TEMPLETON VARIABLE PRODUCTS SERIES FUND, 485BPOS, 1999-04-30

TEMPLETON VARIABLE PRODUCTS SERIES FUND
485BPOS, 1999-04-30

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999.

File Nos.
33-20313
811-5479

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No.

Post-Effective Amendment No. 22 (X)

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 25

TEMPLETON VARIABLE PRODUCTS SERIES FUND
(Exact Name of Registrant as Specified in Charter)
500 East Broward Blvd., Suite 2100
FORT LAUDERDALE, FLORIDA 33396-3091
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code:(954)527-7500
Barbara J. Green
Templeton Variable Product Series Fund
500 East Broward Blvd., Suite 2100
Fort Lauderdale, FLORIDA 33396-3091
(Name and Address of Agent for Service of Process)

Approximate Date of Proposed Public Offering:

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

[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on May 1, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on May 1, 1999 pursuant to paragraph (a)(2)of Rule 485

If appropriate, check the following box:

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

Title of Securities Being Registered:

Shares of Beneficial Interest:

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

Prospectus

Templeton Variable Products Series Fund

Class 1 Shares

May 1, 1999

[Insert Franklin Templeton Ben Head]

As with all fund prospectuses, the SEC has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.

Contents

TEMPLETON VARIABLE
PRODUCTS SERIES FUND

[Begin callout]
INFORMATION ABOUT EACH FUND i Overview
YOU SHOULD KNOW BEFORE
INVESTING INDIVIDUAL FUND DESCRIPTIONS
[End callout] FG-1 Franklin Growth Investments Fund
FS-1 Franklin Small Cap Investments Fund
MS-1 Mutual Shares Investments Fund
TA-1 Templeton Asset Allocation Fund
TB-1 Templeton Bond Fund
TD-1 Templeton Developing Markets Fund
TI-1 Templeton International Fund
TS-1 Templeton Stock Fund
ADDITIONAL INFORMATION, ALL FUNDS
1 Important Recent Developments
2 Distributions and Taxes

FUND ACCOUNT INFORMATION
[Begin callout]
INFORMATION ABOUT FUND 3 Buying Shares
ACCOUNT TRANSACTIONS 3 Selling Shares
AND SERVICES 3 Exchanging Shares
[End callout] 3 Fund Account Policies
4 Questions

FOR MORE INFORMATION

[Begin callout]
WHERE TO LEARN MORE ABOUT Back Cover
EACH FUND
[End callout]

<PAGE>

Templeton Variable Products Series Fund

OVERVIEW
[Insert graphic of globe]

TEMPLETON VARIABLE PRODUCTS SERIES FUND (THE TRUST) CURRENTLY CONSISTS OF EIGHT
SEPARATE FUNDS, OFFERING A WIDE VARIETY OF INVESTMENT CHOICES. EACH FUND HAS
TWO CLASSES OF SHARES, CLASS 1 AND CLASS 2. THE FUNDS ARE ONLY AVAILABLE AS
INVESTMENT OPTIONS IN VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE CONTRACTS.
THE ACCOMPANYING CONTRACT PROSPECTUS, OR DISCLOSURE DOCUMENT, INDICATES WHICH
FUNDS AND CLASSES ARE AVAILABLE TO YOU.

INVESTMENT CONSIDERATIONS

/bullet/ Each fund has its own investment strategy and risk profile. Generally,
the higher the expected rate of return, the greater the risk of loss.

/bullet/ No single fund can be a complete investment program; consider
diversifying your fund choices.

/bullet/ You should evaluate each fund in relation to your personal financial
situation, investment goals, and comfort with risk. Your investment
representative can help you determine which funds are right for you.

/bullet/ All securities markets, interest rates, and currency valuations move
up and down, sometimes dramatically, and mixed with the good years can
be some bad years. Since no one can predict exactly how financial
markets will perform, you may want to exercise patience and focus not
on short-term market movements, but on your long-term investment
goals.

RISKS

/bullet/ There can be no assurance that any fund will achieve its investment
goal.

/bullet/ Because you could lose money by investing in a fund, take the time to
read each fund description and consider all risks before investing.

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

MORE DETAILED INFORMATION ABOUT EACH FUND,
ITS INVESTMENT POLICIES, AND ITS PARTICULAR
RISKS CAN BE FOUND IN THE TRUST'S STATEMENT OF
ADDITIONAL INFORMATION (SAI).

MANAGEMENT

The funds' investment managers and their affiliates manage over $211 billion in
assets. Franklin Templeton is one of the largest mutual fund organizations in
the United States, and offers money management expertise spanning a variety of
investment objectives. In 1992, Franklin, recognized as a leader in managing
domestic mutual funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Advisers team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.

Franklin Growth Investments Fund

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOAL The fund's investment goal is capital appreciation.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities of companies believed to be
globally competitive and to offer favorable opportunities for long-term capital
appreciation. Following this policy, the fund will typically invest
predominantly in established, large- to medium-cap companies with market
capitalization values (share price times the number of common stock shares
outstanding) greater than $1.5 billion. The fund may also invest, to a lesser
extent, in small-cap companies, and in new and emerging industries where growth
is expected to be above average. Equities represent ownership interests in
individual companies and give shareholders a claim in the company's earnings and
assets. They include common and preferred stocks, and securities convertible
into common stock.

[Begin callout]
The fund invests primarily in the common stocks of established companies.
[End callout]

The fund generally invests less than 15% of its total assets in foreign
securities, including Depositary Receipts and emerging markets.

PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined long-term growth strategy. As a "bottom-up" investor
focusing primarily on individual securities, the manager chooses companies that
it believes are leaders in their industries, and are positioned for rapid
growth in revenues, earnings or assets. The manager relies on a team of
analysts to provide in-depth industry expertise and uses both qualitative and
quantitative analysis, to evaluate companies for historical and potential
growth in revenues and earnings, strength and quality of management, and
strategic positioning in its industry. The manager believes such factors point
to steady growth over time potential. The manager diversifies the fund's assets
across many industries, and from time to time may invest substantially in
certain sectors, including technology and biotechnology.

TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goal.

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

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.

[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions, the
value of your investment in the fund will go up and down. This means you could
lose money over short or even extended periods.
[End Callout]

FG-1 Franklin Growth Investments Fund - Class 1

FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.

CURRENCY Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency
by a country's government, will increase or decrease the fund's returns from
its foreign portfolio holdings. Currency markets generally are not as regulated
as securities markets.

COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country. The political, economic, and social structures of some
countries the fund invests in may be less stable and more volatile than those
in the U.S. The risks of investing in these countries include the possibility
of currency devaluations, the imposition of exchange controls, foreign
ownership limitations, expropriation, restrictions on removal of currency or
other assets, nationalization of assets, punitive taxes, and certain custody
and settlement risks. Non-U.S. companies are not subject to the same
disclosure, accounting, auditing and financial reporting standards and
practices as U.S. companies and their stocks may not be as liquid as stocks of
similar U.S. companies, or may become illiquid. Non-U.S. stock exchanges,
trading systems, brokers and companies generally have less government
supervision and regulation than in the U.S.

See "Important Recent Developments" in this prospectus for Year 2000 and euro
discussion, and any potential impact on the fund's portfolio and operations.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
- --------------------------------------------------------------------------------

[Insert graphic of bull and bear]PAST PERFORMANCE

Because the fund started on May 1, 1998, performance for a full calendar year
is not yet available.

FG-2 Franklin Growth Investments Fund - Class 1

[Insert graphic of percentage sign]FEES AND EXPENSES

FRANKLIN GROWTH INVESTMENTS FUND - CLASS 1

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year
ended December 31, 1998. THE TABLE AND THE EXAMPLE DO NOT INCLUDE ANY FEES OR
SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS
AN INVESTMENT OPTION. IF THEY WERE INCLUDED, YOUR COSTS WOULD BE HIGHER.
Investors should consult the contract prospectus or disclosure document for
more information.

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS 1
-------
Maximum sales charge (load) as a percentage of
offering price

Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)(1)
CLASS 1
-------

Management fees 0.60%
Other expenses 4.08%
-----
Total annual fund operating expenses 4.68%
Fee waiver/expense reduction (3.68%)
-----
Net expenses 1.00%
=====

1. Figures reflect expenses from the fund's inception on May 1, 1998 and are
annualized. The manager agreed in advance to limit management fees and make
certain payments to reduce fund expenses as necessary so that Total Fund
Operating Expenses did not exceed 1.00% of the fund's class 1 net assets in
1998. The manager is contractually obligated to continue this arrangement
through 1999.

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. The example assumes you invest $10,000 for
the periods shown and then sell all of your shares at the end of those periods.
The example also assumes your investment has a 5% return each year and the
fund's operating expenses are BEFORE WAIVER as shown above and remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 1 $469 $1,411 $2,359 $4,756

FG-3 Franklin Growth Investments Fund - Class 1

[Insert graphic of briefcase]MANAGEMENT

Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.

MANAGEMENT TEAM The team responsible for the fund's management is:

<TABLE>
<S> <C>
CONRAD B. HERRMANN, CFA Mr. Herrmann has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, ADVISERS 1998 and has been with the Franklin Templeton Group since 1989.

VIVIAN J. PALMIERI Mr. Palmieri has been a manager of the fund since its inception in 1998
PORTFOLIO MANAGER, ADVISERS and has been with the Franklin Templeton Group since 1965.
</TABLE>

The fund pays the manager a fee for managing its assets and making its
investment decisions. The fee is an amount equal to an annual rate of: 0.60% of
the value of net assets up to and including $200 million; 0.50% of the value of
net assets over $200 million up to and including $1.3 billion; and 0.40% of the
value of net assets over $1.3 billion. The manager agreed in advance to limit
management fees and make certain payments to reduce fund expenses as necessary
so that Total Fund Operating Expenses did not exceed 1.00% of the fund's class
1 net assets in 1998. The manager is contractually obligated to continue this
arrangement through 1999.

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

[Insert graphic of dollar bill]FINANCIAL HIGHLIGHTS

The financial highlights table provides further details to help you understand
the financial performance of the Franklin Growth Investments Fund - Class 1
since its inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and the expense ratio. This information has
been audited by McGladrey & Pullen, LLP, independent auditors. Their report -
along with the fund's financial statements - are included in the fund's Annual
Report (available upon request).

PERIOD ENDED
DECEMBER 31, 1998+
------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of period $ 10.00
Income from investment operations:
Net investment income .08
Net realized and unrealized gains 1.26
=======
Total from investment operations 1.34
=======
Net asset value, end of period $ 11.34
=======
Total Return* 13.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 284
Ratios to average net assets:
Expenses 1.00%**
Expenses, excluding waiver and payments by affiliate 4.68%**
Net investment income 1.18%**
Portfolio turnover rate 4.14%

*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 insurance
contracts for which the fund serves as an underlying investment vehicle. If
they had been included, total returns would be lower. Total return is not
annualized.

**Annualized.

+For the period May 1, 1998 (commencement of operations) to December 31, 1998.

FG-4 Franklin Growth Investments Fund - Class 1

Franklin Small Cap Investments Fund

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOAL The fund's investment goal is long-term capital growth.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities of U.S. small capitalization
(small cap) growth companies. Small cap companies are generally those with
market cap values (share price times the number of common stock shares
outstanding) of less than $1.5 billion, at the time of purchase. Equities
represent ownership interests in individual companies and give shareholders a
claim in the company's earnings and assets. They include common and preferred
stocks, and securities convertible into common stock.

[Begin callout]
The fund invests primarily in common stocks of small cap U.S. companies.
[End callout]

PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined "growth at a reasonable price" strategy. As a "bottom-up"
investor focusing primarily on individual securities, the manager chooses small
cap companies that it believes are positioned for rapid growth in revenues,
earnings or assets, and are selling at reasonable prices. The manager relies on
a team of analysts to provide in-depth industry expertise, and uses both
qualitative and quantitative analysis, to evaluate companies for distinct and
sustainable competitive advantages. Such advantages as a particular marketing or
product niche, proven technology, and industry leadership, are all factors the
manager believes point to strong long-term growth potential. The manager
diversifies the fund's assets across many industries, and from time to time may
invest substantially in certain sectors, including technology and biotechnology.

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

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]

SMALLER COMPANIES While smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also have more
risk. Historically, smaller company securities have been more volatile in price
and fluctuated independently from larger company securities, especially over
the shorter-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, and their growth prospects are less
certain. For example, smaller companies may lack depth of management or may
have limited financial resources for growth or development. They may have
limited product lines or market share. Smaller companies may be in new
industries, or their new products or services may not find an established
market or may become quickly obsolete. Smaller companies may also suffer
significant losses, their securities can be less liquid, and investments in
these companies may be speculative. Technology and biotechnology industry
stocks, in particular, can be subject to abrupt or erratic price movements.

FS-1 Franklin Small Cap Investments Fund - Class 1
<PAGE>

See "Important Recent Developments" in this prospectus for Year 2000
discussion, and any potential impact on the fund's portfolio and operations.
More detailed information about the fund, its policies, and risks can be found
in the SAI.

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

[Insert graphic of bull and bear]PAST PERFORMANCE

Because the fund started on May 1, 1998, performance for a full calendar year
is not yet available.

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

[Insert graphic of percentage sign]FEES AND EXPENSES

FRANKLIN SMALL CAP INVESTMENTS FUND - CLASS 1

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS 1
-------
Maximum sales charge (load) as a percentage of
offering price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)(1)

CLASS 1
-------
Management fees 0.75%
Other expenses 1.00%
-----
Total annual fund operating expenses 1.75%
Fee waiver/expense reductions (0.75%)
-----
Net expenses 1.00%
=====

EXAMPLE

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 1 $178 $551 $949 $2,062

FS-2 Franklin Small Cap Investments Fund - Class 1

[Insert graphic of briefcase]MANAGEMENT

Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.

MANAGEMENT TEAM The team responsible for the fund's management is:

<TABLE>
<S> <C>
EDWARD B. JAMIESON Mr. Jamieson has been a manager of the fund since its inception in 1998
EXECUTIVE VICE PRESIDENT, and has been with the Franklin Templeton Group since 1987.
ADVISERS

MICHAEL MCCARTHY Mr. McCarthy has been a manager of the fund since its inception in
VICE PRESIDENT, 1998 and has been with the Franklin Templeton Group since 1992.
ADVISERS

AIDAN O'CONNELL Mr. O'Connell has been a manager of the fund since September 1998.
PORTFOLIO MANAGER, Before joining Franklin Templeton in May 1998, Mr. O'Connell worked
ADVISERS at Hambrecht & Quist.
</TABLE>

The fund pays the manager a fee for managing its assets and making its
investment decisions. The fee is an amount equal to an annual rate of: 0.75% of
the value of net assets up to and including $200 million; 0.65% of the value of
net assets over $200 million up to and including $1.3 billion; and 0.55% of the
value of net assets over $1.3 billion. The manager agreed in advance to limit
management fees and make certain payments to reduce fund expenses as necessary
so that Total Fund Operating Expenses did not exceed 1.00% of the fund's class
1 net assets in 1998. The manager is contractually obligated to continue this
arrangement through 1999.

FS-3 Franklin Small Cap Investments Fund - Class 1
<PAGE>

[Insert graphic of dollar bill]FINANCIAL HIGHLIGHTS

The financial highlights table provides further details to help you understand
the financial performance of the Franklin Small Cap Investments Fund - Class 1
since its inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and the expense ratio. This information has
been audited by McGladrey & Pullen, LLP, independent auditors. Their report -
along with the fund's financial statements - are included in the fund's Annual
Report (available upon request).

PERIOD ENDED
DECEMBER 31, 1998+
------------------
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%

**Annualized.

+For the period May 1, 1998 (commencement of operations) to December 31, 1998.

FS-4 Franklin Small Cap Investments Fund - Class 1

Mutual Shares Investments Fund

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOALS The fund's principal goal is capital appreciation. Its secondary goal is
income.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities of companies that the
manager believes are available at market prices less than their actual value
based on certain recognized or objective criteria (intrinsic value). Following
this value-oriented strategy, the fund will primarily invest in:

/bullet/ UNDERVALUED STOCKS Stocks trading at a discount to asset value.

/bullet/ REORGANIZING COMPANIES Securities of companies in the midst of change
such as mergers, consolidations, liquidations, reorganizations,
financial restructurings, or companies with takeover, tender or
exchange offers or likely to receive such offers (Reorganizing
Companies). The fund may participate in such transactions.

/bullet/ DISTRESSED COMPANIES Securities of companies that are distressed or
even in bankruptcy.

The fund invests primarily in large- to medium-cap companies with market
capitalization values (share price times the number of common stock shares
outstanding) greater than $1.5 billion, but may invest a small portion in
small-cap companies, which have more risk. Equities represent ownership
interests in individual companies and give shareholders a claim in the company's
earnings and assets. They include common and preferred stocks, and securities
convertible into common stock.

[Begin callout]
The fund invests primarily in common stocks of companies the manager believes
are significantly undervalued.
[End callout]

While the fund generally purchases securities for investment purposes, the
manager may use the fund's ownership in a company to seek to influence or
control management, or invest in other companies that do so, when the manager
believes the fund may benefit.

The fund may invest in debt securities rated in any rating category established
by an independent rating agency, including high yield, lower rated or defaulted
debt securities ("junk bonds"), or if unrated, determined by the manager to be
comparable. A debt security obligates the issuer to the bondholders, both to
repay a loan of money at a future date and generally to pay interest. Common
debt securities are bonds, including bonds convertible into common stock and
unsecured bonds; notes; and short-term investments, including cash or cash
equivalents.

The fund typically invests in unrated and lower rated debt securities of
Reorganizing Companies or Distressed Companies. Such debt securities are
primarily secured or unsecured, indebtedness or participations in the
indebtedness, including loan participations and trade claims. Indebtedness
represents a specific commercial loan or portion of a loan which has been given
to a company by a financial institution such as a bank or insurance company. By
purchasing direct indebtedness of companies, a fund steps into the shoes of a
financial institution. Participation interests in indebtedness represent
fractional interests in a company's indebtedness.

The fund currently intends to invest up to approximately 20% of its total
assets in foreign equity and debt securities, including American, European and
Global Depositary Receipts. Depositary receipts are certificates typically
issued by a bank or trust company that give their holders the right to receive
securities issued by a foreign or domestic company. The fund generally seeks to
hedge (protect) against currency risks, largely using forward foreign currency
exchange contracts, where available, and in the manager's opinion, it is
economical to do so (Hedging Instruments).

PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined value strategy. In choosing equity investments, the
manager focuses on the market price of a company's securities relative to its
evaluation of the company's asset value, including an analysis of book value,
cash flow potential, long-term earnings, and multiples of earnings of
comparable securities. Similarly, debt securities are generally selected based
on the manager's own analysis of the security's intrinsic value rather than the
coupon rate or rating. Thus, each security is examined separately and there are
no set criteria as to asset size, earnings or industry type.

TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain

MS-1 Mutual Shares Investments Fund - Class 1
<PAGE>

liquidity, it may invest all or substantially all of the fund's assets in U.S.
or non-U.S. currency short-term investments, including cash or cash
equivalents. Under these circumstances, the fund may temporarily be unable to
pursue its investment goals.

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

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often out
of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.

[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]

REORGANIZING OR DISTRESSED COMPANIES The fund's bargain- driven focus may result
in the fund choosing securities that are not widely followed by other investors,
including companies reporting poor earnings, companies whose share prices have
declined sharply, turnarounds, cyclical companies, or companies emerging from
bankruptcy, which may have higher risk. There can be no assurance that any
merger or other restructuring, or tender or exchange offer proposed at the time
the fund invests in a Reorganizing or Distressed Company will be completed on
the terms contemplated, and therefore, benefit the fund.

FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.

COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country. The political, economic, and social structures of some
countries the fund invests in may be less stable and more volatile than those
in the U.S. The risks of investing in these countries include the possibility
of currency devaluations by a country's government or banking authority, the
imposition of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of assets,
punitive taxes, and certain custody and settlement risks. Non-U.S. companies
are not subject to the same disclosure, accounting, auditing and financial
reporting standards and practices as U.S. companies and their securities may
not be as liquid as securities of similar U.S. companies, or may become
illiquid. Non-U.S. stock exchanges, trading systems, brokers and companies
generally have less government supervision and regulation than in the U.S.

CREDIT This is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength may
affect the security's value and, thus, impact the value of fund shares.

INDEBTEDNESS AND PARTICIPATIONS The purchase of debt securities of Reorganizing
or Distressed Companies always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness, making them less liquid than other
securities, and purchasers of participations, such as the fund, must rely on
the financial institution issuing the participation to assert any rights
against the borrower with respect to the underlying indebtedness. In addition,
the fund takes on the risk as to the creditworthiness of the bank or

MS-2 Mutual Shares Investments Fund - Class 1
<PAGE>

other financial intermediary issuer, as well as of the issuer of the underlying
indebtedness.

LOWER-RATED SECURITIES Junk bonds generally have more risk than higher-rated
securities, and can be considered speculative. Companies issuing high yield
debt securities are not as strong financially, and are more likely to encounter
financial difficulties and be more vulnerable to changes in the economy, such
as a recession or a sustained period of rising interest rates. If an issuer
stops paying interest and/or principal, payments may never resume. The fund may
lose its entire investment on bonds that may be, or are, in default.

The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
company's business and to rating changes, and typically rise and fall in
response to factors that affect the company's stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price
swings due to changes in economic conditions, market activity, large sustained
sales, a high-profile default, or other factors. High yield securities
generally are less liquid than higher-quality bonds, and infrequent trades can
make accurate pricing more difficult. At times, it may be difficult to sell
these securities promptly at an acceptable price, which may limit the fund's
ability to sell these securities.

HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative investments. Their successful use will depend on the manager's
ability to predict market movements, and losses from their use can be greater
than if they had not been used. Risks include potential loss to the fund due to
the imposition of controls by a government on the exchange of foreign
currencies, delivery failure, default by the other party, or inability to close
out a position because the trading market becomes illiquid.

ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in illiquid
securities which are securities with a limited trading market. There is a
possible risk that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value.

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

[Insert graphic of bull and bear]PAST PERFORMANCE

Because the fund started on May 1, 1998, performance for a full calendar year
is not yet available.

MS-3 Mutual Shares Investments Fund - Class 1
<PAGE>

[Insert graphic of percentage sign]FEES AND EXPENSES

MUTUAL SHARES INVESTMENTS FUND - CLASS 1

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 1
-------
Maximum sales charge (load) as a percentage of
offering price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)(1)
CLASS 1
-------
Management fees 0.60%
Other expenses 2.27%
-----
Total annual fund operating expenses 2.87%
Fee waiver/expense reductions (1.87%)
-----
Net expenses 1.00%
=====

EXAMPLE

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 1 $290 $889 $1,513 $3,195

MS-4 Mutual Shares Investments Fund - Class 1
<PAGE>

[Insert graphic of briefcase]MANAGEMENT

Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey, 07078, is the fund's investment manager.

MANAGEMENT TEAM The team members primarily responsible for the fund's
management are:

<TABLE>
<S> <C>
LAWRENCE N. SONDIKE Mr. Sondike has been a manager of the fund since its inception in 1998.
SENIOR VICE PRESIDENT, Before joining the Franklin Templeton Group in 1996, he was a research
FRANKLIN MUTUAL analyst for Heine Securities Corporation, the predecessor of Franklin
Mutual.

DAVID E. MARCUS Mr. Marcus has been a manager of the fund since 1998. Before joining
SENIOR VICE PRESIDENT, the Franklin Templeton Group in 1996, he was a research analyst for
FRANKLIN MUTUAL Heine Securities Corporation, the predecessor of Franklin Mutual.
</TABLE>

Michael F. Price is Chairman of the Board of Directors which oversees the
management of Franklin Mutual. The managers listed above are part of a larger
team of investment professionals with management responsibility for all of the
funds managed by Franklin Mutual, including this fund. Peter Langerman is Chief
Executive Officer and Robert Friedman is Chief Investment Officer of Franklin
Mutual. Mr. Friedman has overall supervisory responsibility for the day to day
management of the funds managed by Franklin Mutual.

The entire team also includes:

<TABLE>
<S> <C>
PETER A. LANGERMAN Mr. Langerman has been involved with the management of the fund
PRESIDENT AND since its inception in 1998. Before joining the Franklin Templeton Group
CHIEF EXECUTIVE OFFICER, in 1996, he was a research analyst for Heine Securities Corporation, the
FRANKLIN MUTUAL predecessor of Franklin Mutual.

ROBERT L. FRIEDMAN Mr. Friedman has been involved with the management of the fund since
CHIEF INVESTMENT OFFICER AND its inception in 1998. Before joining the Franklin Templeton Group in
SENIOR VICE PRESIDENT, 1996, he was a research analyst for Heine Securities Corporation, the
FRANKLIN MUTUAL predecessor of Franklin Mutual.

JEFFREY A. ALTMAN Mr. Altman has been a manager of the fund since its inception in 1998.
SENIOR VICE PRESIDENT, Before joining the Franklin Templeton Group in 1996, he was a research
FRANKLIN MUTUAL analyst for Heine Securities Corporation, the predecessor of Franklin
Mutual.

RAYMOND GAREA Mr. Garea has been a manager of the fund since its inception in 1998.
SENIOR VICE PRESIDENT, Before joining the Franklin Templeton Group in 1996, he was a research
FRANKLIN MUTUAL analyst for Heine Securities Corporation, the predecessor of Franklin
Mutual.

DAVID J. WINTERS Mr. Winters has been a manager of the fund since 1998. Before joining
SENIOR VICE PRESIDENT, the Franklin Templeton Group in 1996, he was a research analyst for
FRANKLIN MUTUAL Heine Securities Corporation, the predecessor of Franklin Mutual.
</TABLE>

In addition, the following Franklin Mutual employees serve as Assistant
Portfolio Managers:

<TABLE>
<S> <C>
JIM AGAH Mr. Agah has been a manager of the fund since 1998. Before joining the
ASSISTANT PORTFOLIO MANAGER, Franklin Templeton Group in 1997, he was vice president of equity sales
FRANKLIN MUTUAL at Keefe, Bryette & Woods.

JEFF DIAMOND Mr. Diamond has been a manager of the fund since 1998. Before joining
ASSISTANT PORTFOLIO MANAGER, the Franklin Templeton Group in 1998, he was a vice president and
FRANKLIN MUTUAL co-manager of Prudential Conservative Stock Fund.
</TABLE>

MS-5 Mutual Shares Investments Fund - Class 1
<PAGE>

management fees and make certain payments to reduce fund expenses as necessary
so that Total Fund Operating Expenses did not exceed 1.00% of the fund's class
1 net assets in 1998. The manager is contractually obligated to continue this
arrangement through 1999.

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

[Insert graphic of dollar bill]FINANCIAL HIGHLIGHTS

The financial highlights table provides further details to help you understand
the financial performance of the Mutual Shares Investments Fund - Class 1 since
its inception. The table shows certain information on a single fund share basis
(per share performance). It also shows some key fund statistics, such as total
return (past performance) and the expense ratio. This information has been
audited by McGladrey & Pullen, LLP, independent auditors. Their report - along
with the fund's financial statements - are included in the fund's Annual Report
(available upon request).

PERIOD ENDED
DECEMBER 31, 1998+
------------------
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%

**Annualized.

+For the period May 1, 1998 (commencement of operations) to December 31, 1998.
Based on average weighted shares outstanding.

MS-6 Mutual Shares Investments Fund - Class 1
<PAGE>

Templeton Asset Allocation Fund

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOAL The fund's investment goal is high total return.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest in
equity securities of companies in any nation, debt securities of companies and
governments of any nation, and in money market instruments. The mix of
investments will be adjusted to capitalize on total return potential produced
by changing economic conditions throughout the world, including emerging market
countries. While there are no minimum or maximum percentage targets for each
asset class, historically stocks have been the predominant investment.

Equities represent ownership interests in individual companies and give
shareholders a claim in the company's earnings and assets. They include common
and preferred stocks, securities convertible into common stock, and American,
European and Global Depositary Receipts. Depositary Receipts are certificates
issued by a bank or trust company that give their holders the right to receive
securities issued by a foreign or domestic company. A debt security obligates
the issuer to the bondholders, both to repay a loan of money at a future date
and generally to pay interest. Common debt securities are bonds, including bonds
convertible into common stock or unsecured bonds; notes; and short-term
investments, including cash or cash equivalents.

[Begin callout]
The fund invests primarily in common stocks and bonds of U.S. and non-U.S.
countries.
[End callout]

PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-
oriented, and long-term. In choosing equity investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins, and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund may
from time to time have significant investments in particular countries.

In choosing debt investments, the fund's manager allocates its assets among
issuers, geographic regions, and currencies based upon its assessment of
relative interest rates among currencies, the manager's outlook for changes in
interest rates, and credit risks. The manager intends to manage the fund's
exposure to various geographic regions and their currencies based on its
assessment of changing market and political conditions; with respect to debt
securities, the manager may also from time to time make use of forward currency
exchange contracts for hedging (protection) purposes (Hedging Instruments).

TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.

TA-1 Templeton Asset Allocation Fund - Class 1
<PAGE>

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies or
industries, or the securities markets as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often out
of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.

FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.

CURRENCY Many of the fund's investments are denominated in foreign currencies.
Generally, when the U.S. dollar rises in value against a foreign currency, an
investment in that country loses value because the investment is worth fewer
dollars. Currency markets generally are not as regulated as securities markets.

COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.

The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of currency devaluations by
a country's government or banking authority, the imposition of exchange
controls, foreign ownership limitations, expropriation, restrictions on removal
of currency or other assets, nationalization of assets, punitive taxes, and
certain custody and settlement risks. In addition, political or economic
conditions can cause previously established securities markets to become limited
trading markets, potentially causing liquid securities to become illiquid,
particularly in emerging market countries.

[Begin callout]
Because the stocks and bonds the fund holds fluctuate in price with foreign
market conditions and currencies, the value of your investment in the fund will
go up and down. This means you could lose money over short or even extended
periods.
[End callout]

Emerging market countries are subject to all of the risks of foreign investing
generally, and have additional heightened risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. Non-U.S. securities markets,
particularly emerging markets, may have substantially lower trading volumes
than U.S. markets, resulting in less liquidity and more volatility than
experienced in the U.S. While short-term volatility in these markets can be
disconcerting, declines in excess of 50% are not unusual.

COMPANY Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. stock exchanges, trading systems, brokers and companies generally have
less government supervision and regulation than in the U.S. The fund may have
greater difficulty voting proxies, exercising shareholder rights, pursuing
legal remedies and obtaining judgments with respect to non-U.S. investments in
non-U.S. courts than with respect to U.S. companies in U.S. courts.

TA-2 Templeton Asset Allocation Fund - Class 1
<PAGE>

more vulnerable to changes in the economy, such as a recession or a sustained
period of rising interest rates. If an issuer stops paying interest and/or
principal, payments may never resume. The fund may lose its entire investment
on bonds that may be, or are, in default.

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

[Insert graphic of bull and bear]PAST PERFORMANCE

This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns for each full calendar year over the past ten
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.

PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.

TEMPLETON ASSET ALLOCATION FUND - CLASS 1(1)
CALENDAR YEAR TOTAL RETURNS

[Insert bar graph]

13.25% -7.98% 27.69% 8.08% 26.12% -2.96% 22.48% 18.93% 15.52% 6.41%
- --------------------------------------------------------------------------------
89 90 91 92 93 94 95 96 97 98

YEAR

BEST QUARTER:
Q4 '98
19.28%

WORST
QUARTER:
Q3 '98
- -18.27%

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
----------- ------------ -------------
TEMPLETON ASSET
ALLOCATION FUND -
CLASS 1(1) 6.41% 11.68% 12.17%
MSCI WORLD INDEX(2) 24.80% 16.19% 11.21%
JP MORGAN GLOBAL
GOVERNMENT BOND
INDEX(2) 15.31% 8.09% 9.09%

1. Past expense reductions by the manager increased returns. All fund
performance assumes reinvestment of dividends and capital gains.

2. Source: Standard & Poor's/registered trademark/ Micropal. The unmanaged
Morgan Stanley Capital International/registered trademark/ (MSCI) World Index
tracks the performance of approximately 1500 securities in 23 countries and is
designed to measure world stock market performance. The unmanaged JP Morgan
Global Government Bond Index tracks the performance of government bond markets
in 13 countries. Indices include reinvested dividends and/or interest. One
cannot invest directly in an index, nor is an index representative of the fund's
investments.

TA-3 Templeton Asset Allocation Fund - Class 1

[Insert graphic of percentage sign]FEES AND EXPENSES

TEMPLETON ASSET ALLOCATION FUND - CLASS 1

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS 1
-------
Maximum sales charge (load) as a percentage of
offering price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS 1
-------
Management fees 0.60%
Other expenses 0.18%
----
Total annual fund operating expenses 0.78%
====

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. The example assumes you invest $10,000 for
the periods shown and then sell all of your shares at the end of those periods.
The example also assumes your investment has a 5% return each year and the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 1 $80 $249 $433 $966

[Insert graphic of briefcase]MANAGEMENT

Templeton Investment Counsel, Inc. (TICI), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager.

MANAGEMENT TEAM The team responsible for managing the equity portion of the
fund is:

<TABLE>
<S> <C>
GARY CLEMONS Mr. Clemons has managed the equity portion of the fund since 1995 and
SENIOR VICE PRESIDENT, TICI has been with the Franklin Templeton Group since 1990.

PETER A. NORI, CFA Mr. Nori has managed the equity portion of the fund since 1996 and has
SENIOR VICE PRESIDENT, TICI been with the Franklin Templeton Group since 1987.
TUCKER SCOTT, CFA Mr. Scott has been a manager of the fund since 1998. Before joining the
VICE PRESIDENT, TICI Franklin Templeton Group in 1996, he worked for Aeltus Investment
Management.
</TABLE>

The fund's debt securities are managed by a team of Templeton Global Bond
Managers, a division of TICI.

The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid 0.60% of its average monthly net assets to the manager.

TA-4 Templeton Asset Allocation Fund - Class 1
<PAGE>

[Insert graphic of dollar bill]FINANCIAL HIGHLIGHTS

The financial highlights table provides further details to help you understand
the financial performance of the Templeton Asset Allocation Fund - Class 1 for
the past 5 years. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and the expense ratio. This information has
been audited by McGladrey & Pullen, LLP, independent auditors. Their report -
along with the fund's financial statements - are included in the fund's Annual
Report (available upon request).

<TABLE>
<CAPTION>
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 $ 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>

TA-5 Templeton Asset Allocation Fund - Class 1
<PAGE>

Templeton Bond Fund

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOAL The fund's investment goal is high current income. Capital appreciation is
a secondary consideration.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the debt securities of governments and their
political subdivisions and agencies, supranational organizations, and companies
located anywhere in the world, including emerging markets. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. Common debt securities are bonds,
including bonds convertible into common stock or unsecured bonds; notes; and
short-term investments, including cash or cash equivalents.

The fund focuses on "investment grade" debt securities. These are issues rated
in the top four rating categories (AAA to BBB) by independent rating agencies
such as Standard & Poor's Corporation (S&P) or Moody's Investors Services, Inc.
(Moody's) or, if unrated, determined by the fund's manager to be comparable. The
fund generally also invests a significant amount of its assets in high yield,
medium and lower rated debt securities ("junk bonds"), or if unrated, determined
by the fund's manager to be comparable. During 1998, about 15.1% of the fund's
portfolio was invested in lower rated and comparable quality unrated debt
securities. Many debt securities of non-U.S. issuers, and especially emerging
market issuers, are rated below investment grade or are unrated so that their
selection depends on the manager's internal analysis. The average maturity of
debt securities in the fund's portfolio is medium-term (about 5 to 15 years),
but will fluctuate depending on the manager's outlook on the country and future
interest rate changes.

[Begin callout]
The fund invests primarily in bonds of governments located around the world.
[End callout]

PORTFOLIO SELECTION The fund's manager allocates its assets among issuers,
geographic regions, and currencies based upon its assessment of relative
interest rates among currencies, the manager's outlook for changes in interest
rates, and credit risks. In considering these factors, a country's changing
market, economic, and political conditions, such as inflation rate, growth
prospects, global trade patterns and government policies will be evaluated. The
manager intends to manage the fund's exposure to various currencies, and may
from time to time seek to hedge (protect) against currency risk by using
forward currency exchange contracts (Hedging Instruments).

TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.

TB-1 Templeton Bond Fund - Class 1
<PAGE>

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes. A sub-category of interest
rate risk is REINVESTMENT RISK, which is the risk that interest rates will be
lower when the fund seeks to reinvest interest payments or the proceeds from a
matured debt security, resulting in less income received by the fund.

[Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of the fund's debt securities will fall
and so too will the fund's share price. This means you could lose money.
[End callout]

FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.

COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.

The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition of
exchange controls, foreign ownership limitations, expropriation, restrictions
on removal of currency or other assets, nationalization of assets, punitive
taxes, and certain custody and settlement risks. In addition, political or
economic conditions can cause previously established securities markets to
become limited trading markets, potentially causing liquid securities to become
illiquid, particularly in emerging market countries.

LOWER RATED-SECURITIES Junk bonds generally have more risk than higher-rated
securities, and can be considered speculative. Companies issuing high yield
debt securities are not as strong financially, and are more likely to encounter
financial difficulties and be more vulnerable to changes in the economy, such
as a recession or a sustained period of rising interest rates. If an issuer
stops paying interest and/or principal, payments may never resume. The fund may
lose its entire investment on bonds that may be, or are, in default.

The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are

TB-2 Templeton Bond Fund - Class 1
<PAGE>

especially sensitive to developments affecting the company's business and to
rating changes, and typically rise and fall in response to factors that affect
the company's stock prices. In addition, the entire high yield securities
market can experience sudden and sharp price swings due to changes in economic
conditions, market activity, large sustained sales, a high-profile default, or
other factors. High yield securities generally are less liquid than
higher-quality bonds, and infrequent trades can make accurate pricing more
difficult. At times, it may be difficult to sell these securities promptly at
an acceptable price, which may limit the fund's ability to sell these
securities.

DIVERSIFICATION The fund is non-diversified under federal securities laws. As
such, it may invest a greater portion of its assets in one issuer and have a
smaller number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax diversification
requirements.

PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep interest
rate risk and country allocations at desired levels, as well as bond
maturities, may cause the fund's portfolio turnover rate to be high. High
turnover generally increases the fund's transaction costs.

TB-3 Templeton Bond Fund - Class 1
<PAGE>

[Insert graphic of bull and bear]PAST PERFORMANCE

TEMPLETON BOND FUND - CLASS 1(1)
CALENDAR YEAR TOTAL RETURNS

[Insert bar graph]

7.65% 6.33% 15.86% 5.53% 11.46% -4.88% 14.92% 9.45% 2.51% 7.17%
- --------------------------------------------------------------------------------
89 90 91 92 93 94 95 96 97 98

YEAR

BEST QUARTER:
Q3 '91
6.17%

WORST
QUARTER:
Q1 '94
- -4.53%

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
----------- ------------ -------------
TEMPLETON BOND FUND - CLASS 1(1) 7.17% 5.62% 7.45%
JP MORGAN GLOBAL GOVERNMENT
BOND INDEX(2) 15.31% 8.09% 9.09%

1. All fund performance assumes reinvestment of dividends and capital gains.
Past expense reductions by the manager increased returns.

2. Source: Standard & Poor's/registered trademark/ Micropal. The unmanaged JP
Morgan Global Government Bond Index tracks the performance of government bond
markets in 13 countries. It includes reinvested dividends and/or interest. One
cannot invest directly in an index, nor is an index representative of the fund's
investments.

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

[Insert graphic of percentage sign]FEES AND EXPENSES

TEMPLETON BOND FUND - CLASS 1

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS 1
-------
Maximum sales charge (load) as a percentage of
offering price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS 1
-------
Management fees 0.50%
Other expenses 0.23%
----
Total annual fund operating expenses 0.73%
====

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. The example assumes you invest $10,000 for
the periods shown and then sell all of your shares at the end of those periods.
The example also assumes your investment has a 5% return each year and the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 1 $75 $233 $406 $906

TB-4 Templeton Bond Fund - Class 1
<PAGE>

[Insert graphic of briefcase]MANAGEMENT

Templeton Investment Counsel, Inc., (TICI), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager. The fund's
investments are managed by a team of Templeton Global Bond Managers, a division
of TICI.

The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid 0.50% of its average monthly net assets to the manager.

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

[Insert graphic of dollar bill]FINANCIAL HIGHLIGHTS

The financial highlights table provides further details to help you understand
the financial performance of the Templeton Bond Fund - Class 1 for the past 5
years. The table shows certain information on a single fund share basis (per
share performance). It also shows some key fund statistics, such as total
return (past performance) and the expense ratio. This information has been
audited by McGladrey & Pullen, LLP, independent auditors. Their report - along
with the fund's financial statements - are included in the fund's Annual Report
(available upon request).

<TABLE>
<CAPTION>
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>

TB-5 Templeton Bond Fund - Class 1
<PAGE>

Templeton Developing Markets Fund

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOAL The fund's investment goal is long-term capital appreciation.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in emerging market equity securities. Emerging
market equity securities generally include equity securities that trade in
emerging markets or are issued by companies that have their principal
activities in emerging market countries.

Emerging market countries generally include those considered to be emerging by
the World Bank, the International Finance Corporation, the United Nations, or
the countries' authorities. These countries are typically located in the
Asia-Pacific region, Eastern Europe, Central and South America, and Africa.
EMERGING MARKET EQUITY SECURITIES AND EMERGING MARKET COUNTRIES ARE MORE FULLY
DESCRIBED IN THE SAI.

Equities represent ownership interests in individual companies and give
shareholders a claim in the company's earnings and assets. They include common
and preferred stocks, and securities convertible into common stock. The fund
also invests in American, European and Global Depositary Receipts, which are
certificates typically issued by a bank or trust company that give their holders
the right to receive securities issued by a foreign or domestic company.

[Begin callout]
The fund invests primarily in the common stocks of companies located in
emerging market countries.
[End callout]

In addition to its principal investments, the fund may invest significantly in
securities of issuers in developed market countries, and particularly those
developed market countries that are linked by tradition, economic markets,
geography or political events to emerging market countries.

Depending upon current market conditions, or for capital appreciation, the fund
may also invest a substantial portion of its assets in rated or unrated debt
securities of companies and governments located anywhere in the world. A debt
security obligates the issuer to the bondholders, both to repay a loan of money
at a future date and generally to pay interest. Common debt securities are
bonds, including bonds convertible into common stock and unsecured bonds;
notes; and short-term investments, including cash or cash equivalents. The fund
may also invest up to 10% of its total assets in securities of closed-end
investment companies to facilitate foreign investment.

PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-
oriented, and long-term. In choosing equity investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund may
from time to time have significant investments in particular countries. The
manager intends to manage the fund's exposure to various geographic regions and
their currencies based on its assessment of changing market and political
conditions.

TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency
investments. Such investments may be medium-term (less than 5 years for this
fund) or short-term, including cash or cash equivalents. Under these
circumstances, the fund may temporarily be unable to pursue its investment
goal.

TD-1 Templeton Developing Markets Fund - Class 1

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies or
industries, or the securities markets as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often out
of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.

FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund. Emerging markets in particular can experience
significant price volatility in any given year, and even daily. The fund should
be thought of as a long-term investment for the aggressive portion of a
well-diversified portfolio.

[Begin callout]
Because the stocks the fund holds fluctuate in price with emerging market
conditions and currencies, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
[End callout]

COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.

The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition of
exchange controls, foreign ownership limitations, expropriation, restrictions
on removal of currency or other assets, nationalization of assets, punitive
taxes, and certain custody and settlement risks. In addition, political or
economic conditions can cause previously established securities markets to
become limited trading markets, potentially causing liquid securities to become
illiquid, particularly in emerging market countries.

CREDIT This is the possibility that an issuer will be unable to make interest
payments or repay principal.

TD-2 Templeton Developing Markets Fund - Class 1
<PAGE>

Changes in an issuer's financial strength may affect the security's value and,
thus, impact the value of fund shares.

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

[Insert graphic of bull and bear]PAST PERFORMANCE

TEMPLETON DEVELOPING MARKETS FUND - CLASS 1(1)
CALENDAR YEAR TOTAL RETURNS

[Insert bar graph]

-29.22% -20.94%
-----------------------
97 98

YEAR

BEST QUARTER:
Q4 '98
26.67%

WORST
QUARTER:
Q4 '97
- -30.58%

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

SINCE
INCEPTION
PAST 1 YEAR (3/4/96)
----------- --------
TEMPLETON DEVELOPING MARKETS FUND - CLASS 1(1) -20.94% -20.25%
MSCI EMERGING MARKETS FREE INDEX(2) -25.34 -13.81
IFC INVESTABLE COMPOSITE INDEX(2) -22.03% -12.49%

1. Past expense reductions by the manager increased returns. All fund
performance assumes reinvestment of dividends and capital gains.

2. Source: Standard & Poor's/registered trademark/ Micropal. The unmanaged
Morgan Stanley, Capital International/registered trademark/ Emerging Markets
Free Index is a market cap weighted index comprising 26 of the 48 countries in
the MSCI universe. The International Finance Corporation's Investable Composite
Index is an emerging markets index that includes 650 stocks from 18 countries
including Mexico, South Korea, Brazil, Jordan and Turkey. Indices include
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's investments.

TD-3 Templeton Developing Markets Fund - Class 1
<PAGE>

[Insert graphic of percentage sign]FEES AND EXPENSES

TEMPLETON DEVELOPING MARKETS FUND - CLASS 1

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS 1
-------
Maximum sales charge (load) as a percentage of
offering price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)

CLASS 1
-------
Management fees 1.25%
Other expenses 0.41%
----
Total annual fund operating expenses 1.66%
====

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. The example assumes you invest $10,000 for
the periods shown and then sell all of your shares at the end of those periods.
The example also assumes your investment has a 5% return each year and the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 1 $169 $523 $902 $1,965

[Insert graphic of briefcase]MANAGEMENT

Templeton Asset Management Ltd. (TAML), 7 Temasek Boulevard, # 38-03, Suntec
Tower One, Singapore, 038987, is the fund's investment manager.

MANAGEMENT TEAM The team responsible for the fund's management is:

<TABLE>
<S> <C>
DR. J. MARK MOBIUS Dr. Mobius has been a manager of the fund since its inception in 1996,
MANAGING DIRECTOR, TAML and has been with the Franklin Templeton Group since 1987.

TOM WU Mr. Wu has been a manager of the fund since its inception in 1996, and
DIRECTOR, TAML has been with the Franklin Templeton Group since 1987.

H. ALLAN LAM Mr. Lam has been a manager of the fund since its inception in 1996, and
PORTFOLIO MANAGER, TAML has been with the Franklin Templeton Group since 1987.

EDDIE CHOW Mr. Chow has been a manager of the fund since its inception in 1996,
PORTFOLIO MANAGER, TAML and has been with the Franklin Templeton Group since 1994.

DENNIS LIM Mr. Lim has been a manager of the fund since its inception in 1996, and
DIRECTOR, TAML has been with the Franklin Templeton Group since 1990.

TEK-KHOAN ONG Mr. Ong has been a manager if the fund since its inception in 1996, and
PORTFOLIO MANAGER, TAML has been with the Franklin Templeton Group since 1993.
</TABLE>

The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid 1.25% of its average monthly net assets to the manager.

TD-4 Templeton Developing Markets Fund - Class 1
<PAGE>

[Insert graphic of dollar bill]FINANCIAL HIGHLIGHTS

The financial highlights table provides further details to help you understand
the financial performance of the Templeton Developing Markets Fund - Class 1
since its inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and the expense ratio. This information has
been audited by McGladrey & Pullen, LLP, independent auditors. Their report -
along with the fund's financial statements - are included in the fund's Annual
Report (available upon request).

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996+
------------- ------------- --------------
<S> <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>

**Annualized.

+For the period March 4, 1996 (commencement of operations) to December 31,
1996.

TD-5 Templeton Developing Markets Fund - Class 1
<PAGE>

Templeton International Fund

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOAL The fund's investment goal is long-term capital growth.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of companies located
outside the U.S., including in emerging markets. While there are no set
percentage targets, the fund generally invests in large- to medium-cap companies
with market capitalization values (share price times the number of common stock
shares outstanding) greater than $1.5 billion, but may invest a small portion in
small-cap companies which have more risk. Equities represent ownership interests
in individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities convertible
into common stock. The fund also invests in American, European and Global
Depositary Receipts, which are certificates typically issued by a bank or trust
company that give their holders the right to receive securities issued by a
foreign or domestic company.

[Begin callout]
The fund invests primarily in a diversified portfolio of non-U.S. common
stocks.
[End callout]

Depending upon current market conditions, the fund may also invest a significant
portion of its assets in debt securities of governments and companies located
anywhere in the world. A debt security obligates the issuer to the bondholders,
both to repay a loan of money at a future date and generally to pay interest.
Common debt securities are bonds, including bonds convertible into common stock
or unsecured bonds; notes; and short-term investments, including cash or cash
equivalents.

PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-
oriented, and long-term. In choosing equity investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund may
from time to time have significant investments in particular countries. The
manager intends to manage the fund's exposure to various geographic regions and
their currencies based on its assessment of changing market and political
conditions.

TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.

TI-1 Templeton International Fund - Class 1
<PAGE>

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies or
industries, or the securities markets as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often out
of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.

[Begin callout]
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
[End callout]

FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.

COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.

The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition of
exchange controls, foreign ownership limitations, expropriation, restrictions
on removal of currency or other assets, nationalization of assets, punitive
taxes, and certain custody and settlement risks. In addition, political or
economic conditions can cause previously established securities markets to
become limited trading markets, potentially causing liquid securities to become
illiquid, particularly in emerging market countries.

Emerging market countries are subject to all of the risks of foreign investing
generally, and have additional heightened risks due to a lack of legal,
business, and social frameworks to support securities markets, and a greater
likelihood of currency devaluations. Non-U.S. securities markets, including
emerging markets, may have substantially lower trading volumes than U.S.
markets, resulting in less liquidity and more volatility than experienced in
the U.S. While short-term volatility in these markets can be disconcerting,
declines in excess of 50% are not unusual.

TI-2 Templeton International Fund - Class 1
<PAGE>

[Insert graphic of bull and bear]PAST PERFORMANCE

TEMPLETON INTERNATIONAL FUND - CLASS 1(1)
CALENDAR YEAR TOTAL RETURNS

[Insert bar graph]

47.28% -2.22% 15.78% 24.04% 13.95% 9.33%
---------------------------------------------------
93 94 95 96 97 98

YEAR

BEST QUARTER:
Q4 '93
19.53%

WORST
QUARTER:
Q3 '98
- -16.54%

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

SINCE
INCEPTION
PAST 1 YEAR PAST 5 YEARS (5/1/92)
----------- ------------ --------
TEMPLETON INTERNATIONAL FUND -
CLASS 1(1) 9.33% 11.84% 14.17%
MSCI EAFE(2) 20.33% 9.50% 11.59%

1. All fund performance assumes reinvestment of dividends and capital gains.

2. Source: Standard & Poor's/registered trademark/ Micropal. The unmanaged
Morgan Stanley Capital International/registered trademark/ Europe, Australia,
Far East (MSCI EAFE) Index tracks the performance of approximately 1000
securities in 20 countries. The average company has a market capitalization of
over $3 billion. It includes reinvested dividends. One cannot invest directly in
an index, nor is an index representative of the fund's investments.

TI-3 Templeton International Fund - Class 1
<PAGE>

[Insert graphic of percentage sign]FEES AND EXPENSES

TEMPLETON INTERNATIONAL FUND - CLASS 1

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS 1
-------
Management fees 0.69%
Other expenses 0.17%
----
Total annual fund operating expenses 0.86%
====

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. The example assumes you invest $10,000 for
the periods shown and then sell all of your shares at the end of those periods.
The example also assumes your investment has a 5% return each year and the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 1 $88 $274 $477 $1,061

[Insert graphic of briefcase]MANAGEMENT

Templeton Investment Counsel, Inc. (TICI), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager.

MANAGEMENT TEAM The team responsible for the fund's management is:

<TABLE>
<S> <C>
PETER A. NORI, CFA Mr. Nori has been a manager of the fund since 1996. He joined the
SENIOR VICE PRESIDENT, TICI Franklin Templeton Group in 1987.

GARY P. MOTYL, CFA Mr. Motyl has been a manager of the fund since 1995. He joined the
DIRECTOR AND Franklin Templeton Group in 1981.
EXECUTIVE VICE PRESIDENT, TICI

HEIDI S. ANDERSEN, CFA Ms. Andersen has been a manager of the fund since 1998. She joined the
VICE PRESIDENT, TICI Franklin Templeton Group in 1995.
</TABLE>

The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid 0.69% of its average monthly net assets to the manager.

TI-4 Templeton International Fund - Class 1
<PAGE>

[Insert graphic of dollar bill]FINANCIAL HIGHLIGHTS

The financial highlights table provides further details to help you understand
the financial performance of the Templeton International Fund - Class 1 for the
past 5 years. The table shows certain information on a single fund share basis
(per share performance). It also shows some key fund statistics, such as total
return (past performance) and the expense ratio. This information has been
audited by McGladrey & Pullen, LLP, independent auditors. Their report - along
with the fund's financial statements - are included in the fund's Annual Report
(available upon request).

<TABLE>
<CAPTION>
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>

TI-5 Templeton International Fund - Class 1
<PAGE>

Templeton Stock Fund

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOAL The fund's investment goal is long-term capital growth.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities of companies located anywhere
in the world, including in the U.S. and emerging markets. While there are no set
percentage targets, the fund generally invests in large- to medium-cap companies
with market capitalization values (share price times the number of common stock
shares outstanding) greater than $1.5 billion, but may invest a small portion in
small-cap companies which have more risk. Equities represent ownership interests
in individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities convertible
into common stock. The fund also invests in American, European, and Global
Depositary Receipts, which are certificates typically issued by a bank or trust
company that give their holders the right to receive securities issued by a
foreign or domestic company.

[Begin callout]
The fund invests primarily in a diversified portfolio of U.S. and non-U.S.
common stocks.
[End callout]

Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of companies and governments located
anywhere in the world. A debt security obligates the issuer to the bondholders,
both to repay a loan of money at a future date and generally to pay interest.
Common debt securities are bonds, including bonds convertible into common stock
or unsecured bonds; notes; and short-term investments, including cash or cash
equivalents.

PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-
oriented, and long-term. In choosing equity investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund may
from time to time have significant investments in particular countries. The
manager intends to manage the fund's exposure to various geographic regions and
their currencies based on its assessment of changing market and political
conditions.

TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.

TS-1 Templeton Stock Fund - Class 1
<PAGE>

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies or
industries, or the securities markets as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often out
of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.

FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.

CURRENCY Many of the fund's investments are denominated in foreign currencies.
Generally, when the U.S. dollar rises in value against a foreign currency, an
investment in that country loses value because that currency is worth fewer
U.S. dollars. Currency markets generally are not as regulated as securities
markets.

COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.

The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition of
exchange controls, foreign ownership limitations, expropriation, restrictions
on removal of currency or other assets, nationalization of assets, punitive
taxes, and certain custody and settlement risks. In addition, political or
economic conditions can cause previously established securities markets to
become limited trading markets, potentially causing liquid securities to become
illiquid, particularly in emerging market countries.

TS-2 Templeton Stock Fund - Class 1
<PAGE>

[Insert graphic of bull and bear]PAST PERFORMANCE

TEMPLETON STOCK FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS

[Insert bar graph]

14.63% -10.88% 27.28 7.12% 34.00% -2.20% 25.24% 22.48% 11.88% 1.26%
- --------------------------------------------------------------------------------
89 90 91 92 93 94 95 96 97 98

YEAR

BEST QUARTER:
Q4 '98
15.90%

WORST QUARTER:
Q3 '98
- -21.03%

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

PAST PAST PAST
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
TEMPLETON STOCK FUND - CLASS 1(1) 1.26% 11.18% 12.23%
MSCI WORLD INDEX2 24.80% 16.19% 11.21%

1. All fund performance assumes reinvestment of dividends and capital gains.
Past expense reductions by the manager increased returns.

2. Source: Standard & Poor's/registered trademark/ Micropal. The unmanaged
Morgan Stanley Capital International/registered trademark/ (MSCI) World Index
tracks the performance of approximately 1500 securities in 23 countries and is
designed to measure world stock market performance. It includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the fund's investments.

TS-3 Templeton Stock Fund - Class 1
<PAGE>

[Insert graphic of percentage sign]FEES AND EXPENSES

TEMPLETON STOCK FUND - CLASS 1

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS 1
-------
Maximum sales charge (load) as a percentage of
offering price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS 1
-------
Management fees 0.70%
Other expenses 0.19%
----
Total annual fund operating expenses 0.89%
====

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. The example assumes you invest $10,000 for
the periods shown and then sell all of your shares at the end of those periods.
The example also assumes your investment has a 5% return each year and the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 1 $91 $284 $493 $1,096

[Insert graphic of briefcase]MANAGEMENT

Templeton Investment Counsel, Inc. (TICI), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager.

MANAGEMENT TEAM The team responsible for the fund's management is:

<TABLE>
<S> <C>
MARK R. BEVERIDGE, CFA Mr. Beveridge has been a manager of the fund since 1995 and has been
SENIOR VICE PRESIDENT, TICI with the Franklin Templeton Group since 1985.

WILLIAM T. HOWARD, JR., CFA Mr. Howard has been a manager of the fund since 1996 and has been
SENIOR VICE PRESIDENT, TICI with the Franklin Templeton Group since 1993.

EDWIN LUGO II Mr. Lugo has been a manager of the fund since 1999. Before joining the
PORTFOLIO MANAGER, TICI Franklin Templeton Group in 1996, he worked at the New Boston
Group.
</TABLE>

The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid 0.70% of its average monthly net assets to the manager.

TS-4 Templeton Stock Fund - Class 1
<PAGE>

[Insert graphic of dollar bill]FINANCIAL HIGHLIGHTS

The financial highlights table provides further details to help you understand
the financial performance of the Templeton Stock Fund - Class 1 for the past 5
years. The table shows certain information on a single fund share basis (per
share performance). It also shows some key fund statistics, such as total
return (past performance) and the expense ratio. This information has been
audited by McGladrey & Pullen, LLP, independent auditors. Their report - along
with the fund's financial statements - are included in the fund's Annual Report
(available upon request).

<TABLE>
<CAPTION>
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>

TS-5 Templeton Stock Fund - Class 1
<PAGE>

[Insert graphic of Starburst] IMPORTANT RECENT DEVELOPMENTS

/bullet/ 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 called
the Year 2000 problem). In addition, the fact that the Year 2000 is a 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 their managers, their service providers and
other third parties they do business with are not Year 2000 ready. For example,
the funds' portfolio 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.

When evaluating current and potential portfolio positions, Year 2000 is one of
the factors that the funds' managers consider. The 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., particularly in emerging
markets, may be more susceptible to Year 2000 problems and may not be required
to make the same level of disclosure regarding Year 2000 readiness as is
required in the U.S. The managers, of course, cannot audit any company or their
major suppliers to verify their Year 2000 readiness. If a company in which any
fund is invested 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 portfolio holdings will have a similar impact
on the price of the fund's shares.

The 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 managers may have no control.

/bullet/ EURO On January 1, 1999, the European Monetary Union (EMU) introduced
a new single currency, the euro, which replaced the national currency for the
eleven 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.

Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the funds may hold in their portfolios, and
their impact on fund performance. 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.

1 Additional Information, All Funds
<PAGE>

[Insert graphic of dollar signs and stacks of coins]DISTRIBUTIONS AND TAXES

INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends
substantially all of its net investment income. Each fund typically pays
dividends from net investment income and net capital gains, if any, following
the close of the calendar year. Dividends or distributions by the funds will
reduce the per share net asset value (NAV) by the per share amount paid.

Dividends paid by a fund will be automatically reinvested in additional shares
of that fund or, if requested, paid in cash to the insurance company
shareholder.

TAX CONSIDERATIONS The tax consequences for contract owners will depend on the
provisions of the variable annuity or variable life insurance contract through
which they are invested in the funds. For more information, please consult the
accompanying contract prospectus or disclosure document.

2 Additional Information, All Funds
<PAGE>

Fund Account Information

[Insert graphic of paper with lines and someone writing]BUYING SHARES

Shares of each fund are sold at NAV to insurance company separate accounts to
serve as investment options for variable annuity or variable life insurance
contracts. The funds' Board monitors this to be sure there are no material
conflicts of interest between the two different types of contract owners. If
there were, the Board would take corrective action.

Contract owners' payments will be allocated by the insurance company separate
account to purchase shares of each fund chosen by the contract owner, and are
subject to any limits or conditions in the contract. Requests to buy shares are
processed at the NAV next calculated after we receive the request in proper
form. The funds do not issue share certificates.
- --------------------------------------------------------------------------------

[Insert graphic of certificate]SELLING SHARES

Each insurance company sells shares of the applicable fund to make benefit or
surrender payments or to execute transfers between investment options under the
terms of its contracts. Requests to sell shares are processed at the NAV next
calculated after we receive the request in proper form.

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

[Insert graphic of two arrows] EXCHANGING SHARES

Contract owners may exchange shares of any one class or fund for shares of
other classes or funds through a transfer between investment options available
under a variable insurance contract, subject to the terms, and any specific
limitations on the exchange (or "transfer") privilege, described in the
contract prospectus. Frequent exchanges can interfere with fund management or
operations and drive up fund costs. To protect shareholders, there are limits
on the number and amount of exchanges that may be made (please see "Market
Timers," below).

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

[Insert graphic of paper and pen]FUND ACCOUNT POLICIES

CALCULATING SHARE PRICE The funds calculate their NAV per share each business
day at the close of trading on the New York Stock Exchange (normally 1:00 p.m.
Pacific time). Each class's NAV is calculated by dividing its net assets by the
number of its shares outstanding.

The funds' assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value.
If a fund holds securities listed primarily on a foreign exchange that trades
on days when the fund is not open for business, the value of the shares may
change on days that the insurance company separate account cannot buy or sell
shares.

Requests to buy and sell shares are processed on any day the funds are open for
business at the NAV next calculated after we receive the request in proper
form.

REPORTS Insurance company shareholders will receive the fund's financial
reports every six months. If you need additional copies, please call 1-800/774-
5001.

MARKET TIMERS The funds are not designed for market timers, large or frequent
transfers. The funds may restrict or refuse purchases or exchanges by market
timers. You will be considered a market timer if you have (i) requested an
exchange out of the fund within two weeks of an earlier exchange request, or

3 Templeton Variable Products Series Fund
<PAGE>

(ii) exchanged shares out of the fund more than twice in a calendar quarter, or
(iii) exchanged shares equal to at least $5 million, or more than 1% of the
fund's net assets, or (iv) otherwise seem to follow a timing pattern. Accounts
under common ownership or control are combined for these limits.

ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:

/bullet/ Each fund may refuse any order to buy shares.

/bullet/ At any time, each fund may establish or change investment
minimums.

/bullet/ Each fund may modify or discontinue the exchange privilege on
60 days' notice to insurance company shareholders.

/bullet/ You may only buy shares of a fund eligible for sale in your
state or jurisdiction.

/bullet/ In unusual circumstances, we may temporarily suspend
redemptions, or postpone the payment of proceeds, as allowed by
federal securities laws.

/bullet/ For redemptions over a certain amount, the funds reserve the
right to make payments in securities or other assets of a fund,
in the case of an emergency.

/bullet/ To permit investors to obtain the current price, insurance
companies are responsible for transmitting all orders to the
fund promptly.

SHARE CLASSES Each fund has two classes of shares, class 1 and class 2. Each
class is identical except that class 2 has a distribution plan or "Rule 12b-1
Plan" which is described in prospectuses offering class 2 shares.

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

[Insert graphic of question mark]QUESTIONS

More detailed information about the Trust and the funds' account policies can
be found in the funds' Statement of Additional Information (SAI). If you have
any questions about the funds, you can write to us at 100 Fountain Parkway, St.
Petersburg, Florida, 33716-1205 or call 1-800/774-5001. For your protection and
to help ensure we provide you with quality service, all calls may be monitored
or recorded.

4 Templeton Variable Products Series Fund

[Begin Callout]
For More Information
[End Callout]

The funds of the Templeton Variable Products Series Fund (the Trust) are only
available as investment options in variable annuity or variable life insurance
contracts. Please consult the accompanying contract prospectus or disclosure
document for information about the terms of an investment in a contract.

You can learn more about the fund in the following documents:

ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Includes a discussion of recent market conditions and investment strategies,
financial statements, detailed performance information, fund holdings, and the
auditor's report (Annual Report only).

STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the funds, their investments,
policies, and risks. It is incorporated by reference (is legally a part of this
prospectus).

You may obtain these free reports by contacting your investment representative
or by calling us at the number below.

Franklin Templeton
1-800/774-5001

You can also obtain information about the funds by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington
DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.

Investment Company Act file 811-5479

Lit Code #

Prospectus

Templeton Variable Products Series Fund

Class 2 Shares

May 1, 1999

[Insert Franklin Templeton Ben Head]

As with all fund prospectuses, the SEC has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.

CONTENTS

TEMPLETON VARIABLE
- ------------------------------PRODUCTS SERIES FUND

- ------------------------------FUND ACCOUNT INFORMATION
[Begin callout]
INFORMATION ABOUT FUND 3 Buying Shares
ACCOUNT TRANSACTIONS 3 Selling Shares
AND SERVICES 3 Exchanging Shares
[End callout] 3 Fund Account Policies
4 Questions

- ------------------------------FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT Back Cover
EACH FUND
[End callout]

<PAGE>

TEMPLETON VARIABLE PRODUCTS SERIES FUND

OVERVIEW
[Insert graphic of globe]

INVESTMENT CONSIDERATIONS

/bullet/ Each fund has its own investment strategy and risk profile. Generally,
the higher the expected rate of return, the greater the risk of loss.

/bullet/ No single fund can be a complete investment program; consider
diversifying your fund choices.

RISKS

/bullet/ There can be no assurance that any fund will achieve its investment
goal.

/bullet/ Because you could lose money by investing in a fund, take the time to
read each fund description and consider all risks before investing.

MORE DETAILED INFORMATION ABOUT EACH FUND,
ITS INVESTMENT POLICIES, AND ITS PARTICULAR
RISKS CAN BE FOUND IN THE TRUST'S STATEMENT OF
ADDITIONAL INFORMATION (SAI).

MANAGEMENT

FRANKLIN GROWTH INVESTMENTS FUND

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOAL The fund's investment goal is capital appreciation.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities of companies believed to be
globally competitive and to offer favorable opportunities for long-term capital
appreciation. Following this policy, the fund will typically invest
predominantly in established, large- to medium-cap companies with market
capitalization values (share price times the number of common stock shares
outstanding), greater than $1.5 billion. The fund may also invest, to a lesser
extent, in small-cap companies, and in new and emerging industries where growth
is expected to be above average. Equities represent ownership interests in
individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities convertible
into common stock.

[Begin callout]
The fund invests primarily in the common stocks of established companies.
[End callout]

The fund generally invests less than 15% of its total assets in foreign
securities, including Depositary Receipts and emerging markets.

PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined long-term growth strategy. As a "bottom-up" investor
focusing primarily on individual securities, the manager chooses companies that
it believes are leaders in their industries, and are positioned for rapid
growth in revenues, earnings or assets. The manager relies on a team of
analysts to provide in-depth industry expertise, and uses both qualitative and
quantitative analysis, to evaluate companies for historical and potential
growth in revenues and earnings, strength and quality of management, and
strategic positioning in its industry. The manager believes such factors point
to steady growth over time potential. The manager diversifies the fund's assets
across many industries, and from time to time may invest substantially in
certain sectors, including technology and biotechnology.

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

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]

FG-1 Franklin Growth Investments Fund - Class 2
<PAGE>

technology and biotechnology industry stocks, in particular, can be subject to
abrupt or erratic price movements.

FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.

FG-2 Franklin Growth Investments Fund - Class 2
<PAGE>

[Insert graphic of bull and bear]PAST PERFORMANCE

Because the fund started on May 1, 1998, performance for a full calendar year
is not yet available.

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

[Insert graphic of percentage sign]FEES AND EXPENSES

FRANKLIN GROWTH INVESTMENTS FUND - CLASS 2

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS 2
-------
Maximum sales charge (load) as a percentage of
offering price

Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)(1)

CLASS 2
=======

Management fees 0.60%
Distribution and service (12b-1) fees 0.25%
Other expenses 4.08%
-----
Total annual fund operating expenses 4.93%
Fee waiver/expense reduction (3.68%)
-----
Net expenses 1.25%
=====

1. Because no class 2 shares were issued as of December 31, 1998, figures
(other than "Rule 12b-1 Fees") are based on the fund's class 1 expenses for the
fiscal year ended December 31, 1998 plus class 2's maximum annual Rule 12b-1
fee of 0.25%. The manager is contractually obligated to limit management fees
and make certain payments to reduce fund expenses as necessary so that Total
Fund Operating Expenses do not exceed 1.25% of the fund's class 2 net assets in
1999.

EXAMPLE

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 2 $493 $1,481 $2,469 $4,899

FG-3 Franklin Growth Investments Fund - Class 2
<PAGE>

[Insert graphic of briefcase]MANAGEMENT

Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California, 94403-7777, is the fund's investment manager.

MANAGEMENT TEAM The team responsible for the fund's management is:

VIVIAN J. PALMIERI Mr. Palmieri has been a manager of the fund since its inception in 1998
PORTFOLIO MANAGER, ADVISERS and has been with the Franklin Templeton Group since 1965.
</TABLE>

The fund pays the manager a fee for managing its assets and making its
investment decisions. The fee is an amount equal to an annual rate of: 0.60% of
the value of net assets up to and including $200 million; 0.50% of the value of
net assets over $200 million up to and including $1.3 billion; and 0.40% of the
value of net assets over $1.3 billion. The manager is contractually obligated
to limit management fees and make certain payments to reduce fund expenses as
necessary so that Total Fund Operating Expenses do not exceed 1.25% of the
fund's class 2 net assets in 1999.

FG-4 Franklin Growth Investments Fund - Class 2
<PAGE>

FRANKLIN SMALL CAP INVESTMENTS FUND

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOAL The fund's investment goal is long-term capital growth.

[Begin callout]
The fund invests primarily in common stocks of small cap U.S. companies.
[End callout]

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

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]

FS-1 Franklin Small Cap Investments Fund - Class 2
<PAGE>

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

[Insert graphic of bull and bear]PAST PERFORMANCE

Because the fund started on May 1, 1998, performance for a full calendar year
is not yet available.
- --------------------------------------------------------------------------------

[Insert graphic of percentage sign]FEES AND EXPENSES

FRANKLIN SMALL CAP INVESTMENTS FUND - CLASS 2

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS 2
=======
Maximum sales charge (load) as a percentage of
offering price

Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)(1)

CLASS 2
=======
Management fees 0.75%
Distribution and service (12b-1) fees 0.25%
Other expenses 1.00%
-----
Total annual fund operating expenses 2.00%
Fee waiver/expense reduction (0.75%)
-----
Net expenses 1.25%
=====

1. Figures reflect expenses from the fund's inception on May 1, 1998 and are
annualized. The manager agreed in advance to limit management fees and make
certain payments to reduce fund expenses as necessary so that Total Fund
Operating Expenses did not exceed 1.25% of the fund's class 2 net assets in
1998. The manager is contractually obligated to continue this arrangement
through 1999.

EXAMPLE

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 2 $203 $627 $1,078 $2,263

FS-2 Franklin Small Cap Investments Fund - Class 2
<PAGE>

[Insert graphic of briefcase]MANAGEMENT

Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.

MANAGEMENT TEAM The team responsible for the fund's management is:

<TABLE>
<S> <C>
EDWARD B. JAMIESON Mr. Jamieson has been a manager of the fund since its inception in 1998
EXECUTIVE SENIOR VICE PRESIDENT, and has been with the Franklin Templeton Group since 1987.
ADVISERS

MICHAEL MCCARTHY Mr. McCarthy has been a manager of the fund since its inception in
VICE PRESIDENT, ADVISERS 1998 and has been with the Franklin Templeton Group since 1992.

AIDAN O'CONNELL Mr. O'Connell has been a manager of the fund since September 1998.
PORTFOLIO MANAGER, ADVISERS Before joining Franklin Templeton in May 1998, Mr. O'Connell worked
at Hambrecht & Quist.
</TABLE>

The fund pays the manager a fee for managing its assets and making its
investment decisions. The fee is an amount equal to an annual rate of: 0.75% of
the value of net assets up to and including $200 million; 0.65% of the value of
net assets over $200 million up to and including $1.3 billion; and 0.55% of the
value of net assets over $1.3 billion. The manager agreed in advance to limit
management fees and make certain payments to reduce fund expenses as necessary
so that Total Fund Operating Expenses did not exceed 1.25% of the fund's class
2 net assets in 1998. The manager is contractually obligated to continue this
arrangement through 1999.

FS-3 Franklin Small Cap Investments Fund - Class 2
<PAGE>

[Insert graphic of dollar bill]FINANCIAL HIGHLIGHTS

The financial highlights table provides further details to help you understand
the financial performance of the Franklin Small Cap Investments Fund - Class 2
since its inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and the expense ratio. This information has
been audited by McGladrey & Pullen, LLP, independent auditors. Their report -
along with the fund's financial statements - are included in the fund's Annual
Report (available upon request).

PERIOD ENDED
DECEMBER 31, 1998+
===================
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%

**Annualized.

+For the period July 29, 1998 (commencement of sales) to December 31, 1998.

FS-4 Franklin Small Cap Investments Fund - Class 2
<PAGE>

MUTUAL SHARES INVESTMENTS FUND

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOALS The fund's principal goal is capital appreciation. Its secondary goal is
income.

/bullet/ Undervalued stocks Stocks trading at a discount to asset value.

/bullet/ Reorganizing companies Securities of companies in the midst of change
such as mergers, consolidations, liquidations, reorganizations,
financial restructurings, or companies with takeover, tender or
exchange offers or likely to receive such offers (Reorganizing
Companies). The fund may participate in such transactions.

/bullet/ Distressed companies Securities of companies that are distressed or
even in bankruptcy.

[Begin callout]
The fund invests primarily in common stocks of companies the manager believes
are significantly undervalued.
[End callout]

TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain

MS-1 Mutual Shares Investments Fund - Class 2

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
Theseprice movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often out
of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.

[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]

FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.

COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country. The political, economic, and social structures of some
countries the fund invests in may be less stable and more volatile than those
in the U.S. The risks of investing in these countries include the possibility
of currency devaluations by a country's government or banking authority, the
imposition of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of assets,
punitive taxes, and certain custody and settlement risks. Non-U.S. companies
are not subject to the same disclosure, accounting, auditing and financial
reporting standards and practices as U.S. companies and their securities may
not be as liquid as securities of similar U.S. companies, or may become
illiquid. Non-U.S. stock exchanges, trading systems, brokers and companies
generally have less government supervision and regulation than in the U.S.

MS-2 Mutual Shares Investments Fund - Class 2

other financial intermediary issuer, as well as of the issuer of the underlying
indebtedness.

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

[Insert graphic of bull and bear]PAST PERFORMANCE

Because the fund started on May 1, 1998, performance for a full calendar year
is not yet available.

MS-3 Mutual Shares Investments Fund - Class 2

[Insert graphic of percentage sign]FEES AND EXPENSES

MUTUAL SHARES INVESTMENTS FUND - CLASS 2

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS 2
-------
Maximum sales charge (load) as a percentage of
offering price

Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)(1)
CLASS 2
-------

Management fees 0.60%
Distribution and service (12b-1) fees 0.25%
Other expenses 2.27%
-----
Total annual fund operating expenses 3.12%
Fee waiver/expense reduction (1.87%)
-----
Net expenses 1.25%
=====

1. Figures reflect expenses from the fund's inception on May 1, 1998 and are
annualized. The manager agreed in advance to limit management fees and make
certain payments to reduce fund expenses as necessary so that Total Fund
Operating Expenses did not exceed 1.25% of the fund's class 2 net assets in
1998. The manager is contractually obligated to continue this arrangement
through 1999.

EXAMPLE

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 2 $315 $963 $1,635 $3,430

[Insert graphic of briefcase]MANAGEMENT

Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey, 07078, is the fund's investment manager.

MANAGEMENT TEAM The team members primarily responsible for the fund's
management are:

Michael F. Price is Chairman of the Board of Directors which oversees the
management of Franklin Mutual. The managers listed above are part of a larger
team of investment professionals with management responsibility for all of the
funds managed by Franklin Mutual including this fund. Peter Langerman is Chief
Executive Officer and Robert Friedman is Chief Investment Officer of Franklin
Mutual. Mr. Friedman has overall supervisory responsibility for the day to day
management of the funds managed by Franklin Mutual.

MS-4 Mutual Shares Investments Fund - Class 2

The entire team also includes:

In addition, the following Franklin Mutual employees serve as Assistant
Portfolio Managers:

The fund pays the manager a fee for managing its assets and making its
investment decisions. The fee is equal to an annual rate of 0.60% of the fund's
net assets. The manager agreed in advance to limit management fees and make
certain payments to reduce fund expenses as necessary so that Total Fund
Operating Expenses did not exceed 1.25% of the fund's class 2 net assets in
1998. The manager is contractually obligated to continue this arrangement
through 1999.

MS-5 Mutual Shares Investments Fund - Class 2

[Insert graphic of dollar bill]FINANCIAL HIGHLIGHTS

The financial highlights table provides further details to help you understand
the financial performance of the Mutual Shares Investments Fund - Class 2 since
its inception. The table shows certain information on a single fund share basis
(per share performance). It also shows some key fund statistics, such as total
return (past performance) and the expense ratio. This information has been
audited by McGladrey & Pullen, LLP, independent auditors. Their report - along
with the fund's financial statements - are included in the fund's Annual Report
(available upon request).

PERIOD ENDED
DECEMBER 31, 1998+
------------------
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%

**Annualized.

+For the period November 10, 1998 (commencement of sales) to December 31, 1998.

MS-6 Mutual Shares Investments Fund - Class 2

TEMPLETON ASSET ALLOCATION FUND

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOAL The fund's investment goal is high total return.

[Begin callout]
The fund invests primarily in common stocks and bonds of U.S. and non-U.S.
countries.
[End callout]

TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.

TA-1 Templeton Asset Allocation Fund - Class 2

[Insert graphic of chart with line going up and down] MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies or
industries, or the securities markets as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often out
of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.

FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.

COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.

The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition of
exchange controls, foreign ownership limitations, expropriation, restrictions
on removal of currency or other assets, nationalization of assets, punitive
taxes, and certain custody and settlement risks. In addition, political or
economic conditions can cause previously established securities markets to
become limited trading markets, potentially causing liquid securities to become
illiquid, particularly in emerging market countries.

TA-2 Templeton Asset Allocation Fund - Class 2

more likely to encounter financial difficulties and be more vulnerable to
changes in the economy, such as a recession or a sustained period of rising
interest rates. If an issuer stops paying interest and/or principal, payments
may never resume. The fund may lose its entire investment on bonds that may be,
or are, in default.

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

[Insert graphic of bull and bear]PAST PERFORMANCE

TEMPLETON ASSET ALLOCATION FUND - CLASS 2(1)
CALENDAR YEAR TOTAL RETURNS

[Insert bar graph]

13.25% -7.98% 27.69% 8.08% 26.12% -2.96% 22.48% 18.93% 15.37% 6.10%
- --------------------------------------------------------------------------------
89 90 91 92 93 94 95 96 97 98

Best
Quarter:
Q4 '98
19.17%

Worst
Quarter:
Q3 '98
- -18.32%

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
----------- ------------ -------------
TEMPLETON ASSET
ALLOCATION FUND -
CLASS 2(1) 6.10% 11.59% 12.12%
MSCI WORLD INDEX(2) 24.80% 16.19% 11.21%
JP MORGAN GLOBAL
GOVERNMENT BOND
INDEX(2) 15.31% 8.09% 9.09%

1. Past expense reductions by the manager increased returns. All fund
performance assumes reinvestment of dividends and capital gains. Because class 2
shares were not offered until May 1, 1997, performance shown for periods prior
to that date represents the historical results of class 1 shares. Performance of
class 2 shares for periods after May 1, 1997 reflect class 2's higher annual
fees and expenses resulting from its Rule 12b-1 plan. Maximum annual plan
expenses are 0.25%.

2. Source: Standard & Poor's/registered trademark/ Micropal. The unmanaged MSCI
World Index tracks the performance of approximately 1500 securities in 23
countries and is designed to measure world stock market performance. The
unmanaged JP Morgan Global Government Bond Index tracks the performance of
government bond markets in 13 countries. Indices include reinvested dividends
and/or interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.

TA-3 Templeton Asset Allocation Fund - Class 2

[Insert graphic of percentage sign]FEES AND EXPENSES

TEMPLETON ASSET ALLOCATION FUND - CLASS 2

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS 2
-------
Maximum sales charge (load) as a percentage of
offering price

Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)

CLASS 2
-------
Management fees 0.60%
Distribution and service (12b-1) fees 0.25%
Other expenses 0.18%
----
Total annual fund operating expenses 1.03%
====

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. The example assumes you invest $10,000 for
the periods shown and then sell all of your shares at the end of those periods.
The example also assumes your investment has a 5% return each year and the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 2 $105 $328 $569 $1,259

[Insert graphic of briefcase]MANAGEMENT

Templeton Investment Counsel, Inc. (TICI), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager.

MANAGEMENT TEAM The team responsible for managing the equity portion of the
fund is:

<TABLE>
<S> <C>
GARY CLEMONS Mr. Clemons has managed the equity portion of the fund since 1995 and
SENIOR VICE PRESIDENT, TICI has been with the Franklin Templeton Group since 1990.

PETER A. NORI, CFA Mr. Nori has managed the equity portion of the fund since 1996 and has
SENIOR VICE PRESIDENT, TICI been with the Franklin Templeton Group since 1987.

TUCKER SCOTT, CFA Mr. Scott has been a manager of the fund since 1998. Before joining the
VICE PRESIDENT, TICI Franklin Templeton Group in 1996, he worked for Aeltus Investment
Management.
</TABLE>

The fund's debt securities are managed by a team of Templeton Global Bond
Managers, a division of TICI.

TA-4 Templeton Asset Allocation Fund - Class 2

[Insert graphic of dollar bill]FINANCIAL HIGHLIGHTS

The financial highlights table provides further details to help you understand
the financial performance of the Templeton Asset Allocation Fund - Class 2
since its inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and the expense ratio. This information has
been audited by McGladrey & Pullen, LLP, independent auditors. Their report -
along with the fund's financial statements - are included in the fund's Annual
Report (available upon request).

YEAR ENDED
DECEMBER 31,
----------------------------
1998 1997+
----------- --------------
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%

* 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 insurance
contracts for which the fund serves as an underlying investment vehicle. If
they had been included, total returns would be lower. Total return is not
annualized.

**Annualized.

+For the period May 1, 1997 (effective date) to December 31, 1997.

TA-5 Templeton Asset Allocation Fund - Class 2

TEMPLETON BOND FUND

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOAL The fund's investment goal is high current income. Capital appreciation is
a secondary consideration.

[Begin callout]
The fund invests primarily in bonds of governments located around the world.
[End callout]

TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.

TB-1 Templeton Bond Fund - Class 2

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.

COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.

The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition of
exchange controls, foreign ownership limitations, expropriation, restrictions
on removal of currency or other assets, nationalization of assets, punitive
taxes, and certain custody and settlement risks. In addition, political or
economic conditions can cause previously established securities markets to
become limited trading markets, potentially causing liquid securities to become
illiquid, particularly in emerging market countries.

The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are

TB-2 Templeton Bond Fund - Class 2

TB-3 Templeton Bond Fund - Class 2

[Insert graphic of bull and bear]PAST PERFORMANCE

TEMPLETON BOND FUND - CLASS 2(1)
CALENDAR YEAR TOTAL RETURNS

[Insert bar graph]

7.65% 6.33% 15.86% 5.33% 11.46% -4.88% 14.92% 9.45% 2.51% 7.17%
- --------------------------------------------------------------------------------
89 90 91 92 93 94 95 96 97 98

Best
Quarter:
Q3 '91
6.17%

Worst
Quarter:
Q1 '94
- -4.53%

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
----------- ------------ -------------
TEMPLETON BOND FUND(1) 7.17% 5.62% 7.45%
JP MORGAN GLOBAL GOVERNMENT
BOND INDEX(2) 15.31% 8.09% 9.09%

1. All fund performance assumes reinvestment of dividends and capital gains.
Past expense reductions by the manager increased returns. Because no class 2
shares were issued as of December 31, 1998, performance shown represents the
historical results of class 1 shares. Although invested in the same portfolio of
securities as class 1, class 2 performance will differ only because of class 2's
higher annual fees and expenses resulting from its Rule 12b-1 plan. Maximum
annual plan expenses are 0.15%.

TB-4 Templeton Bond Fund - Class 2

[Insert graphic of percentage sign]FEES AND EXPENSES

TEMPLETON BOND FUND - CLASS 2

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS 2
-------
Maximum sales charge (load) as a percentage of
offering price

Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)(1)
CLASS 2
-------
Management fees 0.50%
Distribution and service (12b-1) fees 0.15%
Other expenses 0.23%
----
Total annual fund operating expenses 0.88%
====

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. The example assumes you invest $10,000 for
the periods shown and then sell all of your shares at the end of those periods.
The example also assumes your investment has a 5% return each year and the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 2 $90 $281 $488 $1,084

[Insert graphic of briefcase]MANAGEMENT

TB-5 Templeton Bond Fund - Class 2

TEMPLETON DEVELOPING MARKETS FUND

[Insert graphic of bullseye and arrows]GOALS AND STRATEGIES

GOAL The fund's investment goal is long-term capital appreciation.

[Begin callout]
The fund invests primarily in the common stocks of companies located in
emerging market countries.
[End callout]

PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-
oriented, and long-term. In choosing equity investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund may
from time to time have significant investments in particular countries. The
manager intends to manage the fund's exposure to various geographic regions and
their currencies based on its assessment of changing market and political
conditions.

TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency
investments. Such investments may be medium-term (less than 5 years for this
fund) or short-term, including cash or cash equivalents. Under these
circumstances, the fund may temporarily be unable to pursue its investment
goal.

TD-1 Templeton Developing Markets Fund - Class 2

[Insert graphic of chart with line going up and down]MAIN RISKS

The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies or
industries, or the securities markets as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often out
of favor with other investors. If other investors fail to recognize the
company's value and do not become buyers, or if they become sellers, or in
markets favoring faster-growing companies, value stocks may not increase in
value as anticipated by the manager or may decline further.

COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.

The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition of
exchange controls, foreign ownership limitations, expropriation, restrictions
on removal of currency or other assets, nationalization of assets, punitive
taxes, and certain custody and settlement risks. In addition, political or
economic conditions can cause previously established securities markets to
become limited trading markets, potentially causing liquid securities to become
illiquid, particularly in emerging market countries.

CREDIT This is the possibility that an issuer will be unable to make interest
payments or repay principal.

TD-2 Templeton Developing Markets Fund - Class 2

Changes in an issuer's financial strength may affect the security's value and,
thus, impact the value of fund shares.

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

[Insert graphic of bull and bear]PAST PERFORMANCE

TEMPLETON DEVELOPING MARKETS FUND - CLASS 2(1)
CALENDAR YEAR TOTAL RETURNS

[Insert bar graph]

-29.33% -21.03%
------------------
97 98

Best
Quarter:
Q4 '98
26.73%

Worst
Quarter
Q4 '97
- -30.61%

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

SINCE
INCEPTION
PAST 1 YEAR (3/4/96)
------------- ------------
TEMPLETON DEVELOPING MARKETS FUND - CLASS 2(1) -21.03% -20.31%
MSCI EMERGING MARKETS FREE INDEX(2) -25.34% -13.81%
IFC INVESTABLE COMPOSITE INDEX2 -22.03% -12.49%

1. Past expense reductions by the manager increased returns. All fund
performance assumes reinvestment of dividends and capital gains. Because class 2
shares were not offered until May 1, 1997, performance shown for periods prior
to that date represent the historical results of class 1 shares. Performance of
class 2 shares for periods after May 1, 1997 reflect class 2's higher annual
fees and expenses resulting from its Rule 12b-1 plan. Maximum annual plan
expenses are 0.25%.

2. Source: Standard & Poor's/registered trademark/ Micropal. The unmanaged
Morgan Stanley Capital International/registered trademark/ Emerging Markets Free
Index is a market cap weighted index comprising 26 of the 48 countries in the
MSCI universe. The International Finance Corporation's Investable Composite
Index is an emerging markets index that includes 650 stocks from 18 countries
including Mexico, South Korea, Brazil, Jordan and Turkey. Indices include
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's investments.

TD-3 Templeton Developing Markets Fund - Class 2
<PAGE>

[Insert graphic of percentage sign]FEES AND EXPENSES

TEMPLETON DEVELOPING MARKETS FUND - CLASS 2

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS 2
-------
Maximum sales charge (load) as a percentage of
offering price

Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)

CLASS 2
-------
Management fees 1.25%
Distribution and service (12b-1) fees 0.25%
Other expenses 0.41%
----
Total annual fund operating expenses 1.91%
====

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. The example assumes you invest $10,000 for
the periods shown and then sell all of your shares at the end of those periods.
The example also assumes your investment has a 5% return each year and the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS 2 $194 $600 $1,032 $2,233