo AB, B................................................. Sweden 547,000 12,551,753
--------------
48,714,632
--------------
BANKING 12.2%
Banco Popular Espanol SA.................................... Spain 64,000 4,832,897
*Bangkok Bank Public Co. Ltd., fgn. ........................ Thailand 2,763,800 5,704,830
Bank Austria AG, 144A....................................... Austria 340,000 17,298,266
Banque Nationale de Paris................................... France 188,986 15,568,966
Credicorp Ltd. ............................................. Peru 292,160 2,629,440
Den Norske Bank............................................. Norway 1,880,000 6,489,566
Foreningssparbanken AB, A................................... Sweden 152,000 3,937,921
HSBC Holdings Plc., ADR..................................... Hong Kong 35,800 8,918,519
Merita AS................................................... Finland 3,400,000 21,621,835
National Bank of Canada..................................... Canada 440,000 7,104,167
National Westminster Bank Plc. ............................. United Kingdom 787,342 15,169,155
*Shinhan Bank Co. Ltd. ..................................... South Korea 35,343 270,400
Unibanco Uniao de Bancos Brasileiros SA, GDR................ Brazil 99,500 1,436,531
Unidanmark AS, A............................................ Denmark 150,000 13,551,732
--------------
124,534,225
--------------
BUILDING MATERIALS & COMPONENTS .5%
Caradon Plc. ............................................... United Kingdom 3,170,730 5,380,825
--------------
BUSINESS & PUBLIC SERVICES .8%
TNT Post Group NV........................................... Netherlands 263,235 8,486,022
--------------
CHEMICALS 2.5%
Akzo Nobel NV............................................... Netherlands 68,000 3,097,991
Kemira OY................................................... Finland 1,088,632 7,847,507
Rhone-Poulenc SA, A......................................... France 279,800 14,405,227
--------------
25,350,725
--------------
DATA PROCESSING & REPRODUCTION 1.7%
*Newbridge Networks Corp. .................................. Canada 564,260 17,139,398
--------------
ELECTRICAL & ELECTRONICS 3.4%
ABB AG, Br. ................................................ Switzerland 4,000 4,688,751
Alcatel SA.................................................. France 127,875 15,657,603
Philips Electronics NV...................................... Netherlands 218,000 14,636,330
--------------
34,982,684
--------------
ENERGY SOURCES 4.3%
Perez Companc SA, B......................................... Argentina 1,975,000 8,361,776
Shell Transport & Trading Co. Plc. ......................... United Kingdom 1,874,973 11,479,745
Societe Elf Aquitaine SA, Br. .............................. France 87,200 10,083,993
Total SA, B................................................. France 70,000 7,092,478
YPF Sociedad Anonima, ADR................................... Argentina 228,600 6,386,513
--------------
43,404,505
--------------
FINANCIAL SERVICES 4.0%
AXA-UAP..................................................... France 208,300 30,203,537
ING Groep NV................................................ Netherlands 177,736 10,843,913
--------------
41,047,450
--------------
</TABLE>

TI- 7

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
---------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOOD & HOUSEHOLD PRODUCTS 2.4%
Illovo Sugar Ltd. .......................................... South Africa 3,005,800 $ 3,193,447
Northern Foods Plc. ........................................ United Kingdom 2,245,907 5,249,978
Panamerican Beverages Inc., A............................... Mexico 258,900 5,647,256
Tate & Lyle Plc. ........................................... United Kingdom 1,763,000 9,826,221
--------------
23,916,902
--------------
FOREST PRODUCTS & PAPER 3.6%
*Asia Pulp & Paper Co. Ltd., ADR............................ Indonesia 369,600 3,026,100
Assidomaen AB............................................... Sweden 135,100 2,133,386
Cartiere Burgo SpA.......................................... Italy 434,800 2,812,983
Fletcher Challenge Ltd. Forestry Division................... New Zealand 4,619,765 1,537,449
Metsa Serla OY, B........................................... Finland 380,750 3,045,459
Norske Skogindustrier ASA, A................................ Norway 176,400 5,116,734
Sappi Ltd. ................................................. South Africa 412,354 1,594,671
Stora Enso OY, R............................................ Finland 400,000 4,028,913
Stora Kopparbergs Bergslags AB, B........................... Sweden 300,000 3,330,948
UPM-Kymmene Corp. .......................................... Finland 351,000 9,843,583
--------------
36,470,226
--------------
HEALTH & PERSONAL CARE 2.4%
Medeva Plc. ................................................ United Kingdom 3,190,000 5,625,821
Novartis AG................................................. Switzerland 2,606 5,122,825
Teva Pharmaceutical Industries Ltd., ADR.................... Israel 335,200 13,638,450
--------------
24,387,096
--------------
INDUSTRIAL COMPONENTS 1.1%
BTR Plc. ................................................... United Kingdom 2,474,062 5,062,967
Madeco Manufacturera de Cobre SA, ADR....................... Chile 190,000 1,591,250
SKF AB, B................................................... Sweden 193,900 2,260,548
Yamato Kogyo Co. Ltd. ...................................... Japan 420,000 2,435,106
--------------
11,349,871
--------------
INSURANCE 8.7%
Ace Ltd. ................................................... Bermuda 320,545 11,038,768
Exel Ltd. .................................................. Bermuda 170,450 12,783,750
National Mutual Asia Ltd. .................................. Hong Kong 11,930,000 8,931,427
Partnerre Ltd. ............................................. Bermuda 269,000 12,306,750
SCOR SA..................................................... France 250,000 16,536,286
Zurich Allied AG............................................ Switzerland 37,000 27,396,432
--------------
88,993,413
--------------
MERCHANDISING 2.3%
David Jones Ltd. ........................................... Australia 2,225,500 2,457,019
Safeway Plc. ............................................... United Kingdom 2,197,408 10,958,706
Storehouse.................................................. United Kingdom 3,498,781 7,974,927
Takashimaya Co. Ltd. ....................................... Japan 292,984 2,470,104
--------------
23,860,756
--------------
METALS & MINING 3.9%
Angang New Steel Company Ltd., H, 144A...................... China 22,414,000 1,533,372
Anglo American Platinum Corp. Ltd. ......................... South Africa 518,809 7,117,060
Boehler-Uddeholm AG......................................... Austria 27,210 1,267,110
Boehler-Uddeholm AG, 144A................................... Austria 33,800 1,573,991
British Steel Plc. ......................................... United Kingdom 4,090,000 6,243,366
+Chongqing Iron & Steel Ltd., H............................. China 25,564,000 1,253,906
Ispat International NV...................................... Netherlands 227,600 1,763,900
Pechiney SA, A.............................................. France 136,212 4,450,018
Pohang Iron & Steel Co. Ltd. ............................... South Korea 85,000 5,414,111
WMC Ltd. ................................................... Australia 2,870,000 8,660,750
--------------
39,277,584
--------------
</TABLE>

TI- 8

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
---------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTI-INDUSTRY 5.5%
Alfa SA de CV, A............................................ Mexico 2,550,000 $ 7,180,738
Broken Hill Proprietary Co. Ltd. ........................... Australia 1,210,543 8,923,948
Cheung Kong Holdings Ltd. .................................. Hong Kong 850,000 6,116,687
Elementis Plc. ............................................. United Kingdom 2,052,331 2,851,171
Hutchison Whampoa Ltd. ..................................... Hong Kong 1,350,000 9,540,482
Next Plc. .................................................. United Kingdom 1,515,000 12,300,474
*Saab AB, B................................................. Sweden 703,550 7,377,649
Swire Pacific Ltd., A....................................... Hong Kong 400,000 1,791,603
--------------
56,082,752
--------------
REAL ESTATE .3%
New Asia Realty and Trust Co. Ltd., A....................... Hong Kong 2,670,000 2,826,035
--------------
TELECOMMUNICATIONS 11.2%
British Telecommunications Plc. ............................ United Kingdom 995,403 15,012,608
*Cable & Wireless Optus Ltd. ............................... Australia 3,417,600 7,189,917
Compania De Telecomunicaciones De Chile SA, ADR............. Chile 422,400 8,738,400
Hong Kong Telecommunications Ltd. .......................... Hong Kong 5,427,349 9,492,475
Koninklijke KPN NV.......................................... Netherlands 263,235 13,184,894
Telecom Italia SpA, di Risp................................. Italy 2,832,750 17,802,803
*Telecomunicacoes Brasileiras SA (Telebras), ADR............ Brazil 156,170 11,351,607
Telefonica de Argentina SA, B, ADR.......................... Argentina 299,800 8,375,663
Telefonica del Peru SA, B................................... Peru 3,000,000 3,773,764
Telefonica del Peru SA, B, ADR.............................. Peru 29,000 367,938
Telefonica SA, ADR.......................................... Spain 71,400 9,665,775
Telefonos de Mexico SA (Telmex), L, ADR..................... Mexico 191,300 9,313,919
--------------
114,269,763
--------------
TRANSPORTATION 3.5%
Hitachi Zosen Corp. ........................................ Japan 3,342,000 4,621,915
Koninklijke Nedlloyd Groep NV............................... Netherlands 216,300 2,939,015
Mayne Nickless Ltd., A...................................... Australia 2,414,474 8,959,554
Peninsular & Oriental Steam Navigation Co. ................. United Kingdom 792,650 9,363,306
Qantas Airways Ltd., ADR, 144A.............................. Australia 231,900 4,724,963
Singapore Airlines Ltd., fgn. .............................. Singapore 736,500 5,401,000
--------------
36,009,753
--------------
UTILITIES ELECTRICAL & GAS 9.3%
BG Plc. .................................................... United Kingdom 2,020,588 12,766,297
*Centrica Plc. ............................................. United Kingdom 1,870,000 3,756,801
*Evn AG..................................................... Austria 48,600 6,884,558
Gener SA, ADR............................................... Chile 2,700 43,200
Hong Kong Electric Holdings Ltd. ........................... Hong Kong 4,062,365 12,322,512
Iberdrola SA, Br. .......................................... Spain 754,500 14,137,335
Korea Electric Power Corp. ................................. South Korea 269,000 6,666,279
National Grid Group Plc. ................................... United Kingdom 953,785 7,585,213
National Power Plc. ........................................ United Kingdom 516,000 4,558,622
Shandong Huaneng Power Development Co. Ltd., ADR............ China 100,000 456,250
Thames Water Group Plc. .................................... United Kingdom 747,372 14,461,253
VEBA AG..................................................... Germany 183,000 10,844,200
--------------
94,482,520
--------------
TOTAL COMMON STOCKS (COST $775,613,097)..................... 915,205,242
--------------
PREFERRED STOCKS 2.0%
Banco Bradesco SA BBD pfd. ................................. Brazil 896,769,450 4,972,775
*Banco Bradesco SA BBD pfd., rts. .......................... Brazil 37,170,324 21,165
Cia Vale do Rio Doce, A, ADR, pfd. ......................... Brazil 335,000 4,297,538
Lojas Americanas SA, pfd. .................................. Brazil 312,058,451 1,510,898
News Corp. Ltd., ADR, pfd. ................................. Australia 95,900 2,367,531
SBC Communications Inc., cvt., pfd. ........................ Mexico 120,000 5,340,000
</TABLE>

TI- 9

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
---------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS (CONT.)
*Tele Leste Celular Participacoes SA, pfd. ................. Brazil 4,866,533 $ 2,819
*Tele Sudeste Celular Participacoes SA, pfd. ............... Brazil 4,866,533 20,542
*Telecomunicacoes De Minas Gerais Celular Telemig, pfd. .... Brazil 1,705,000 33,444
*Telesp Celular Participacoes SA, pfd. ..................... Brazil 4,866,533 35,847
*Telesp Participacoes SA, pfd. ............................. Brazil 4,866,533 110,763
Usinas Siderugicas de Minas Gerais, Sponsored ADR........... Brazil 970,000 2,143,513
--------------
TOTAL PREFERRED STOCKS (COST $40,138,146)................... 20,856,835
--------------
<CAPTION>
PRINCIPAL
AMOUNT**
--------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS (COST $52,513,238) 5.1%
Federal Farm Credit Banks, 4.90%, 3/01/99................... United States $50,000,000 49,991,400
U.S. Treasury Bills, 4.60%, 1/21/99......................... United States 2,520,000 2,514,792
--------------
TOTAL SHORT TERM INVESTMENTS................................ 52,506,192
--------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST
$868,264,481)............................................. 988,568,269
--------------
(A)REPURCHASE AGREEMENT (COST $40,646,000) 4.0%
Barclays Bank Plc., 4.75%, 1/04/99 (Maturity Value
$40,667,452) Collateralized by U.S. Treasury Notes and
Bonds..................................................... United States 40,646,000 40,646,000
--------------
TOTAL INVESTMENTS (COST $908,910,481) 100.9%................ 1,029,214,269
OTHER ASSETS, LESS LIABILITIES (.9%)........................ (8,858,105)
--------------
TOTAL NET ASSETS 100.0%..................................... $1,020,356,164
--------------
--------------
</TABLE>

*NON INCOME PRODUCING.
**SECURITIES TRADED IN U.S. DOLLARS.
(A)AT DECEMBER 31, 1998, ALL REPURCHASE AGREEMENTS HELD BY THE FUND HAD BEEN
ENTERED INTO ON THAT DATE.
+THE INVESTMENT COMPANY ACT OF 1940 DEFINES "AFFILIATED COMPANIES" AS
INVESTMENTS IN PORTFOLIO COMPANIES IN WHICH THE FUND OWNS 5% OR MORE OF THE
OUTSTANDING VOTING SECURITIES. INVESTMENTS IN AFFILIATED COMPANIES AT DECEMBER
31, 1998 WERE $1,253,906.
See Notes to Financial Statements.
TI- 10

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $868,264,481).... $ 988,568,269
Repurchase agreement, at value and cost.................... 40,646,000
Cash....................................................... 127,428
Receivables:
Investment securities sold................................ 1,168,587
Fund shares sold.......................................... 990,335
Dividends and interest.................................... 5,054,569
--------------
Total assets........................................... 1,036,555,188
--------------
Liabilities:
Payables:
Investment securities purchased........................... 9,924,373
Fund shares redeemed...................................... 5,337,290
To affiliates............................................. 655,969
Accrued expenses........................................... 281,392
--------------
Total liabilities...................................... 16,199,024
--------------
Net assets, at value........................................ $1,020,356,164
==============
Net assets consist of:
Undistributed net investment income........................ $ 28,186,871
Net unrealized appreciation................................ 120,303,788
Accumulated net realized gain.............................. 95,341,431
Beneficial shares.......................................... 776,524,074
--------------
Net assets, at value........................................ $1,020,356,164
==============
CLASS 1:
Net asset value per share ($980,469,840 / 47,399,690 shares
outstanding)............................................. $20.69
==============
CLASS 2:
Net asset value per share ($39,886,324 / 1,935,511 shares
outstanding).............................................. $20.61
==============
</TABLE>

See Notes to Financial Statements.
TI- 11

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $3,722,358)
Dividends.................................................. $31,386,965
Interest................................................... 6,412,315
-----------
Total investment income............................... $ 37,799,280
Expenses:
Management fees (Note 3)................................... 7,098,752
Administrative fees (Note 3)............................... 986,271
Distribution fees - Class 2 (Note 3)....................... 74,364
Custodian fees............................................. 437,000
Reports to shareholders.................................... 217,800
Registration and filing fees............................... 6,000
Professional fees.......................................... 29,000
Trustees' fees and expenses................................ 22,000
Other...................................................... 31,763
-----------
Total expenses........................................ 8,902,950
------------
Net investment income........................... 28,896,330
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... 96,938,963
Foreign currency transactions............................. (1,060,210)
-----------
Net realized gain..................................... 95,878,753
Net unrealized depreciation on investments............ (37,191,402)
------------
Net realized and unrealized gain............................ 58,687,351
------------
Net increase in net assets resulting from operations........ $ 87,583,681
------------
------------
</TABLE>

See Notes to Financial Statements.
TI- 12

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Financial Statements (continued)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 28,896,330 $ 22,938,035
Net realized gain from investments and foreign currency 95,878,753 44,773,859
transactions.............................................
Net unrealized appreciation (depreciation) on (37,191,402) 33,944,248
investments..............................................
--------------------------------
Net increase in net assets resulting from operations... 87,583,681 101,656,142
Distributions to shareholders from:
Net investment income:
Class 1.................................................. (22,916,242) (19,635,324)
Class 2.................................................. (505,990) --
Net realized gains:
Class 1.................................................. (40,971,463) (7,892,630)
Class 2.................................................. (929,242) --
Fund share transactions (Note 2):
Class 1.................................................. 22,012,097 180,999,255
Class 2.................................................. 20,066,468 17,905,036
--------------------------------
Net increase in net assets............................. 64,339,309 273,032,479
Net assets:
Beginning of year.......................................... 956,016,855 682,984,376
--------------------------------
End of year................................................ $1,020,356,164 $956,016,855
--------------------------------
--------------------------------
Undistributed net investment income included in net assets:
End of year................................................ $ 28,186,871 $ 22,712,773
--------------------------------
--------------------------------
</TABLE>

See Notes to Financial Statements.
TI- 13

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Templeton International Fund (the Fund) is a separate, diversified series of
Templeton Variable Products Series Fund (the Trust), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks long-term capital growth through a flexible policy of investing in stocks
and debt obligations of companies and governments outside the United States. The
following summarizes the Fund's significant accounting policies.

a. SECURITY VALUATION:

b. FOREIGN CURRENCY TRANSLATION:

Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.

c. INCOME TAXES:

No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.

d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

TI- 14

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)

e. ACCOUNTING ESTIMATES:

2. BENEFICIAL SHARES

At December 31, 1998, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
-----------1998--------------------------------1997------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 1 SHARES:
Shares sold................................................. 6,749,923 $ 142,271,216 13,166,780 $ 258,892,155
Shares issued on reinvestment of distributions.............. 3,071,524 63,887,704 1,502,617 27,527,954
Shares redeemed............................................. (8,923,288) (184,146,823) (5,280,097) (105,420,854)
---------------------------------------------------------------
Net increase................................................ 898,159 $ 22,012,097 9,389,300 $ 180,999,255
---------------------------------------------------------------
---------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
-----------1998-------------------------------1997*-----------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 2 SHARES:
Shares sold................................................. 8,195,067 $ 161,830,748 1,240,830 $ 25,401,552
Shares issued on reinvestment of distributions.............. 69,167 1,435,233 -- --
Shares redeemed............................................. (7,203,053) (143,199,513) (366,500) (7,496,516)
--------------------------------------------------------------
Net increase................................................ 1,061,181 $ 20,066,468 874,330 $ 17,905,036
--------------------------------------------------------------
--------------------------------------------------------------
*Effective date of Class 2 shares was May 1, 1997.
</TABLE>

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

The Fund pays an investment management fee to TICI based on the average daily
net assets of the Fund as follows:

<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.75% First $200 million
0.675% Over $200 million, up to and including $1.3 billion
0.60% Over $1.3 billion
</TABLE>

TI- 15

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Notes to Financial Statements (continued)

The Fund reimburses Distributors up to 0.25% per year of its average daily net
assets of Class 2 shares, for costs incurred in marketing the Fund's Class 2
shares.

Legal fees of $16,119 were paid to a law firm in which a partner is an officer
of the Fund.

4. INCOME TAXES

<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 250,688,336
Unrealized depreciation..................................... (130,384,548)
-------------
Net unrealized appreciation................................. $ 120,303,788
-------------
-------------
</TABLE>

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1998 aggregated $305,520,400 and $268,478,009, respectively.

TI- 16

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund

We have audited the accompanying statement of assets and liabilities, including
the Statement of Investments, of the Templeton International Fund, series of
Templeton Variable Products Series Fund (the Trust) as of December 31, 1998, and
the related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and the
financial highlights for the periods indicated in the accompanying financial
statements. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Templeton International Fund, series of Templeton Variable Products Series Fund
as of December 31, 1998, the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles.

McGladrey & Pullen, LLP

New York, New York
January 28, 1999

TI- 17

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
Tax Designation

Under Section 852(b)(3)(C) of the Internal Revenue Code, the Templeton
International Fund hereby designates $95,248,601 as a capital gain dividend for
the fiscal year ended December 31, 1998.

Under Section 854(b)(2) of the Internal Revenue Code, the Templeton
International Fund hereby designates 1.17% of the ordinary income dividends as
income qualifying for the dividends received deduction for the fiscal year ended
December 31, 1998.

TI- 18

PAGE

TEMPLETON STOCK FUND

Investment Goal: Templeton Stock Fund seeks capital growth through a policy of
investing primarily in common stocks issued by companies, large and small, in
various nations throughout the world.

During the 12 months under review, global stock markets experienced severe
volatility and provided mixed results. Although benign inflation and low
interest rates contributed to a considerable rise in U.S. and European stock
markets, Asia's financial turmoil and Russia's economic meltdown helped lead to
disappointing performances in many emerging markets.

NORTH AMERICA

The U.S. equity market surged upward during the reporting period, as the
Standard & Poor's(R) 500 Stock Index delivered a return of more than 20% for the
fourth consecutive year.(1) Within this environment, finding U.S. stocks that
meet our value criteria proved difficult, and at the end of the reporting
period, the Fund was underweighted in domestic holdings compared to the Morgan
Stanley Capital International(R) (MSCI) World Index.(2) However, two of our
holdings, Ford Motor Co. and Home Depot Inc., rose 81.9% and 107.9%,
respectively, and we sold our American Express shares at a significant profit.

EUROPE

During the past three years, Europe continued to progress toward a single
currency, as a number of European countries tightened fiscal policy to meet
membership requirements of the European Economic Union. Italy and Spain reduced
inflation and public debt, the French and German economies slowed, and interest
rates throughout Europe fell. Although many European stock markets performed
well in 1998, our value style of investing made it difficult to find bargain
stocks there. However, we initiated a position in Firstbus Plc., a U.K.
transportation company. During the period our holdings of Astra AB, A&B and
Telefonica SA rose considerably, and we sold shares of Lex Service Plc., a major
auto retailer, at a substantial profit.

GEOGRAPHIC DISTRIBUTION
TEMPLETON STOCK FUND
BASED ON TOTAL NET ASSETS
12/31/98

[This chart shows in pie format the geographich distribution of Templeton Stock
Fund's portfolio holdings on December 31, 1998, based on total net assets.]

[Pie Chart]

Europe 49.4%
North America 28.0%
Latin America 9.4%
Asia 7.5%
Australia/New Zealand 4.9%
Middle East/Africa 0.7%
Short-Term Investments & Other Net Assets 0.1%

TOP TEN COUNTRIES
REPRESENTED IN THE FUND
TEMPLETON STOCK FUND
12/31/98

[This chart shows in table format the top 10 countries represented in Templeton
Stock Fund as of December 31, 1998, based on total net assets.]

% OF TOTAL
COUNTRY NET ASSETS
- ------- ----------
United States 21.6%
United Kingdom 10.6%
France 9.8%
Netherlands 6.3%
Sweden 5.4%
Hong Kong 4.5%
Australia 4.0%
Spain 4.0%
Brazil 3.9%
Switzerland 3.9%

(1). Source: Standard & Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.

(2). The MSCI World Index includes approximately 1,500 companies representing
the stock markets of 22 countries, including the U.S., Canada, the United
Kingdom, and Japan.

TS-1

PAGE

TOP 10 HOLDINGS
TEMPLETON STOCK FUND
12/31/98

[The following chart shows in table format the top 10 holdings of in Templeton
Stock Fund as of December 31, 1998, based on total net assets.]

<TABLE>
<CAPTION>
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
- --------- ----------
<S> <C>
Intel Corp.
Electronic Components &
Instruments, U.S. 2.7%

Zurich Allied AG
Insurance, Switzerland 2.5%

AXA-UAP
Financial Services, France 2.5%

Iberdrola SA, Br.
Utilities Electric & Gas, Spain 2.0%

Rhone-Poulenc SA, A
Chemicals, France 1.9%

ING Groep NV
Financial Services,
Netherlands 1.9%

Safeway Plc.
Merchandising,
United Kingdom 1.8%

Motorola Inc.
Electrical & Electronics, U.S. 1.8%

Fannie Mae
Financial Services, U.S. 1.8%

Antec Corp.
Electrical & Electronics, U.S. 1.7%
</TABLE>

For a complete list of portfolio holdings, please see the Fund's Statement of
Investments.

ASIA

Although many Asian stock markets rallied toward the end of the reporting
period, this region continued to be a difficult environment for investors for
many reasons, including concerns about debt repayments, currency devaluations
and corporate bankruptcies. Compared to the MSCI World Index, we were
underweighted in Asia (especially in Japan, where we felt most share prices were
overvalued), and on December 31, 1998, our Asian exposure represented only 7.5%
of total net assets.

LATIN AMERICA

Throughout the year, Asia's economic malaise and Russia's financial collapse
were among the events that negatively impacted Latin American equity markets,
where we were overweighted compared to the Morgan Stanley Capital
International(R) (MSCI) World Index.(2) Because of its heavy debt refinancing
schedule and overvalued currency, Brazil, in particular, was placed in an
extremely vulnerable position. Apparently, believing that the Brazilian
government would be forced to devalue the real (its currency) to make exports
more competitive, a number of in vestors withdrew money from Brazil, and its
stock market plummeted 38.2% during the reporting period.(3) Many investors
seemed to think that most emerging-market economies were at risk, and other
South American equity markets also plunged. Taking advantage of price declines,
we initiated a position in Perez Companc SA, B, one of Argentina's largest oil
and gas companies.

Looking forward, we are optimistic about international equity markets' long-term
prospects, but believe significant risks still exist for global investors. Many
nations now depend on exports to the U.S., and if consumer demand slackens
there, the global economy could be hurt.

Please remember, this discussion reflects our views, opinions and portfolio
holdings as of December 31, 1998, the end of the reporting period. However,
market and economic

(2). The MSCI World Index includes approximately 1,500 companies representing
the stock markets of 22 countries, including the U.S., Canada, the United
Kingdom, and Japan.

(3). Source: Bloomberg. Market return is measured in U.S. dollars and includes
reinvested dividends.

TS-2

PAGE

conditions are changing constantly, which may affect our strategies and the
Fund's portfolio composition. Although past performance is not predictive of
future results, these insights may help you understand our investment and
management philosophy.

It is important to remember that foreign securities investments involve special
risks including changes in currency values, market price swings, and economic,
social, and political developments in the countries where the portfolios are
invested. Developing markets involve similar but heightened risks related to
their smaller size and lesser liquidity. These risks are discussed in the
prospectus.

We thank you for investing in Templeton Stock Fund and welcome your comments or
suggestions.

Sincerely,

/s/ Mark R. Beveridge
Mark R. Beveridge, CFA, CIC
Portfolio Manager
Templeton Stock Fund

TS-3

PAGE

TEMPLETON STOCK FUND
CLASS 1

PERFORMANCE SUMMARY AS OF 12/31/98

TOTAL RETURN INDEX COMPARISON
$10,000 INVESTMENT (1/1/89 - 12/31/98)

The MSCI World Index includes approximately 1,500 companies representing the
stock markets of 22 countries, and includes reinvested dividends. The Consumer
Price Index (CPI) is a commonly used measure of inflation. The Fund's
performance differs from an index's because an index is not managed, does not
contain cash (the Fund generally carries a certain percentage of cash at any
given time), and includes no sales charges or management expenses. Of course,
one cannot invest directly in an index, nor is an index representative of the
Fund's portfolio. Sources for indices are Standard & Poor's Micropal and MSCI.

[The following line graph hypothetically compares the performance of Templeton
Stock Fund Class 1 shares to that of the MSCI EAFE Index and the Consumer Price
Index (CPI), based on a $10,000 investment from 1/1/89 -12/31/98.]

[LINE GRAPH]

<TABLE>
<CAPTION>
Total Return Index Comparison
<S> <C> <C> <C>
Templeton Stock Fund-Class I MSCI World Index CPI
-----------------------------------------------------------------------
1/1/89 $10,000 $10,000 $10,000
1/31/89 $10,467 $10,364 $10,051
2/28/89 $10,282 $10,300 $10,091
3/31/89 $10,478 $10,236 $10,149
4/30/89 $10,721 $10,474 $10,216
5/31/89 $10,692 $10,218 $10,274
6/30/89 $10,526 $10,105 $10,299
7/31/89 $11,219 $11,248 $10,324
8/31/89 $11,502 $10,978 $10,341
9/30/89 $11,473 $11,290 $10,373
10/31/89 $10,809 $10,915 $10,424
11/30/89 $10,985 $11,353 $10,448
12/31/89 $11,463 $11,719 $10,464
1/31/90 $11,043 $11,174 $10,572
2/28/90 $11,112 $10,697 $10,622
3/31/90 $11,309 $10,053 $10,680
4/30/90 $10,882 $9,909 $10,697
5/31/90 $11,706 $10,955 $10,722
6/30/90 $11,716 $10,879 $10,780
7/31/90 $11,716 $10,980 $10,821
8/31/90 $10,872 $9,954 $10,920
9/30/90 $9,878 $8,906 $11,012
10/31/90 $9,749 $9,739 $11,078
11/30/90 $10,047 $9,581 $11,102
12/31/90 $10,216 $9,784 $11,102
1/31/91 $10,772 $10,143 $11,169
2/28/91 $11,498 $11,084 $11,186
3/31/91 $11,418 $10,759 $11,202
4/30/91 $11,429 $10,845 $11,218
5/31/91 $11,797 $11,093 $11,251
6/30/91 $11,194 $10,410 $11,285
7/31/91 $11,868 $10,903 $11,302
8/31/91 $12,042 $10,870 $11,334
9/30/91 $12,144 $11,157 $11,385
10/31/91 $12,298 $11,340 $11,401
11/30/91 $11,960 $10,848 $11,434
12/31/91 $13,003 $11,640 $11,443
1/31/92 $13,044 $11,426 $11,459
2/29/92 $13,463 $11,230 $11,501
3/31/92 $13,187 $10,704 $11,559
4/30/92 $13,626 $10,854 $11,575
5/31/92 $14,128 $11,288 $11,592
6/30/92 $13,783 $10,912 $11,633
7/31/92 $13,814 $10,942 $11,659
8/31/92 $13,522 $11,210 $11,691
9/30/92 $13,532 $11,109 $11,724
10/31/92 $13,407 $10,811 $11,766
11/30/92 $13,647 $11,006 $11,782
12/31/92 $13,929 $11,097 $11,775
1/31/93 $14,117 $11,136 $11,833
2/28/93 $14,441 $11,402 $11,874
3/31/93 $14,907 $12,065 $11,916
4/30/93 $15,141 $12,626 $11,949
5/31/93 $15,621 $12,920 $11,965
6/30/93 $15,706 $12,813 $11,982
7/31/93 $15,940 $13,079 $11,982
8/31/93 $16,983 $13,681 $12,015
9/30/93 $17,111 $13,430 $12,040
10/31/93 $17,835 $13,802 $12,090
11/30/93 $17,388 $13,024 $12,098
12/31/93 $18,666 $13,663 $12,098
1/31/94 $19,699 $14,567 $12,132
2/28/94 $18,996 $14,381 $12,174
3/31/94 $18,115 $13,763 $12,215
4/30/94 $18,395 $14,191 $12,232
5/31/94 $18,643 $14,230 $12,239
6/30/94 $18,104 $14,193 $12,281
7/31/94 $19,020 $14,465 $12,313
8/31/94 $19,710 $14,904 $12,364
9/30/94 $19,106 $14,515 $12,397
10/31/94 $19,300 $14,930 $12,406
11/30/94 $18,481 $14,285 $12,422
12/31/94 $18,255 $14,426 $12,422
1/31/95 $18,029 $14,213 $12,471
2/28/95 $18,573 $14,423 $12,521
3/31/95 $18,902 $15,120 $12,562
4/30/95 $19,626 $15,650 $12,604
5/31/95 $20,361 $15,787 $12,629
6/30/95 $20,833 $15,785 $12,654
7/31/95 $21,864 $16,578 $12,653
8/31/95 $21,634 $16,212 $12,688
9/30/95 $22,248 $16,687 $12,711
10/31/95 $21,743 $16,428 $12,753
11/30/95 $22,259 $17,001 $12,744
12/31/95 $22,862 $17,502 $12,736
1/31/96 $23,312 $17,821 $12,811
2/29/96 $23,695 $17,932 $12,852
3/31/96 $24,197 $18,235 $12,918
4/30/96 $24,723 $18,666 $12,968
5/31/96 $25,090 $18,686 $12,993
6/30/96 $25,273 $18,784 $13,001
7/31/96 $24,197 $18,124 $13,026
8/31/96 $25,041 $18,336 $13,051
9/30/96 $25,640 $19,057 $13,092
10/31/96 $26,032 $19,193 $13,134
11/30/96 $27,414 $20,272 $13,159
12/31/96 $27,989 $19,951 $13,159
1/31/97 $29,163 $20,194 $13,200
2/28/97 $29,059 $20,430 $13,240
3/31/97 $29,208 $20,030 $13,273
4/30/97 $29,046 $20,688 $13,289
5/31/97 $30,464 $21,969 $13,281
6/30/97 $32,111 $23,067 $13,296
7/31/97 $33,637 $24,134 $13,312
8/31/97 $31,733 $22,523 $13,338
9/30/97 $34,447 $23,750 $13,371
10/31/97 $31,382 $22,504 $13,404
11/30/97 $31,058 $22,905 $13,396
12/31/97 $31,314 $23,188 $13,380
1/31/98 $30,963 $23,838 $13,404
2/28/98 $33,083 $25,455 $13,431
3/31/98 $35,275 $26,533 $13,458
4/30/98 $35,546 $26,796 $13,482
5/31/98 $35,049 $26,465 $13,507
6/30/98 $34,643 $27,096 $13,523
7/31/98 $34,582 $27,057 $13,539
8/31/98 $28,111 $23,452 $13,555
9/30/98 $27,359 $23,871 $13,572
10/31/98 $29,872 $26,034 $13,604
11/30/98 $31,859 $27,586 $13,604
12/31/98 $32,177 $28,938 $13,596
</TABLE>

EXPENSES: Performance reflects the Fund's Class 1 operating expenses, but does
NOT include any Contract fees, expenses, or sales charges. If they had been
included, performance would be lower. These charges and deductions, particularly
for variable life policies, can have a significant effect on Contract values and
insurance benefits. See the Contract prospectus for a complete description of
these expenses, including sales charges.

PERFORMANCE

TEMPLETON STOCK FUND - CLASS 1
PERIODS ENDED 12/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (8/31/88)
------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return 1.26% 69.96% 221.77% 225.64%

Average Annual Total Return 1.26% 11.18% 12.39% 12.08%

Value of $10,000 Investment $10,126 $16,996 $32,177 $32,564

12/31/94 12/31/95 12/31/96 12/31/97 12/31/98

One-Year Total Return -2.20% 25.24% 22.48% 11.88% 1.26%
</TABLE>

TS-4 Past performance cannot predict or guarantee future results.

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Highlights

<TABLE>
<CAPTION>
CLASS 1
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.................... $23.19 $22.88 $20.83 $16.94 $17.53
--------------------------------------------------------------------
Income from investment operations:
Net investment income................................ .39 .47 .41 .40 .26
Net realized and unrealized gains (losses)........... .04 2.11 3.88 3.80 (.64)
--------------------------------------------------------------------
Total from investment operations...................... .43 2.58 4.29 4.20 (.38)
--------------------------------------------------------------------
Less distributions from:
Net investment income................................ (.49) (.40) (.40) (.27) (.21)
Net realized gains................................... (2.06) (1.87) (1.84) (.04) --
--------------------------------------------------------------------
Total distributions................................... (2.55) (2.27) (2.24) (.31) (.21)
--------------------------------------------------------------------
Net asset value, end of year.......................... $21.07 $23.19 $22.88 $20.83 $16.94
--------------------------------------------------------------------
--------------------------------------------------------------------
Total Return*......................................... 1.26% 11.88% 22.48% 25.24% (2.20)%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)....................... $646,865 $732,248 $644,366 $498,777 $378,849
Ratios to average net assets:
Expenses............................................. .89% .81% .65% .66% .73%
Net investment income................................ 1.65% 2.05% 2.06% 2.18% 1.81%
Portfolio turnover rate............................... 37.27% 25.82% 23.40% 33.93% 5.10%
</TABLE>

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
CLASS 2
-----------------------
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997+
-----------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $23.15 $21.62
-----------------------
Income from investment operations:
Net investment income...................................... .40 .06
Net realized and unrealized gains (losses)................. (.03) 1.47
-----------------------
Total from investment operations............................ .37 1.53
-----------------------
Less distributions from:
Net investment income...................................... (.47) --
Net realized gains......................................... (2.06) --
-----------------------
Total distributions......................................... (2.53) --
-----------------------
Net asset value, end of year................................ $20.99 $23.15
-----------------------
-----------------------
Total Return*............................................... .99% 7.08%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $25,593 $16,414
Ratios to average net assets:
Expenses................................................... 1.14% 1.14%**
Net investment income...................................... 1.37% .75%**
Portfolio turnover rate..................................... 37.27% 25.82%
</TABLE>

*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE 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. TOTAL RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
+FOR THE PERIOD MAY 1, 1997 (EFFECTIVE DATE) TO DECEMBER 31, 1997.
See Notes to Financial Statements.
TS- 6

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS 96.6%
AEROSPACE & MILITARY TECHNOLOGY 1.0%
Boeing Co................................................... United States 202,800 $ 6,616,350
Raytheon Co., A............................................. United States 255 13,180
------------
6,629,530
------------
APPLIANCES & HOUSEHOLD DURABLES 1.1%
Sony Corp................................................... Japan 101,500 7,405,541
------------
AUTOMOBILES 2.9%
Fiat SpA.................................................... Italy 1,452,780 5,044,822
Ford Motor Co............................................... United States 130,000 7,629,375
Volvo AB, B................................................. Sweden 299,100 6,863,308
------------
19,537,505
------------
BANKING 6.3%
Australia & New Zealand Banking Group Ltd. ................. Australia 603,200 3,951,310
Banco Bradesco SA, ADR...................................... Brazil 987,100 5,473,677
Banque Nationale de Paris................................... France 83,454 6,875,073
Deutsche Bank AG, Br. ...................................... Germany 111,900 6,602,745
HSBC Holdings Plc. ......................................... Hong Kong 267,804 6,671,551
*Thai Farmers Bank Public Co. Ltd., fgn. ................... Thailand 3,165,100 5,574,966
Unidanmark AS, A............................................ Denmark 76,800 6,938,487
------------
42,087,809
------------
BROADCASTING & PUBLISHING .9%
News Corp. Ltd., ADR........................................ Australia 124,900 3,302,044
Television Broadcasts Ltd. ................................. Hong Kong 1,136,000 2,932,654
------------
6,234,698
------------
BUSINESS & PUBLIC SERVICES 1.6%
Lex Service Plc. ........................................... United Kingdom 582,100 3,699,562
Waste Management Inc. ...................................... United States 151,018 7,041,191
------------
10,740,753
------------
CHEMICALS 3.4%
Akzo Nobel NV............................................... Netherlands 216,900 9,881,681
Rhone-Poulenc SA, A......................................... France 254,302 13,092,488
------------
22,974,169
------------
DATA PROCESSING & REPRODUCTION 3.0%
*3Com Corp. ................................................ United States 239,800 10,746,037
*Newbridge Networks Corp. .................................. Canada 304,700 9,255,263
------------
20,001,300
------------
ELECTRICAL & ELECTRONICS 6.9%
ABB AB, A................................................... Sweden 621,300 6,630,123
Alcatel SA.................................................. France 52,735 6,457,116
*Antec Corp. ............................................... United States 571,700 11,505,462
Motorola Inc. .............................................. United States 195,300 11,925,506
Philips Electronics NV...................................... Netherlands 146,800 9,856,024
------------
46,374,231
------------
ELECTRONIC COMPONENTS & INSTRUMENTS 2.7%
Intel Corp. ................................................ United States 155,000 18,377,187
------------
</TABLE>

TS- 7

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
ENERGY SOURCES 6.0%
Norsk Hydro AS.............................................. Norway 205,900 $ 6,904,771
Perez Companc SA, B......................................... Argentina 461,600 1,954,327
Repsol SA................................................... Spain 117,100 6,255,997
Societe Elf Aquitaine SA, Br. .............................. France 84,420 9,762,508
Total SA, B................................................. France 92,597 9,382,031
YPF Sociedad Anonima, ADR................................... Argentina 208,300 5,819,381
------------
40,079,015
------------
FINANCIAL SERVICES 7.2%
AXA-UAP..................................................... France 113,891 16,514,215
Fannie Mae.................................................. United States 160,200 11,854,800
ICICI Ltd., GDR, 144A....................................... India 321,700 2,139,305
ING Groep NV................................................ Netherlands 207,537 12,662,112
Morgan Stanley Dean Witter & Co............................. United States 68,900 4,891,900
*Waddell & Reed Financial Inc............................... United States 7,169 169,816
------------
48,232,148
------------
FOOD & HOUSEHOLD PRODUCTS 1.2%
Archer-Daniels Midland Co................................... United States 482,370 8,290,734
------------
FOREST PRODUCTS & PAPER 2.7%
Assidomaen AB............................................... Sweden 55,400 874,830
Carter Holt Harvey Ltd. .................................... New Zealand 1,283,352 1,152,484
Fletcher Challenge Ltd. Forestry Division................... New Zealand 5,344,852 1,778,756
Georgia Pacific Corp. ...................................... United States 119,300 6,986,506
Stora Enso OY, R............................................ Finland 475,300 4,787,356
Stora Kopparbergs Bergslags AB, B........................... Sweden 240,000 2,664,759
------------
18,244,691
------------
HEALTH & PERSONAL CARE 6.1%
Astra AB, A................................................. Sweden 110,066 2,247,270
Astra AB, B................................................. Sweden 348,267 7,089,252
Medeva Plc. ................................................ United Kingdom 3,069,000 5,412,428
Novartis AG................................................. Switzerland 2,486 4,886,931
Nycomed Amersham Plc. ...................................... United Kingdom 879,923 6,121,000
*Skyepharma Plc. ........................................... United Kingdom 7,974,500 10,415,078
Teva Pharmaceutical Industries Ltd., ADR.................... Israel 119,300 4,854,019
------------
41,025,978
------------
INDUSTRIAL COMPONENTS 3.3%
BTR Plc. ................................................... United Kingdom 3,381,537 6,920,041
Goodyear Tire & Rubber Co................................... United States 110,000 5,548,125
Granges AB.................................................. Sweden 421,725 6,087,225
Yamato Kogyo Co. Ltd. ...................................... Japan 598,000 3,467,128
------------
22,022,519
------------
INSURANCE 9.4%
Ace Ltd. ................................................... Bermuda 196,100 6,753,194
Exel Ltd. .................................................. Bermuda 81,800 6,135,000
HIH Insurance Ltd. ......................................... Australia 2,558,865 3,390,077
Muenchener Rueckversicherungs-Gesellschaft.................. Germany 519 253,954
Muenchener Rueckversicherungs-Gesellschaft, Br. ............ Germany 12,976 4,269,241
*Muenchener Rueckversicherungs-Gesellschaft, wts. .......... Germany 519 24,305
National Mutual Asia Ltd. .................................. Hong Kong 3,820,000 2,859,853
Partnerre Ltd. ............................................. Bermuda 160,400 7,338,300
Reliastar Financial Corp.................................... United States 227,400 10,488,825
Torchmark Corp.............................................. United States 126,000 4,449,375
</TABLE>

TS- 8

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
INSURANCE (CONT.)
Waddell & Reed Financial Inc................................ United States 30,857 $ 717,425
Zurich Allied AG............................................ Switzerland 22,700 16,808,082
------------
63,487,631
------------
LEISURE & TOURISM .7%
Kuoni Reisen Holding AG, B.................................. Switzerland 1,185 4,702,039
------------
MACHINERY & ENGINEERING .6%
New Holland NV.............................................. Netherlands 288,200 3,944,737
------------
MERCHANDISING 3.6%
Home Depot Inc.............................................. United States 114,200 6,987,612
Safeway Plc. ............................................... United Kingdom 2,398,120 11,959,678
Storehouse.................................................. United Kingdom 2,297,000 5,235,654
------------
24,182,944
------------
METALS & MINING 1.9%
Eramet SA................................................... France 127,200 3,823,150
Ispat International NV...................................... Netherlands 253,300 1,963,075
WMC Ltd. ................................................... Australia 2,426,584 7,322,661
------------
13,108,886
------------
MULTI-INDUSTRY 4.0%
Alfa SA de CV, A............................................ Mexico 1,562,000 4,398,554
Cheung Kong Holdings Ltd. .................................. Hong Kong 905,000 6,512,472
DESC SA de CV DESC, B....................................... Mexico 4,464,500 3,828,004
DESC SA de CV DESC, C....................................... Mexico 900 850
Hicom Holdings Bhd. ........................................ Malaysia 3,806,800 1,263,535
Hutchison Whampoa Ltd. ..................................... Hong Kong 891,100 6,297,425
Inchcape Plc. .............................................. United Kingdom 1,619,100 3,461,515
La Cemento Nacional SA, GDR, 144A........................... Ecuador 2,650 286,200
La Cemento Nacional SA, GDR, Reg S.......................... Ecuador 1,000 108,000
Swire Pacific Ltd., B....................................... Hong Kong 609,000 404,834
------------
26,561,389
------------
REAL ESTATE 1.7%
National Health Investors Inc. ............................. United States 208,500 5,147,344
Summit Properties Inc. ..................................... United States 346,700 5,980,575
------------
11,127,919
------------
TELECOMMUNICATIONS 6.9%
Compania De Telecomunicaciones De Chile SA, ADR............. Chile 130,300 2,695,581
Hong Kong Telecommunications Ltd. .......................... Hong Kong 2,782,800 4,867,139
Nortel Inversora SA, ADR.................................... Argentina 143,700 2,371,050
Northern Telecom, Ltd. ..................................... Canada 133,860 6,709,733
Rostelecom, ADR............................................. Russia 253,100 1,059,856
Telecom Italia SpA.......................................... Italy 848,000 7,235,253
*Telecomunicacoes Brasileiras SA (Telebras), ADR............ Brazil 46,400 3,372,700
Telefonica SA............................................... Spain 158,100 7,040,525
*Telefonica SA, rts......................................... Spain 158,100 140,587
Telefonos de Mexico SA (Telmex), L, ADR..................... Mexico 225,800 10,993,638
------------
46,486,062
------------
TRANSPORTATION 6.2%
Air New Zealand Ltd., B..................................... New Zealand 2,099,100 3,304,377
ASG AB, B................................................... Sweden 188,900 3,577,210
British Airways Plc. ....................................... United Kingdom 1,031,000 6,981,399
Canadian National Railway Co. .............................. Canada 126,400 6,562,760
Firstbus Plc. .............................................. United Kingdom 658,400 4,365,234
</TABLE>

TS- 9

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
TRANSPORTATION (CONT.)
Helikopter Services Group ASA............................... Norway 478,600 $ 2,261,399
Koninklijke Nedlloyd Groep NV............................... Netherlands 291,500 3,960,809
Mayne Nickless Ltd., A...................................... Australia 1,011,799 3,754,552
Peninsular & Oriental Steam Navigation Co. ................ United Kingdom 581,100 6,864,337
------------
41,632,077
------------
UTILITIES ELECTRICAL & GAS 5.3%
Centrais Eletricas Brasileiras SA (Eletrobras), ADR......... Brazil 571,500 4,919,181
*Evn AG..................................................... Austria 65,520 9,281,404
Iberdrola SA, Br. .......................................... Spain 706,000 13,228,574
VEBA AG..................................................... Germany 144,000 8,533,141
------------
35,962,300
------------
TOTAL COMMON STOCKS (COST $539,788,357)..................... 649,453,792
------------
PREFERRED STOCKS 3.3%
Banco Itau SA, pfd. ........................................ Brazil 7,017,500 3,426,654
Embotelladora Andina SA, B, ADR, pfd. ...................... Chile 336,600 4,375,800
*Embratel Participacoes SA, pfd. ........................... Brazil 88,209,044 1,204,593
News Corp. Ltd., pfd. ...................................... Australia 294,809 1,795,554
News Corp. Ltd., pfd., ADR.................................. Australia 130,000 3,209,375
Petroleo Brasileiro SA, pfd. ............................... Brazil 22,799,900 2,585,215
*Tele Celular Sul Participacoes SA, pfd. ................... Brazil 88,209,044 148,931
*Tele Centro Oeste Celular Participacoes SA, pfd. .......... Brazil 88,209,044 92,717
*Tele Centro Sul Participacoes SA, pfd. .................... Brazil 88,209,044 765,829
*Tele Leste Celular Participacoes SA, pfd. ................. Brazil 88,209,044 51,104
*Tele Nordeste Celular Participacoes SA, pfd. .............. Brazil 88,209,044 80,306
*Tele Norte Celular Participacoes SA, pfd. ................. Brazil 88,209,044 40,883
*Tele Norte Leste Participacoes SA, pfd. ................... Brazil 88,209,044 1,102,385
*Tele Sudeste Celular Participacoes SA, pfd. ............... Brazil 88,209,044 372,329
Telecomunicacoes Brasileiras SA (Telebras), pfd. ........... Brazil 88,209,044 10,221
*Telemig Celular Participacoes SA, pfd. .................... Brazil 88,209,044 97,828
*Telesp Celular Participacoes SA, pfd. ..................... Brazil 88,209,044 649,750
*Telesp Participacoes SA, pfd. ............................. Brazil 88,209,044 2,007,655
------------
TOTAL PREFERRED STOCKS (COST $24,401,180)................... 22,017,129
------------
TOTAL INVESTMENTS (COST $564,189,537) 99.9%................. 671,470,921
OTHER ASSETS, LESS LIABILITIES .1%.......................... 987,091
------------
TOTAL NET ASSETS 100.0%..................................... $672,458,012
------------
------------
</TABLE>

*NON INCOME PRODUCING
See Notes to Financial Statements.
TS- 10

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $564,189,537).... $671,470,921
Receivables:
Investment securities sold................................ 2,538,017
Dividends................................................. 2,476,926
Other assets............................................... 90,682
------------
Total assets........................................... 676,576,546
------------
Liabilities:
Payables:
Investment securities purchased........................... 473,911
Fund shares redeemed...................................... 501,264
To affiliates............................................. 456,315
Funds advanced by custodian................................ 2,382,010
Accrued expenses........................................... 305,034
------------
Total liabilities...................................... 4,118,534
------------
Net assets, at value........................................ $672,458,012
============
Net assets consist of:
Undistributed net investment income........................ $ 11,403,074
Net unrealized appreciation................................ 107,281,384
Accumulated net realized gain.............................. 47,461,381
Beneficial shares.......................................... 506,312,173
------------
Net assets, at value........................................ $672,458,012
============
CLASS 1:
Net asset value per share ($646,865,387 / 30,699,638 shares
outstanding).............................................. $21.07
============
CLASS 2:
Net asset value per share ($25,592,625 / 1,219,406 shares
outstanding).............................................. $20.99
============
</TABLE>

See Notes to Financial Statements.
TS- 11

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $2,092,812)
Dividends.................................................. $18,051,815
Interest................................................... 569,286
-----------
Total investment income............................... $ 18,621,101
Expenses:
Management fees (Note 4)................................... 5,100,755
Administrative fees (Note 4)............................... 702,686
Distribution fees - Class 2 (Note 4)....................... 53,988
Custodian fees............................................. 445,000
Reports to shareholders.................................... 204,000
Professional fees.......................................... 53,600
Trustees' fees and expenses................................ 18,000
Other...................................................... 13,396
-----------
Total expenses........................................ 6,591,425
------------
Net investment income........................... 12,029,676
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... 47,606,776
Foreign currency transactions............................. (37,819)
-----------
Net realized gain..................................... 47,568,957
Net unrealized depreciation on investments............ (47,396,839)
------------
Net realized and unrealized gain............................ 172,118
------------
Net increase in net assets resulting from operations........ $ 12,201,794
------------
------------
</TABLE>

See Notes to Financial Statements.
TS- 12

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Statements (continued)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 12,029,676 $ 15,090,974
Net realized gain from investments and foreign currency
transactions............................................. 47,568,957 64,659,885
Net unrealized depreciation on investments................ (47,396,839) (2,630,723)
------------------------------
Net increase in net assets resulting from operations... 12,201,794 77,120,136
Distributions to shareholders from:
Net investment income:
Class 1.................................................. (15,083,722) (11,299,102)
Class 2.................................................. (357,002) --
Net realized gains:
Class 1.................................................. (63,413,199) (53,491,951)
Class 2.................................................. (1,560,086) --
Fund share transactions (Note 3):
Class 1.................................................. (19,220,136) 75,008,241
Class 2.................................................. 11,228,384 16,958,890
------------------------------
Net increase (decrease) in net assets.................. (76,203,967) 104,296,214
Net assets:
Beginning of year.......................................... 748,661,979 644,365,765
------------------------------
End of year................................................ $672,458,012 $748,661,979
------------------------------
------------------------------
Undistributed net investment income included in net assets:
End of year................................................ $ 11,403,074 $ 15,048,456
------------------------------
------------------------------
</TABLE>

See Notes to Financial Statements.
TS- 13

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Templeton Stock Fund (the Fund) is a separate, diversified series of Templeton
Variable Products Series Fund (the Trust), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
capital growth through a policy of investing primarily in common stocks issued
by companies, large and small, in various nations throughout the world. The
following summarizes the Fund's significant accounting policies.

a. SECURITY VALUATION:

b. FOREIGN CURRENCY TRANSLATION:

Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.

c. INCOME TAXES:

No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.

d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

TS- 14

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)

e. ACCOUNTING ESTIMATES:

2. MERGER OF TEMPLETON VARIABLE ANNUITY FUND

On May 8, 1998, the Fund acquired all of the net assets of Templeton Variable
Annuity Fund (Variable Annuity Fund) pursuant to a plan of reorganization
approved by Variable Annuity Fund's shareholders. The merger was accomplished by
a tax-free exchange of 699,965 Class 1 shares of the Fund (valued at $23.84 per
share) for the net assets of the Variable Annuity Fund which aggregated
$16,687,175, including $4,980,981 of unrealized appreciation. The combined net
assets of the Fund immediately after the merger were $839,071,006.

3. BENEFICIAL SHARES

At December 31, 1998, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 1 SHARES:
Shares sold................................................. 2,562,174 $ 50,875,104 4,159,792 $ 96,416,712
Shares issued on reinvestment of distributions.............. 3,523,201 78,496,920 2,970,704 64,791,053
Shares redeemed............................................. (6,963,562) (148,592,160) (3,715,179) (86,199,524)
--------------------------------------------------------------
Net increase (decrease)..................................... (878,187) $ (19,220,136) 3,415,317 $ 75,008,241
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997*
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 2 SHARES:
Shares sold................................................. 641,741 $ 14,204,072 780,245 $ 18,686,201
Shares issued on reinvestment of distributions.............. 86,200 1,917,088 -- --
Shares redeemed............................................. (217,530) (4,892,776) (71,250) (1,727,311)
--------------------------------------------------------------
Net increase (decrease)..................................... 510,411 $ 11,228,384 708,995 $ 16,958,890
--------------------------------------------------------------
--------------------------------------------------------------
*Effective date of Class 2 shares was May 1, 1997.
</TABLE>

4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

TS- 15

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Notes to Financial Statements (continued)

4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
The Fund pays an investment management fee to TICI based on the average daily
net assets of the Fund as follows:

<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.75% First $200 million
0.675% Over $200 million, up to and including $1.3 billion
0.60% Over $1.3 billion
</TABLE>

The Fund pays its allocated share of an administrative fee to FT Services based
on the Trust's aggregate average daily net assets as follows:

The Fund reimburses Distributors up to .25% per year of its average daily net
assets of Class 2 shares, for costs incurred in marketing the Fund's Class 2
shares.

Legal fees of $19,008 were paid to a law firm in which a partner is an officer
of the Fund.

5. INCOME TAXES

<TABLE>
<S> <C>
Unrealized appreciation..................................... $188,552,791
Unrealized depreciation..................................... (81,271,407)
------------
Net unrealized appreciation................................. $107,281,384
------------
------------
</TABLE>

6. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1998 aggregated $278,627,327 and $334,663,934, respectively.

TS- 16

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund

We have audited the accompanying statement of assets and liabilities, including
the Statement of Investments, of the Templeton Stock Fund, series of Templeton
Variable Products Series Fund (the Trust) as of December 31, 1998, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and the
financial highlights for the periods indicated in the accompanying financial
statements. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Templeton Stock Fund, series of Templeton Variable Products Series Fund as of
December 31, 1998, the results of its operations, the changes in its net assets
and the financial highlights for the periods indicated, in conformity with
generally accepted accounting principles.

McGladrey & Pullen, LLP

New York, New York
January 28, 1999

TS- 17

PAGE

TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Tax Designation

Under Section 852(b)(3)(C) of the Internal Revenue Code, the Templeton Stock
Fund hereby designates $51,870,821 as a capital gain dividend for the fiscal
year ended December 31, 1998.

Under Section 854(b)(2) of the Internal Revenue Code, the Templeton Stock Fund
hereby designates 9.97% of the ordinary income dividends as income qualifying
for the dividends received deduction for the fiscal year ended December 31,
1998.

TS- 18

PAGE

SUPPLEMENT DATED NOVEMBER 17, 1998
TO THE PROSPECTUS DATED MAY 1, 1998
OF
TEMPLETON VARIABLE PRODUCTS SERIES FUND

I. The section "Foreign Securities" under "Explanation of Risk Factors" is
amended by deleting the fourth paragraph and adding the following text at
the end of the section:

Euro. On January 1, 1999, the European Monetary Union ("EMU") plans to
introduce a new single currency, the Euro, which will replace the national
currency for participating member countries. If a Fund holds investments in
countries with currencies replaced by the Euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.

The process to establish the Euro may result in market volatility. It is not
possible to predict the impact of the Euro on the business or financial
condition of European issuers or on the Funds. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets. To
the extent a Fund holds non-U.S. dollar (Euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.

Franklin Resources, Inc. ("Resources"), the parent company of the Funds'
Investment Managers, has created an interdepartmental team to handle all
Euro-related changes to enable the Franklin Templeton Group of Funds to
process transactions accurately and completely with minimal disruption to
business activities. While there can be no assurance that the Funds will not
be adversely affected, the Investment Managers and their affiliated service
providers are taking steps that they believe are reasonably designed to
address the Euro issue.

II. The section "Year 2000" under "Other Information" is replaced with the
following:

Year 2000 Problem. The Funds' business operations depend upon a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market
links. Many of the systems currently use a two digit date field to represent
the date, and unless these systems are changed or modified, they may not be
able to distinguish the Year 1900 from the Year 2000 (commonly referred to
as the Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.

When the Year 2000 arrives, the Funds' operations could be adversely
affected if the computer systems used by the Investment Managers, their
service providers and other third parties they do business with are not Year
2000 ready. For example, the Funds' portfolio holdings and operational areas
could be impacted, including securities trade processing, interest and
dividend payments, securities pricing, shareholder account services,
reporting, custody functions and others. The Funds could experience
difficulties in effecting transactions if any of their foreign
subcustodians, or if foreign broker/dealers or foreign markets are not ready
for Year 2000.

In evaluating current and potential portfolio positions, Year 2000 is only
one of the factors that the Funds' Investment Managers take into
consideration. The Investment Managers will rely upon public filings and
other statements made by companies regarding their Year 2000 readiness.
Issuers in countries outside of the U.S., and in particular in emerging
markets, may not be required to make the same level of disclosure regarding
Year 2000 readiness that is required in the U.S. The Investment Managers, of
course, cannot audit each company and their major suppliers to verify their
Year 2000 readiness. If a company any Fund is invested in is adversely
affected by Year 2000 problems, it is likely that the price of its security
will also be adversely affected. A decrease in the value of one or more of a
Fund's holdings will have a similar impact on the price of the Fund's
shares.

The Investment Managers and their affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the Funds' ability to reduce
the effects of the Year 2000 problem is also very much dependent upon the
efforts of third parties over which the Funds and their Investment Managers
may have no control.

Please keep this supplement with your prospectus for future reference.

PS- 1

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[FRANKLIN TEMPLETON LOGO]
100 Fountain Parkway
St. Petersburg, Florida 33716-1205

TEMPLETON VARIABLE PRODUCTS SERIES FUND

INVESTMENT MANAGERS

Templeton Investment Counsel, Inc. ("TICI")
Templeton Asset Management Ltd., Singapore
Franklin Advisers, Inc.
Franklin Mutual Advisers, Inc.

DISTRIBUTOR

Franklin Templeton Distributors, Inc.

Templeton Variable Products Series Fund Shares are currently sold only to
Insurance Company Separate Accounts ("Separate Accounts") to serve as the
investment vehicles for both Variable Annuity and Variable Life Insurance
contracts (the "Contracts"). This report must be preceded or accompanied by the
current prospectus for the applicable contract, which includes the Separate
Account and the Templeton Variable Product Series Fund prospectuses. The
prospectuses contain more detailed information, including sales charges, risks
and advantages. Please read the prospectuses carefully before investing or
sending money. These reports and prospectuses do not constitute an offering in
any jurisdiction in which such offering may not lawfully be made.

To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.

[RECYCLE LOGO] Printed on recycled paper

OL2510 A 02/99