FRANKLIN VALUEMARK FUNDS, 485BPOS, 1999-04-30

FRANKLIN VALUEMARK FUNDS
485BPOS, 1999-04-30

Previous: FBR CAPITAL CORP /NV/, 8-K, 1999-04-30

Next: VIRTUAL ENTERPRISES INC, 10QSB, 1999-04-30

As filed with the Securities and Exchange Commission on April 30, 1999

File Nos.
33-23493
811-5583

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. 28 (X)

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 29 (X)

FRANKLIN VALUEMARK FUNDS
(Exact Name of Registrant as Specified in Charter)

777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code (650) 312-2000

DEBORAH R. GATZEK, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(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) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) 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:
Money Market Fund - Class 1
Money Market Fund - Class 2
Growth and Income Fund - Class 1
Growth and Income Fund - Class 2
Natural Resources Securities Fund - Class 1
Natural Resources Securities Fund - Class 2
Real Estate Securities Fund - Class 1
Real Estate Securities Fund - Class 2
Global Utilities Securities Fund - Class 1
Global Utilities Securities Fund - Class 2
High Income Fund - Class 1
High Income Fund - Class 2
Templeton Global Income Securities Fund Class 1
Templeton Global Income Securities Fund Class 2
Income Securities Fund Class 1
Income Securities Fund Class 2
U.S. Government Securities Fund - Class 1
U.S. Government Securities Fund - Class 2
Zero Coupon Fund - 2000 - Class 1
Zero Coupon Fund - 2000 - Class 2
Zero Coupon Fund - 2005 - Class 1
Zero Coupon Fund - 2005 - Class 2
Zero Coupon Fund - 2010 - Class 1
Zero Coupon Fund - 2010 - Class 2
Rising Dividend Fund - Class 1
Rising Dividend Fund - Class 2
Templeton Pacific Growth Fund - Class 1
Templeton Pacific Growth Fund - Class 2
Templeton International Equity Fund - Class 1
Templeton International Equity Fund - Class 2
Templeton Developing Markets Equity Fund - Class 1
Templeton Developing Markets Equity Fund - Class 2
Templeton Global Growth Fund - Class 1
Templeton Global Growth Fund - Class 2
Templeton Global Asset Allocation Fund - Class 1
Templeton Global Asset Allocation Fund - Class 2
Small Cap Fund - Class 1
Small Cap Fund - Class 2
Capital Growth Fund - Class 1
Capital Growth Fund - Class 2
Templeton International Smaller Companies Fund - Class 1
Templeton International Smaller Companies Fund - Class 2
Mutual Discovery Securities Fund - Class 1
Mutual Discovery Securities Fund - Class 2
Mutual Shares Securities Fund - Class 1
Mutual Shares Securities Fund - Class 2
Global Health Care Securities Fund - Class 1
Global Health Care Securities Fund - Class 2
Value Securities Fund - Class 1
Value Securities Fund - Class 2

Prospectus

Franklin
Valuemark
Funds

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

FRANKLIN VALUEMARK FUNDS

[Begin callout]
Information about each fund you should know before investing
[End callout]

1 Overview

Individual Fund Descriptions

Capital Preservation and Income

2 Money Market Fund

Income

4 High Income Fund

7 Templeton Global Income Securities Fund

10 U.S. Government Securities Fund

13 Zero Coupon Funds, 2000, 2005, 2010

Growth and Income

16 Global Utilities Securities Fund

19 Growth and Income Fund

21 Income Securities Fund

24 Mutual Shares Securities Fund

28 Real Estate Securities Fund

31 Rising Dividends Fund

34 Templeton Global Asset Allocation Fund

37 Value Securities Fund

Capital Growth

40 Capital Growth Fund

43 Global Health Care Securities Fund

46 Mutual Discovery Securities Fund

51 Natural Resources Securities Fund

54 Small Cap Fund

56 Templeton Developing Markets Equity Fund

59 Templeton Global Growth Fund

62 Templeton International Equity Fund

65 Templeton International Smaller Companies Fund

68 Templeton Pacific Growth Fund

Additional Information, All Funds

71 Important Recent Developments

71 Distributions and Taxes

72 Financial Highlights

Fund Account Information

[Begin callout]
Information about fund account transactions
and services
[End callout]

76 Buying Shares

76 Selling Shares

76 Exchanging Shares

76 Fund Account Policies

77 Questions

For More Information

[Begin callout]
Where to learn more about each fund
[End callout]

Back Cover

Franklin Valuemark Funds

Overview

[insert graphic of pyramid]

Franklin Valuemark Funds (the Trust) currently consists of twenty-five
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 indicates which funds and classes are
available to you.

INVESTMENT CONSIDERATIONS

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

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

o 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.

o 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 investments goals.

Risks

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

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

o 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 $216 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.

o Franklin Advisers, Inc., 777 Mariners Island Blvd., P.O. Box 7777, San
Mateo, California, 94403-7777.

o Franklin Advisory Services, LLC, One Parker Plaza, Ninth Floor, Fort Lee,
New Jersey, 07024.

o Franklin Mutual Advisers, LLC, 51 John F. Kennedy Parkway, Short Hills, New
Jersey, 07078.

o Templeton Asset Management Ltd., 7 Temasek Blvd. #38-03, Suntec Tower One,
Singapore, 038987.

o Templeton Global Advisors Limited, Lyford Cay Nassau, N.P., Bahamas.

o Templeton Investment Counsel, Inc., Broward Financial Centre, Suite 2100,
Fort Lauderdale, Florida, 33394.

Money Market Fund
[Insert graphic of bullseye and arrows]

Goal and Strategies

Goal The fund's goal is high current income, consistent with liquidity and
capital preservation. The fund also tries to maintain a stable share price of
$1.00.

[Begin callout]
The fund invests exclusively in money market securities.
[End callout]

Principal investments The fund invests exclusively in U.S. dollar
denominated money market debt instruments, including those issued by:

o U.S. or foreign corporations;
o U.S. and foreign banks;
o the U.S. Government, its agencies or authorities; and
o foreign governments or multinational organizations such as the World Bank.

A debt instrument obligates the issuer both to repay a loan of money at a
future date and generally to pay interest. Money market securities are
high-quality, short-term (maturing in 13 months or less) debt instruments
that may have fixed, floating or variable interest rates. Common money market
securities are U.S. Treasury bills, U.S. Government agency securities,
commercial paper (unsecured promissory note issued by large companies or
financial firms), bank certificates of deposit, repurchase agreements,
short-term corporate obligations, and bankers acceptances (credit instruments
guaranteed by a bank).

Under the SEC's money fund rules, the fund maintains a dollar-weighted
average portfolio maturity of 90 days or less and only buys securities:

o with remaining maturities of 397 days or less, and
o that the fund's Board of Trustees determines present minimal credit risks,
and
o that are rated in the top two short-term rating categories by independent
rating agencies or, if unrated, determined by the fund's Board of Trustees
to be comparable.

No more than 25% of the fund's total assets may be invested in money market
securities issued by foreign banks or foreign branches of U.S. banks. No more
than 5% of assets may be invested in securities rated in the second highest
category (or comparable unrated). The fund may acquire securities on a
when-issued or delayed delivery basis, lend portfolio securities, and invest
up to 10% of its assets in illiquid investments.

PORTFOLIO SELECTION In selecting investments for the fund, the manager uses
a conservative investment approach, focusing on the highest quality and the
most liquid of eligible money market securities. The manager then assesses
the relative value of each security meeting its stringent credit criteria in
order to find the best combination of assets that it believes will maximize
the fund's yield relative to its investment environment expectations. The
manager also monitors short-term interest rates, economic conditions, and
Federal Reserve monetary policy to determine the portfolio maturity it
believes will provide a high overall return to the fund. Consistent with the
manager's strategy of providing a higher-quality investment, the fund does
not invest in potentially volatile securities.

[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.

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. In that case, the fund would receive
less income, resulting in lower total return. Since the fund limits its
investments to high-quality, short-term securities, it will generally earn
lower yields than a fund with lower-quality, longer-term securities subject
to more risk.

CREDIT The fund's investments in securities which are not backed by the full
faith and credit of the U.S. Government depend on the ability of the issuer
to meet interest or principal payments. Changes in an issuer's financial
strength may affect the debt security's value and, thus, impact the value of
fund shares. Even securities supported by credit enhancements have the credit
risk of the entity providing credit support.

FOREIGN SECURITIES The fund's investments in foreign money market securities are
always dollar denominated. Nonetheless, securities or credit support, issued by
a foreign entity are subject to possible adverse foreign economic, political or
legal developments that may affect the ability of that entity to meet its
obligations. In addition, non-U.S. companies are not subject to the same
disclosure, accounting, auditing and financial reporting standards and practices
as 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.

[Begin callout]
An investment in the fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the fund tries
to keep a $1 share price, it is possible to lose money by investing in
the fund.
[End callout]

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Securities purchased on a
when-issued or delayed delivery basis are subject to market fluctuations and
their value at delivery may be higher or lower than the purchase price.

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

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 the fund's average
annual total returns. 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.

MONEY MARKET FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

7.62% 5.48% 3.06% 2.54% 3.82% 5.74% 5.16% 5.24% 5.22%

90 91 92 93 94 95 96 97 98

Year

[Begin callout]
Best Quarter:

Q4 '89
1.96 %

Worst Quarter:

Q2 '93
0.61%
[End callout]

Average Annual Total Returns
For the periods ended December 31, 1998

Since Inception
Past 1 Year Past 5 Years (01/24/89)
- ------------------------------------------------------------------------------
Money Market Fund - Class 11 5.22% 5.04% 5.16%

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

To obtain the fund's current yield information, please call 1-800/342-3863.

[Insert graphic of briefcase] Management

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

The fund pays the manager a fee for managing the fund's assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998,
management fees, before any advance waiver, were 0.51% of the fund's average
daily net assets. Under an agreement by the manager to limit its fees, the
fund paid 0.43% of its average daily net assets to the manager in 1998. The
manager ended its fee waiver arrangement beginning January 1, 1999.

High Income Fund
[Insert graphic of bullseye and arrows] Goals and Strategies

GOALS The fund's principal investment goal is to earn a high level of
current income. Its secondary goal is capital appreciation.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in debt securities. The fund seeks to invest
in debt securities that are offering the highest yield and expected total
return. 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; zero coupon bonds; notes; and short-term investments,
including cash or cash equivalents. While the fund may also invest in
dividend-paying common or preferred stocks, it more typically holds equity
as a result of receiving those securities in a corporate restructuring.
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 high yield, lower rated bonds.
[End callout]

The fund may invest up to 100% of its assets in high yield, lower quality
debt securities ("junk bonds"). These securities are either rated below
investment grade (below the top four rating categories) by independent rating
agencies such as Standard & Poor's Corporation (S&P) and Moody's Investors
Service, Inc. (Moody's), or are unrated securities the manager determines are
comparable. Nevertheless, the fund generally invests in securities rated at
least Caa by Moody's or CCC by S&P or unrated securities the fund's manager
determines are comparable. The fund will not purchase defaulted securities.
If, however, a security is downgraded in rating or goes into default, the
fund will not automatically sell the security. Generally, lower rated
securities pay higher yields than more highly rated securities to compensate
investors for the higher risk. During 1998, about 97.2% of the fund's
portfolio was invested in lower rated and comparable quality unrated debt
securities.

The fund may also invest up to 20% of its total assets in foreign securities,
including up to 10% in emerging markets, and will typically focus on
dollar-denominated corporate debt. 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.

PORTFOLIO SELECTION Yield and expected return are the primary criteria used
by the manager in selecting securities. The manager searches for securities
it believes offer opportunities for income today and growth tomorrow. It
performs independent analysis of the corporate debt securities being
considered for the fund's portfolio, rather than relying principally on the
ratings assigned by rating agencies. In its analysis, the manager considers a
variety of factors, including:

o a security's relative value based on such factors as anticipated cash flow,
interest or dividend coverage, asset coverage, and earnings prospects;
o the experience and managerial strength of the company;
o responsiveness to changes in interest rates and business conditions;
o debt maturity schedules and borrowing requirements; and
o the company's changing financial condition and market recognition of the
change.

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
goals.

[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.

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 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]

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.

LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes
called "junk bonds," generally have more risk than higher-rated securities.
Companies issuing high yield debt securities are not as strong financially as
those with higher credit ratings. These companies are more likely to
encounter financial difficulties and are more vulnerable to changes in the
economy, such as a recession or a sustained period of rising interest rates,
that could prevent them from making interest and principal payments. 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 changes in the ratings assigned by ratings
agencies. Prices are often closely linked with the company's stock prices and
typically rise and fall in response to factors that affect stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, stock market
activity, large sustained sales by major investors, a high-profile default,
or other factors. High yield securities are also generally less liquid than
higher-quality bonds. Many of these securities do not trade frequently, and
when they do trade their prices may be significantly higher or lower than
expected. At times, it may be difficult to sell these securities promptly at
an acceptable price, which may limit the fund's ability to sell securities in
response to specific economic events or to meet redemption requests.

FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. 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 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.

Emerging market countries have additional risks due to a lack of established
legal, business and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. While short-term volatility in
these markets can be disconcerting, declines in excess of 50% are not unusual.

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, risks, and bond
ratings can be found in the SAI.

[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.

HIGH INCOME FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

-8.67% 30.15% 16.21% 15.71% -2.26% 19.76% 13.90% 11.47% 0.99%

90 91 92 93 94 95 96 97 98

Year

[Begin callout]
Best Quarter:

Q1 '91
11.19%

Worst Quarter:

Q3 '90
- -8.87%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS

For the periods ended December 31, 1998

Since Inception
Past 1 Year Past 5 Years (01/24/89)
- --------------------------------------------------------------------------------
High Income Fund - Class 11 0.99% 8.46% 9.35%
CSFirst Boston High Yield Index2 0.58% 8.16% 10.65%

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

2. Source: Standard & Poor's(R) Micropal. The unmanaged CS First Boston High
Yield Index is a trader-priced portfolio constructed to mirror the public
high yield debt market. Indices include 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 briefcase] Management

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

Jeff Holbrook, CFA
Vice President, Advisers

Mr. Holbrook has been a manager of fund since 1997, and has been with the
Franklin Templeton Group since 1992.

Chris Molumphy, CFA
Senior Vice President, Advisers

Mr. Molumphy has been a manager of the fund since its inception in 1989, and
has been with the Franklin Templeton Group since 1988.

R. Martin Wiskemann
Vice President, Advisers

Mr. Wiskemann has been a manager of the fund since its inception in 1989. Mr.
Wiskemann has more than 30 years' experience in the securities industry.

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

Templeton Global Income Securities Fund

[Insert graphic of bullseye and arrows] Goal 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.

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

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 may also invest up to 30% of its net assets in high
yield, lower rated debt securities ("junk bonds") that are rated at least B,
including emerging market debt, or if unrated, determined by the fund's
manager to be comparable. The fund will not purchase defaulted securities.
If, however, a security is downgraded in rating or goes into default, the
fund will not automatically sell the security. During 1998, about 20.2% 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.

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).

[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.

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.

FOREIGN SECURITIES Securities of governments and companies located outside
the U.S. involve risks that can increase the potential for losses in 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]

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 are generally 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.

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.

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.

HEDGING INSTRUMENTS Hedging Instruments used by the 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.

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.

[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.

TEMPLETON GLOBAL INCOME FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

9.83% 12.34% -0.40% 16.68% -4.99% 14.68% 9.56% 2.55% 7.08%

90 91 92 93 94 95 96 97 98

Year

[Begin callout]
Best Quarter:

Q1 '93
5.33%

Worst Quarter:

Q3 '92
- -4.84%
[End callout]

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

Since Inception
Past 1 Year Past 5 Years (01/24/89)
- ------------------------------------------------------------------------------

Templeton Global Income
Securities Fund - Class 11 7.08% 5.56% 7.52%
JP Morgan Global
Government Bond Index2 15.31% 8.09% 9.23%

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

2. Source: Standard & Poor's(R) Micropal. 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.

[Insert graphic of briefcase] Management

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

Under an agreement with Advisers, Templeton Investment Counsel, Inc. (TICI)
through its Templeton Global Bond Managers division (Global Bond Managers),
is the fund's sub-advisor. A team from Global Bond Managers provides Advisers
with investment management advice and assistance and is responsible for the
day-to-day management of
the fund.

U.S. Government Securities Fund

[Insert graphic of bullseye and arrows] Goal and Strategies

GOAL The fund's investment goal is income.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
in a portfolio limited to U.S. Government securities, primarily fixed and
variable rate mortgage-backed securities. The fund currently invests a
substantial portion of its assets in Government National Mortgage Association
obligations ("Ginnie Maes").

[Begin callout]
The fund invests primarily in mortgage-backed U.S. Government securities.
[End callout]

Ginnie Maes represent an ownership interest in mortgage loans made by banks
and other financial institutions to finance purchases of homes. The
individual loans are packaged or "pooled" together for sale to investors. As
the underlying mortgage loans are paid off, investors receive principal and
interest payments. Ginnie Maes carry a guarantee backed by the full faith and
credit of the U.S. Government. The guarantee applies only to the timely
payment of principal and interest on the mortgages in the pool, and does not
apply to the market prices and yields of the Ginnie Maes or to the net asset
value or performance of the fund, which will vary with changes in interest
rates and other market conditions. Ginnie Mae yields (interest income as a
percent of price) have historically exceeded the current yields on other
types of U.S. Government securities with comparable maturities, although
interest rate changes and unpredictable prepayments can greatly change total
return.

In addition to Ginnie Maes, the fund may invest in mortgage-backed securities
issued or guaranteed by the Federal National Mortgage Association, Federal
Home Loan Mortgage Corporation, or other U.S. Government agencies. The fund
may also invest in U.S. Government securities backed by other types of
assets, including business loans guaranteed by the U.S. Small Business
Administration, and obligations of the Tennessee Valley Authority. Finally,
the fund may invest in U.S. Treasury bonds, notes and bills, and securities
issued by U.S. Government agencies or authorities. Securities issued or
guaranteed by FNMA, FHLMC, TVA and certain other entities are not backed by
the full faith and credit of the U.S. Government, but are generally supported
by the creditworthiness of the issuer.

These debt securities may be fixed-rate, adjustable-rate, a hybrid of the
two, or zero coupon securities. 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. Zero coupon securities are debt securities that make no
periodic interest payments but instead are sold at substantial discounts from
their value at maturity. The fund typically invests in zero coupon bonds
issued or created by the U.S. Government or its agencies, where the coupons
have been stripped off a bond and the principal and interest payments are
sold separately.

The fund may purchase securities on a "to-be-announced" and "delayed
delivery" basis. This means the securities will be paid for and delivered to
the fund at a future date, generally in 30 to 45 days.

PORTFOLIO SELECTION The manager generally buys, and holds, high quality
securities which pay high current interest rates. Using this straightforward,
low turnover approach, the manager seeks to produce high current income with
a high degree of credit safety and lower price volatility, from a
conservatively managed portfolio of U.S. Government securities.

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.

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. Zero coupon bonds are more
sensitive to interest rate changes and their price will fluctuate more than
the prices of interest-paying bonds or notes for comparable maturities. 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.

GINNIE MAES Ginnie Maes, and other mortgage- and asset-backed securities, differ
from conventional debt securities because principal is paid back over the life
of the security rather than at maturity. The fund may receive unscheduled
prepayments of principal due to voluntary prepayments, refinancing or
foreclosure on the underlying mortgage or other loans. During periods of
declining interest rates, the volume of principal prepayments generally
increases as borrowers refinance their mortgages at lower rates. The fund may be
forced to reinvest returned principal at lower interest rates, reducing the
fund's income. For this reason, Ginnie Maes may be less effective than other
types of securities as a means of "locking in" long-term interest rates and may
have less potential for capital appreciation during periods of falling interest
rates than other investments with similar maturities. A reduction in the
anticipated rate of principal prepayments, especially during periods of rising
interest rates, may increase the effective maturity of Ginnie Maes making them
more susceptible than other debt securities to a decline in market value when
interest rates rise. This could increase volatility of the fund's returns and
share price.

CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. The fund's investments in securities
which are not backed by the full faith and credit of the U.S. Government
depend upon the ability of the issuing agency or instrumentality to meet
interest or principal payments, and may not permit recourse against the U.S.
Treasury.

[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 calendar years or since the fund's inception. The table shows how the
fund's average annual total returns compare with those of a broad-based
index. Of course, past performance cannot predict or guarantee future results.

U.S. GOVERNMENT SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

8.92% 15.93% 7.69% 9.71% -4.55% 19.46% 3.62% 9.31% 7.44%

90 91 92 93 94 95 96 97 98

Year

[Begin callout]
Best Quarter:

Q2 '95
6.53%

Worst Quarter:

Q1 '94
- -4.24%
[End callout]

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

Since Inception
Past 1 Year Past 5 Years (03/14/89)
- -------------------------------------------------------------------------------

U.S. Government Securities
Fund - Class11 7.44% 6.77% 8.29%
Lehman Brothers Intermediate
Government Bond Index2 8.49% 6.45% 8.43%

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

2. Source: Standard & Poor's(R) Micropal. Lehman Brothers Intermediate
Government Bond Index is an unmanaged index of fixed-rate bonds issued by the
U.S. Government and its agencies that are rated investment grade or higher
and have one to ten years remaining until maturity and at least $100 million
outstanding. Indices include 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 briefcase] Management

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

Jack Lemein
Executive Vice President, Advisers

Mr. Lemein has been a manager of the fund since its inception in 1989. Mr.
Lemein has more than 30 years experience in the securities industry.

David Capurro
Senior Vice President, Advisers

Mr. Capurro has been a manager of the fund since its inception in 1989, and
has been with the Franklin Templeton Group since 1983.

Roger Bayston, CFA
Senior Vice President, Advisers

Mr. Bayston has been a manager of the fund since 1993, and has been with the
Franklin Templeton Group since 1991.

T. Anthony Coffey, CFA
Vice President, Advisers

Mr. Coffey has been a manager of the fund since 1996, and has been with the
Franklin Templeton Group since 1989.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.48% of its average daily net assets to the manager.

Zero Coupon Funds:
maturing in December 2000, 2005, 2010

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

GOAL Each fund's investment goal is to provide as high an investment return
as is consistent with capital preservation.

PRINCIPAL INVESTMENTS Under normal market conditions, each fund will invest at
least 65% of its net assets in zero coupon securities, primarily U.S. Treasury
issued stripped securities and stripped securities issued by the U.S.
Government, and its agencies and authorities. The fund may also invest a lesser
amount in zero coupon securities issued by U.S. companies and stripped
eurodollar obligations, which are U.S. dollar denominated debt securities
typically issued by foreign subsidiaries of U.S. companies.

[Begin callout]
Each fund seeks to return a reasonably assured targeted dollar amount,
predictable at the time of investment, on a specific date in the future by
investing primarily in zero coupon securities.
[End callout]

Stripped U.S. Treasury securities are backed by the full faith and credit of
the U.S. Government. The guarantee applies only to the timely payment of
principal and does not apply to the market prices and yields of the zero
coupon bonds or to the net asset value or performance of the fund, which will
vary with changes in interest rates and other market conditions. Where the
fund invests in other than stripped U.S. Treasury securities, the zero coupon
bonds will be rated at least A by independent rating agencies such as
Standard & Poor's Corporation (S&P) or Moody's Investors Services, Inc.
(Moody's) or, if unrated, securities 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. Zero coupon
securities are debt securities that make no periodic interest payments but
instead are sold at substantial discounts from their value at maturity. The
buyer receives the rate of return by the gradual appreciation of the zero
coupon bond, which is redeemed at face value on the specified maturity date.
The most common zero coupon security is the zero coupon bond which may be
issued by a government or a corporation, or may be created by a dealer firm
when it strips the coupons off a bond and sells the principal and interest
payments separately.

As a fund approaches its Target Date, its investments will be made up of
increasingly larger amounts of short-term money market investments, including
cash and cash equivalents. Each fund reserves the right to invest up to 10%
of its total assets in foreign securities, although typically each fund
invests less, and only in dollar denominated obligations.

PORTFOLIO SELECTION In selecting investments for the funds, the manager
seeks to keep the average duration of each fund to within twelve months of
each fund's maturity Target Date. Duration is a measure of the length of an
investment, taking into account the timing and amount of any interest
payments and the principal repayment. By balancing investments with slightly
longer and shorter durations, the manager believes it can reduce its unknown
"reinvestment risk." Since each fund will not be invested entirely in zero
coupon securities maturing on the Target Date but will also invest in money
market securities, there will be some reinvestment risk and liquidation costs.

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.

MATURITY Each fund matures on the third Friday of December of its specific
maturity year (Target Date). On each fund's Target Date, the fund will be
converted into cash. At least 30 days prior to the Target Date, contract
owners will be notified and given an opportunity to select another investment
option. If an investor does not complete an instruction form directing what
should be done with the cash proceeds, the proceeds will be automatically
invested in the Money Market Fund and the contract owners will be notified of
such event.

[Insert graphic of chart with line going up and down] main risks

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

If fund shares are redeemed prior to the maturity of the fund, an investor
may receive a significantly different investment return than anticipated at
the time of purchase. Therefore, the Zero Coupon Funds may not be appropriate
for contract owners who do not plan to invest for the long-term or until
maturity.

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. Because zero coupon securities do
not pay interest, the market value of zeros can fall more dramatically than
interest-paying securities of similar maturities when interest rates rise.
When interest rates fall, however, zeros rise more rapidly in value. In
general, securities with longer maturities usually are more sensitive to
price changes. Thus, the Zero Coupon Fund 2010 may experience more volatility
in its share price than the Zero Coupon Fund 2000. 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.

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 debt security's value and, thus, impact the value of
fund shares.

[Insert graphic of bull and bear] PAST PERFORMANCE

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

ZERO COUPON FUND - 2000 CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

5.91% 20.19% 9.04% 16.15% -6.76% 20.67% 2.43% 7.11% 7.50%

90 91 92 93 94 95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q4 '90
9.51%

Worst
Quarter:

Q1 '94
- -5.18%

[End callout]

Average Annual Total Returns
For the periods ended December 31, 1998

Since Inception
Past 1 Year Past 5 Years (3/14/89)
- --------------------------------------------------------------------------------

Zero Coupon - 2000 Class 11 7.50% 5.82% 9.21%
Merrill Lynch Zero Coupon 1-Year
Bond Total Return Index2 6.22% 5.82% 6.81%
Merrill Lynch Zero Coupon 5-Year
Bond Total Return Index2 10.57% 6.88% 9.89%

Zero Coupon Fund - 2005 Class 1
Calendar Year Total Returns1

[Insert bar graph]

2.69% 20.37% 10.81% 22.21% -9.60% 31.76% -0.50% 11.37% 12.53%

90 91 92 93 94 95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q1 '89
13.10%

Worst
Quarter:

Q1 '94
- -8.15%
[End callout]

Average Annual Total Returns
For the periods ended December 31, 1998

Since Inception
Past 1 Year Past 5 Years (3/14/89)
- ------------------------------------------------------------------------------

Zero Coupon - 2005 Class 11 12.53% 8.24% 11.35%
Merrill Lynch Zero Coupon 5-Year
Bond Total Return Index2 10.57% 6.88% 9.89%
Merrill Lynch Zero Coupon 10-Year
Bond Total Return Index2 15.53% 9.52% 12.55%

Zero Coupon Fund - 2010 Class 1
Calendar Year Total Returns1

[Insert bar chart]

0.57% 20.09% 10.31% 25.47% -10.97% 42.79% -2.69% 16.57% 14.45%

90 91 92 93 94 95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q2 '95
16.03%

Worst
Quarter:

Q1 '90
- -10.43%
[End callout]

Average Annual Total Returns
For the periods ended December 31, 1998

Since Inception
Past 1 Year Past 5 Years (3/14/89)
- --------------------------------------------------------------------------------

Zero Coupon - 2010 Class 11 14.45% 10.54% 12.61%
Merrill Lynch Zero Coupon 10-Year
Bond Total Return Index2 15.53% 9.52% 12.55%
Merrill Lynch Zero Coupon 20-Year
Bond Total Return Index2 15.98% 12.80% 15.41%

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

2. Source: Standard & Poor's(R) Micropal. The unmanaged Merrill Lynch Zero
Coupon indices include zero coupon bonds that pay no interest and are issued
at a discount from redemption price. One cannot invest directly in an index,
nor is an index representative of the fund's investments.

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the funds' investment manager.

MANAGEMENT TEAM The team responsible for the funds' management is:

David Capurro
Senior Vice President, Advisers
Mr. Capurro has been a manager of the fund since its inception in 1989, and
has been with the Franklin Templeton Group since 1983.

Jack Lemein
Executive Vice President, Advisers
Mr. Lemein has been a manager of the fund since its inception in 1989. Mr.
Lemein has more than 30 years' experience in the securities industry.

T. Anthony Coffey, CFA
Vice President, Advisers

Mr. Coffey has been a manager of the fund since 1989, and has been with the
Franklin Templeton Group since 1989.

Each fund pays the manager a fee for managing the fund's assets, making its
investment decisions, and providing certain administrative facilities and
services for the funds. For the fiscal year ended December 31, 1998,
management fees, before any advance waiver, were 0.63% each for the 2000 and
2005 funds, and 0.62% for the 2010 fund, as a percentage of each fund's
average daily net assets. Under an agreement by the manager to limit its
fees, the 2000 and 2005 funds each paid 0.37%, and the 2010 fund paid 0.36%,
of average daily net assets to the manager in 1998. The manager ended its fee
waiver agreement beginning January 1, 1999.

Global Utilities Securities Fund

[Insert graphic of bullseye and arrows] Goals and Strategies

GOALS The fund's investment goals are capital appreciation and current
income.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies in the
public utilities industry. These companies are primarily engaged in the
ownership, operation or other services, or manufacture of facilities or
equipment used to provide:

o electricity
o natural gas
o telecommunications services (including telephone communications, cable and
internet, satellite and other pay television services, and wireless
telecommunications)
o water

The manager expects to invest substantially in the electricity and
telecommunications sectors.

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 may buy public utilities companies anywhere in the world, including
emerging markets, but generally invests a greater percentage of its assets in
U.S. companies than any other single country.

[Begin callout]
The fund concentrates in common stocks of U.S.
and non-U.S. companies engaged in the public utilities industry.
[End callout]

The fund may also invest a significant portion of its assets in small-cap
companies which have market capitalization values (share price times the
number of common stock shares outstanding) of less than $1.5 billion.

PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined value-oriented strategy. Relying on a team of analysts
to provide in-depth industry expertise, the manager looks for companies that
will position the fund to benefit from potential future technological
advances and increasing worldwide demand in the public utilities sector. As a
"bottom-up" investor focusing primarily on individual securities, 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.

[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.

UTILITIES INDUSTRY By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. Utility companies in the U.S.
and in non-U.S. countries have generally been subject to substantial
government regulation. Major changes in government policies, ranging from
increased regulation or expropriation to deregulation, privatization or
increased competition, may dramatically increase or reduce opportunities for
companies in these industries. For example, while certain companies may
develop more profitable opportunities, others may be forced to defend their
core businesses and may be less profitable.

In addition, electric utility companies have historically been subject to
price regulation; risks associated with high interest costs on borrowings or
reduced ability to borrow; restrictions on operations and increased costs due
to environmental and safety regulations; regulators disallowing these higher
costs in rate authorizations; difficulties in obtaining fuel for electric
generation at reasonable prices; risks associated with the operation of
nuclear power plants; and the effects of energy conservation and other
factors affecting the level of demand for services.

Gas transmission and distribution companies continue to undergo significant
changes as well. Many companies have diversified into oil and gas exploration
and development, making returns more sensitive to energy prices.

The wireless telecommunications industry is in its early developmental
stages, characterized by emerging, rapidly growing companies, and is subject
to the risk of rapidly changing technology. The water supply industry is
highly fragmented due to local ownership. Generally, these companies are more
mature and expect little or no per capita volume growth.

[Begin callout]
Because the stocks the fund holds fluctuate in price with global market
conditions, currencies, and interest rate movements, 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]

INTEREST RATE Rate changes can be sudden and unpredictable. Utility company
stocks often pay relatively high dividends, so they are particularly
sensitive to interest rate movements. Therefore, like bonds, their stock
prices may rise as interest rates fall or fall as interest rates rise.

FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. 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.

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 foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.

SMALLER COMPANIES While smaller companies, and to a lesser extent mid-size
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 have fluctuated
independently from larger company securities, especially over the
shorter-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, their growth prospects are less
certain, their securities are less liquid, and they can be considered
speculative. These companies may suffer significant losses, and technology
and biotechnology industry stocks, in particular, can be subject to abrupt or
erratic price movements.

[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.

GLOBAL UTILITIES SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

1.84% 24.56% 9.69% 10.54% -11.56% 31.35% 7.07% 26.76% 11.19%

90 91 92 93 94 95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q4 '97
13.45%

Worst
Quarter:

Q1 '94
- -10.27%
[End callout]

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

Since Inception
Past 1 Year Past 5 Years (1/24/89)
- ------------------------------------------------------------------------------

Global Utilities Securities
Fund - Class 11 11.19% 11.88% 12.57%
S&P 500(R)Index2 28.58% 24.06% 18.70%
FT/S&P Actuaries World
Utilities Index2 36.67% 15.96% 12.95%

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

2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Financial Times/S&P Actuaries World Utilities Index includes electric
utilities, waterworks supply, natural gas and telephone companies. Indices
include 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 briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

Ian Link, CFA
Vice President, Advisers

Mr. Link has been a manager of the fund since 1995, and has been with the
Franklin Templeton Group since 1989.

Alex W. Peters
PORTFOLIO MANAGER, Advisers

Mr. Peters has been a manager of the fund since 1999, and has been with the
Franklin Templeton Group since 1992.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.47% of its average daily net assets to the manager.

Growth and Income Fund

[Insert graphic of bullseye and arrows] Goals and Strategies

GOALS The fund's principal investment goal is capital appreciation. Its
secondary goal is to provide current income.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in a broadly diversified portfolio of equity
securities that the manager believes have the potential to increase in value.
To help identify undervalued financially strong companies with attractive
long-term growth prospects, the manager uses a current relative yield
analysis. Dividend yield is a stock's annual per share dividends divided by
its per share market price. Following this strategy, the fund will invest
predominantly in common stocks that have dividend yields at least equal to
the yield of the Standard & Poor's 500 Index. The fund seeks current income
through receipt of dividends from its investments. 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 may also invest up to 30% of its total assets in foreign securities,
including Depositary Receipts and emerging markets, but currently intends to
limit such investments to 20%. The fund may also invest to a lesser extent in
equity real estate investment trusts (REITs). REITS are usually publicly
traded companies that manage a portfolio of real estate to earn profits and
tend to pay high yields since they must distribute most of their earnings.

[Begin callout]
The fund invests primarily in common stocks offering above market current
dividend yields.
[End callout]

[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.
[Begin 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, 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.

Emerging market countries have additional risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. While short-term volatility in
these markets can be disconcerting, declines in excess of 50% are not unusual.

REITs A REIT's performance depends on the types and locations of the
properties it owns and on how well it manages those properties. The value of
a REIT may also be affected by factors that affect the underlying properties,
the real estate industry, or local or general economic conditions.

[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.

GROWTH AND INCOME FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

- -2.35% 23.63% 6.73% 10.32% -3.41% 32.83% 14.19% 27.74 8.33%

90 91 92 93 94 95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q1 '91
10.93%

Worst
Quarter:

Q3 '90
- -12.63%
[End callout]

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

Since Inception
Past 1 Year Past 5 Years (01/24/89)
- ------------------------------------------------------------------------------

Growth and Income Fund -
Class 11 8.33% 15.51% 11.72%
S&P 500(R)Index2 28.58% 24.06% 18.70%

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

2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. Indices
include 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 briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

Frank Felicelli, CFA
Senior Vice President, Advisers

Mr. Felicelli has been a manager of the fund since 1995, and has been with
the Franklin Templeton Group since 1986.

William Hawes
PORTFOLIO MANAGER, Advisers

Mr. Hawes has been a manager of the fund since 1999, and has been with the
Franklin Templeton Group since 1998.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.47% of its average daily net assets to the manager.

Income Securities Fund

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

GOAL The fund's investment goal is to maximize income while maintaining
prospects for capital appreciation.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in a diversified portfolio of debt and equity securities. 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.
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 seeks income by selecting investments such as corporate, foreign,
and U.S. Treasury bonds. In its search for income-producing growth
opportunities, the fund invests in common stocks with attractive dividend
yields of companies from a variety of industries such as utilities, oil, gas,
real estate, and consumer goods. From time to time, the fund may invest
substantially in certain sectors, including utilities.

The fund may invest up to 100% of its total assets in debt securities that
are below investment grade, including up to 5% in defaulted debt, but it is
not currently expected that the fund will invest more than 50% of its assets
in these securities. Investment grade debt securities are rated in the top
four rating categories by independent rating agencies such as Standard &
Poor's Corporation (S&P) and Moody's Investors Service, Inc. (Moody's). The
fund generally invests in securities rated at least Caa by Moody's or CCC by
S&P or, if unrated, determined by the fund's manager to be comparable.
Generally, lower rated securities pay higher yields than more highly rated
securities to compensate investors for the higher risk. During 1998, about
30% of the fund's portfolio was invested in lower rated and comparable
quality unrated debt securities.

The fund may invest up to 25% of its assets in foreign securities, including
emerging markets. It ordinarily buys foreign securities that are traded in
the U.S or American Depositary Receipts, which 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. 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.

[Begin callout]
The fund invests primarily in a diversified portfolio of high yield lower
rated bonds, and stocks.
[End callout]

PORTFOLIO SELECTION The manager searches for undervalued or out-of-favor
securities it believes offer opportunities for income today and growth
tomorrow. It performs independent analysis of the debt securities being
considered for the fund's portfolio, rather than relying principally on the
ratings assigned by rating agencies. In its analysis, the manager considers a
variety of factors, including:

[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.

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 funds seek to reinvest interest payments, or the
proceeds from a matured debt security, resulting in less income received by
the fund.

[Begin callout]
Because the bonds and stocks the fund holds fluctuate in price with interest
rate changes and market conditions, the value of your investment in the fund
will go up and down. This means you could lose money.
[End callout]

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, industries, or securities markets. 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. Utility company
stocks pay relatively high dividends, so they are particularly sensitive to
interest rate movements: like bonds, when interest rates rise, their stock
prices tend to fall.

CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. Because
its value can be influenced by many different factors, a convertible security
is not as sensitive to interest rate changes as a similar non-convertible
debt security, and generally has less potential for gain or loss than the
underlying stock.

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, 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.

[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.

INCOME SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

Insert bar graph]

- -7.42% 39.93% 13.20% 18.59% -6.27% 22.40% 11.28% 17.09% 1.64%

90 91 92 93 94 95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q1 '91
16.48%

Worst
Quarter:

Q3 '90
- -8.42%
[End callout]

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

Since Inception
Past 1 Year Past 5 Years (01/24/89)
- ------------------------------------------------------------------------------

Income Securities Fund - Class 11 1.64% 8.73% 11.23%
Lehman Brothers Government/
Corporate Bond Index2 9.47% 7.30% 9.29%
S&P 500(R)Index2 28.58% 24.06% 18.70%

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

2. Source: Standard & Poor's(R) Micropal. The Lehman Brothers
Government/Corporate Bond Index is an unmanaged index of fixed-rate U.S.
Government and foreign and domestic corporate bonds that are rated investment
grade or higher and have maturities of one year or more and at least $50
million outstanding. The S&P 500(R) Index is an unmanaged group of widely held
common stocks covering a variety of industries. Indices include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the fund's portfolio.

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

Charles B. Johnson
Chairman of the Board, Advisers

Mr. Johnson has been a manager of the fund since its inception in 1989, and
has been with the Franklin Templeton Group since 1957.

Matthew F. Avery
Senior Vice President, Advisers

Mr. Avery has been a manager of the fund since its inception in 1989, and has
been with the Franklin Templeton Group since 1987.

Frederick G. Fromm
Vice President, Advisers

Mr. Fromm has been a manager of the fund since 1998, and has been with the
Franklin Templeton Group since 1992.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.47% of its average daily net assets to the manager.

Mutual Shares Securities 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:

o UNDERVALUED STOCKS Stocks trading at a discount to asset value.

o 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.

o 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]

The fund invests primarily in 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.

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 or 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.

[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.

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 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.

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 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.

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

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

MUTUAL SHARES SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

17.73% 0.09%
97 98
Year

[Begin callout]
Best
Quarter:

Q4 '98
12.94%

Worst
Quarter:

Q3 '98
- -17.65%
[End callout]

Average Annual Total Returns
For the periods ended December 31, 1998

Since Inception
Past 1 Year (11/08/96)
- ------------------------------------------------------------------------------

Mutual Shares Securities
Fund - Class 11 0.09% 9.70%
S&P 500(R)Index2 28.58% 30.66%

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

2. Source: Standard and Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. Indices
include 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 briefcase] MANAGEMENT

Franklin Mutual Advisers, LLC (Franklin Mutual) is the fund's investment
manager.

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

Lawrence N. Sondike
Senior Vice President
Franklin Mutual

Mr. Sondike has been a manager of the fund since its inception in 1996.
Before joining the Franklin Templeton Group in 1996, he was a research
analyst for Heine Securities Corporation, the predecessor of Franklin Mutual
(Heine).

David E. Marcus
Senior Vice President
Franklin Mutual

Mr. Marcus has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.

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 A. Langerman
is Chief Executive Officer and Robert L. 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 team also includes:

Peter A. Langerman
President and Chief Executive Officer
Franklin Mutual

Mr. Langerman has been involved with the management of the fund since its
inception in 1996. Before joining the Franklin Templeton Group in 1996, he
was a research analyst for Heine.

Robert L. Friedman
Chief Investment Officer
Senior Vice President
Franklin Mutual

Mr. Friedman has been involved with the management of the fund since its
inception in 1996. Before joining the Franklin Templeton Group in 1996, he
was a research analyst for Heine.

Jeffrey A. Altman
Senior Vice President
Franklin Mutual

Mr. Altman has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.

Raymond Garea
Senior Vice President
Franklin Mutual

Mr. Garea has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.

David J. Winters
Senior Vice President
Franklin Mutual

Mr. Winters has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1996, he was a research analyst for Heine.

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

Jim Agah
Assistant Portfolio Manager
Franklin Mutual

Mr. Agah has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1997, he was vice president of equity sales at
Keefe, Bryette & Woods.

Jeff Diamond
Assistant Portfolio Manager
Franklin Mutual

Mr. Diamond has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1998, he was a vice president and co-manager of
Prudential Conservative Stock Fund.

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 daily net assets to the manager.

Real Estate Securities Fund

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

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

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in securities of companies operating in the
real estate industry, primarily equity real estate investment trusts (REITs).
Real estate companies include:

o companies qualifying under federal tax law as REITs,

o real estate operating companies, real estate services companies,
homebuilders and developers that derive at least half of their assets or
revenues from the ownership, construction, management or other services, or
sale of residential, commercial or industrial real estate.

[Begin callout]
The fund concentrates in securities of companies in the real estate industry,
primarily equity REITs.
[End callout]

REITs are real estate investment trust companies, usually publicly traded,
that manage a portfolio of income-producing real estate properties such as
apartments, hotels, office buildings, or shopping centers. Equity REITs take
ownership positions in real estate and shareholders receive income from the
rents received, and receive capital gains on the properties sold at a profit.
Other types, for example mortgage REITs, specialize in lending money to
developers and pass interest income on to shareholders. Still others are hybrid
REITs, having a mix of equity and debt investments. The fund generally invests
in medium-cap (less than $5 billion) to small-cap (less than $1.5 billion)
REITs, because that is reflective of the industry itself. Market capitalization
is defined as share price times the number of common stock shares outstanding.

In addition to its principal investments, the fund may invest in equity or
debt securities of issuers engaged in businesses whose products and services
are closely related to the real estate industry, and issuers whose principal
business is unrelated to the real estate industry but who have very
significant real estate holdings believed to be undervalued relative to the
company's securities. Equities represent ownership interests in individual
companies and give shareholders a claim in the company's earnings and assets.
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 manager seeks to manage the risks of industry concentration by
diversifying into different types of real estate investments although such
risks cannot be eliminated. Historically, there has been a low correlation
between the real estate market and the broader equity market. While there is
no certainty those trends will continue in the future, investments in real
estate securities may be a useful way to diversify one's overall portfolio.

PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined value-oriented strategy for this fund. As a
"bottom-up" investor focusing primarily on individual securities, the fund's
manager will focus on the market price of a company's security relative to
its evaluation of the company's long-term earnings, asset value, and cash
flow potential. Using both qualitative and quantitative analysis and on-site
visits, the manager evaluates security characteristics, the strength and
quality of management, and underlying properties. In addition, the manager
may consider other factors, such as the supply and demand outlook for various
property types and regional markets.

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 goals.

[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.

REAL ESTATE SECURITIES By concentrating in a single industry sector, the
fund carries much greater risk of adverse developments in that sector than a
fund that invests in a wide variety of industries. Real estate values rise
and fall in response to a variety of factors, including local, regional and
national economic conditions and tax considerations, the strength of specific
industries renting properties, and other factors affecting the supply and
demand for properties. When economic growth is slowing, demand for property
decreases and prices may decline. Rising interest rates, which drive up
mortgage and financing costs, can restrain construction and buying and
selling activity and make other investments more attractive. Property values
could decrease because of overbuilding, increases in property taxes and
operating expenses, changes in zoning laws, environmental regulations or
hazards, uninsured casualty or condemnation losses, or a general decline in
neighborhood values.

REITs Equity REITs can be affected by any changes in the value of the
properties owned, while mortgage REITs can be affected by the quality of any
credit extended. A REIT's performance depends on the types and locations of
the properties it owns and on how well it manages those properties or loan
financings. A decline in rental income could occur because of extended
vacancies, increased competition from other properties, tenants' failure to
pay rent or poor management.

A REIT's performance also depends on the company's ability to finance
property purchases and renovations and manage its cash flows. Because REITs
are typically invested in a limited number of projects or in a particular
market segment, they are more susceptible to adverse developments affecting a
single project or market segment than more broadly diversified investments.
Loss of status as a qualified REIT or changes in the treatment of REITs under
the federal tax law, could adversely affect the value of a particular REIT or
the market for REITs as a whole.

[Begin callout]
Because the securities the fund holds fluctuate in price with real estate
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 Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, their growth prospects are less
certain, their securities are less liquid, and they can be considered
speculative. These companies may suffer significant losses. Small cap REITs
can be subject to greater risks than mid- or large-cap issuers due to greater
regional concentration and less diversification in terms of the regions,
clients and types of properties available for investment.

[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.

REAL ESTATE SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

Insert bar graph]

- -11.98% 33.47% 12.12% 19.01% 2.89% 17.53% 32.82% 20.70% -16.82%

90 91 92 93 94 95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q1 '91
20.13%

Worst
Quarter:

Q3 '90
- -14.14%
[End callout]

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

Since Inception
1 Year 5 Years (01/24/89)
- ------------------------------------------------------------------------------

Real Estate Securities Fund -
Class 11 -16.82% 10.03% 10.30%
S&P 500(R)Index2 28.58% 24.06% 18.70%
Wilshire Real Estate
Securities Index2 -17.43% 9.36% 4.57%

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

2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Wilshire Real Estate Securities Index is a market-cap weighted index of
publicly traded real estate securities. Indices include 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 briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

Matthew F. Avery
Senior Vice President, Advisers

Mr. Avery has been a manager of the fund since its inception in 1989, and has
been with the Franklin Templeton Group since 1987.

Douglas Barton, CFA
Vice President, Advisers

Mr. Barton has been a manager of the fund since 1998, and has been with the
Franklin Templeton Group since 1988.

Rising Dividends Fund

[Insert graphic of bullseye and arrows] GOAL 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 the securities of companies that have:

o consistently increased dividends in at least 8 out of the last 10 years and
have not decreased dividends during that time;

o increased dividends substantially (at least 100%) over the past ten years;

o reinvested earnings, paying out less than 65% of current earnings in
dividends (except for utility companies);

o strong balance sheets, with long-term debt representing no more than 30% of
total capitalization (except for utility companies); and

o attractive prices, either in the lower half of the stock's price/earnings
ratio range for the past 10 years or less than the average current market
price/earnings ratio of the stocks comprising the Standard & Poor's(R) 500
Stock Index (this criterion applies only at the time of purchase).

[Begin callout]
The fund will invest primarily in the common stocks of financially sound
companies that have paid consistently rising dividends.
[End callout]

The fund typically invests the rest of its assets in equity securities of
companies that pay dividends but do not meet all of these criteria. Following
these policies, the fund typically invests predominantly in equity securities
issued by large- and mid-cap U.S. companies, which generally have market
capitalization values (share price times the number of common stock shares
outstanding) greater than $1.5 billion. It may also invest substantially in
small-cap companies which generally have lower market capitalizations.
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.

PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined value-oriented strategy. As a "bottom-up" investor
focusing primarily on individual securities, the manager will focus on the
market price of a company's securities relative to its evaluation of the
company's long-term earnings, and in particular a strong dividend record,
asset value, and cash flow potential. The manager seeks bargains among
companies with steadily rising dividends and strong balance sheets - out of
favor companies that offer, in the manager's opinion, excellent long-term
potential that might include companies that have stumbled recently, dropping
sharply in price, but with significant potential.

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.

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 and services may not find an established market or may
become obsolete. Smaller companies may suffer significant losses, their
securities can be less liquid, and investments in these companies may be
speculative.

[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.

RISING DIVIDENDS FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

-3.48% -4.08% 29.74% 24.18% 33.03% 6.92%

93 94 95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q4 '98
19.38%

Worst
Quarter:

Q3 '98
- -14.78%
[End callout]

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

Since Inception
Past 1 Year Past 5 Years (01/27/92)
- ------------------------------------------------------------------------------

Rising Dividends Fund - Class 11 6.92% 17.06% 12.98%
Wilshire MidCap Company
Growth Index2 -1.08% 13.83% 13.61%

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

2. Source: Standard & Poor's(R) Micropal. The Wilshire MidCap Company Growth
Index is an unmanaged group of securities of companies selected based on
growth characteristics from among the middle capitalization universe of the
Wilshire 5000. Indices include 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 briefcase] MANAGEMENT

Franklin Advisory Services, LLC (Advisory Services) is the fund's investment
manager.

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

Donald G. Taylor
Senior Vice President,
Advisory Services

Mr. Taylor has been a manager of the fund since 1996. Before joining the
Franklin Templeton Group in 1996, he was a Portfolio Manager for Fidelity
Management & Research Co.

William J. Lippman
President, Advisory Services

Mr. Lippman has been a manager of the fund since its inception in 1992. He
has more than 30 years' experience in the securities industry and joined the
Franklin Templeton Group in 1988.

Bruce C. Baughman
Senior Vice President,
Advisory Services

Mr. Baughman has been a manager of the fund since its inception in 1992, and
has been with the Franklin Templeton Group since 1988.

Margaret McGee
Vice President, Advisory Services

Ms. McGee has been a manager of the fund since its inception in 1992, and has
been with the Franklin Templeton Group since 1988.

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

Templeton Global Asset Allocation Fund

[Insert graphic of bullseye and arrows] GOAL 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]

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 may also invest up to 25% of its total assets in high
yield, medium and lower rated debt securities ("junk bonds"), or, if unrated,
determined by the fund's manager to be comparable. The fund will not invest
in defaulted securities. During 1998, about 10.2% 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.

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).

[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 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]

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.

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.

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.

[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.

TEMPLETON GLOBAL ASSET ALLOCATION FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

19.84% 11.71% -0.04%

96 97 98

Year

[Begin callout]
Best
Quarter:

Q4 '98
11.93%

Worst
Quarter:

Q3 '98
- -13.12%
[End callout]

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

Since Inception
Past 1 Year (05/01/95)
- ------------------------------------------------------------------------------

Templeton Global Asset
Allocation Fund - Class 11 -0.04% 10.25%
MSCI World Index(R)2 24.80% 18.24%
JP Morgan Global Government
Bond Index2 15.31% 7.49%

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

2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI World Index(R)
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.

[Insert graphic of briefcase] MANAGEMENT

Templeton Global Advisors Limited (TGAL) is the fund's investment manager.

Under an agreement with TGAL, Templeton Investment Counsel, Inc. (TICI)
through its Templeton Global Bond Managers division (Global Bond Managers),
is the fund's sub-advisor.

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

Dale Winner, CFA
Portfolio Manager,

Mr. Winner has been a manager of the fund since 1997. Before joining TGAL
Franklin Templeton in 1995, he was a trust officer at J.P. Morgan.

Jeffrey A. Everett, CFA
Executive Vice President, TGAL

Mr. Everett has been a manager of the fund since its inception in 1995, and
has been with the Franklin Templeton Group since 1990.

Mark G. Holowesko, CFA
President, TGAL

Mr. Holowesko has been a manager of the fund since 1999, and has been with
the Franklin Templeton Group since 1985.

A team from Global Bond Managers is responsible for managing the debt portion
of the fund's investments.

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 0.65% of its average daily net assets to the manager.

Value Securities Fund

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

GOAL The fund's investment goal is long-term total return.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies of various
sizes that the fund's manager believes are selling substantially below the
underlying value of their assets or their private market value (what a
sophisticated investor would pay for the entire company). Following this
strategy, the fund will invest in companies with, for example: low prices
relative to book value, cash flow, or earnings (of the market, of the
industry group or earnings growth); valuable intangibles not reflected in the
stock price such as franchises, trademarks, distribution channels or market
share for particular products or services; underused or understated assets or
cash; or strong balance sheets. 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 companies the manager
believes are significantly undervalued.
[End callout]

The fund may invest substantially in securities of small-cap companies, which
have market capitalization values (share price times the number of common
stock shares outstanding) of less than $1.5 billion, at the time of purchase.
The fund may also invest up to 25% of its total assets in foreign securities,
including Depositary Receipts and emerging markets, but has no current
intention of investing more than 15%.

PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined value-oriented strategy for this fund. As a "bottom-up"
investor focusing primarily on individual securities, the 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. The manager
seeks bargains among the "under researched and unloved" - out of favor companies
that offer, in the manager's opinion, excellent long-term potential that might
include former growth companies that have stumbled recently, dropping sharply in
price, but with significant potential ("fallen angels") or companies that are a
potential turnaround or takeover target.

[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.

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, industries, or securities markets. 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. 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.

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 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.

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.

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 foreign 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 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.

[Insert graphic of bull and bear] PERFORMANCE

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

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisory Services, LLC (Advisory Services) is the fund's investment
manager.

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

William J. Lippman
President, Advisory Services

Mr. Lippman has been a manager of the fund since its inception in 1998. He
has more than 30 years' experience in the securities industry and joined the
Franklin Templeton Group in 1988.

Bruce C. Baughman
Senior Vice President,
Advisory Services

Mr. Baughman has been a manager of the fund since its inception in 1998,
andhas been with the Franklin Templeton Group since 1988.

Gerard P. Sullivan
Senior Vice President,
Advisory Services

Mr. Sullivan has been a manager of the fund since its inception in 1998.
Before joining the Franklin Templeton Group in 1998, he was a portfolio
manager for SunAmerica Asset Management and for Texas Commerce Investment
Management & Co.

Margaret McGee
Vice President, Advisory Services

Ms. McGee has been a manager of the fund since its inception in 1998 and has
been with the Franklin Templeton Group since 1988.

The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of 0.60% of the
average daily net assets up to an including $200 million; 0.50% of the
average daily net assets up to $1.3 billion; and 0.40% of the average daily
net assets over $1.3 billion.

Capital Growth Fund

[Insert graphic of bullseye and arrows] goal 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 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.

[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.

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.

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

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.

CAPITAL GROWTH FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

18.31% 20.29%

97 98

Year

[Begin callout]
Best
Quarter:

Q4 '98
19.73%

Worst
Quarter:

Q3 '98
- -10.47%
[End callout]

Average Annual Total Returns

For the periods ended December 31, 1998

Since Inception
Past 1 Year (05/01/96)
- ------------------------------------------------------------------------------

Capital Growth Fund - Class 11 20.29% 19.72%
S&P 500(R)2 Index 28.58% 29.00%
Russell 1000 Index(R)2 27.02% 27.92%

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

2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Russell 1000 Index measures the 1,000 largest companies in the Russell 3000
Index. Indices include 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 briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

Conrad B. Herrmann, CFA
Senior Vice President, Advisers

Mr. Herrmann has been a manager of the fund since its inception in 1996, and
has been with the Franklin Templeton Group since 1989.

Vivian J. Palmieri
Portfolio Manager, Advisers

Mr. Palmieri has been a manager of the fund since its inception in 1996, and
has been with the Franklin Templeton Group since 1965.

Kent Shepherd, CFA
Vice President, Advisers

Mr. Shepherd has been a manager of the fund since its inception in 1999, and
has been with the Franklin Templeton Group since 1991.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.75% of its average daily net assets to the manager.

Global Health Care Securities Fund

[Insert graphic of bullseye and arrows] Goal and Strategies

GOAL The fund's investment goal is capital appreciation.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 70% of its total assets in equity securities of companies in the health
care industry. These are companies whose principal assets or activities are in
research, development, production or distribution of products and services in
industries such as pharmaceutical; biotechnology; health care facilities,
information systems and personal products; medical supplies, technology and
services; and managed care companies. 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 concentrates in common stocks of U.S. and non-U.S. companies in the
health care industry.
[End callout]

The fund may buy health care companies anywhere in the world, but generally
invests predominantly in U.S. companies. The fund may also invest a
substantial portion of its assets in small-cap companies which have market
capitalization values (share price times the number of common stock shares
outstanding) of less than $1.5 billion.

Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of U.S. or non-U.S. issuers. 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 manager is a research driven, fundamental investor,
combining both growth and value strategies. As a "bottom-up" investor
focusing primarily on individual securities, the manager chooses companies
that fill particular health care niches and that it believes are positioned
for rapid growth in revenues, earnings or assets, and/or are selling at
reasonable prices using a company's historical value measures. The manager
relies on a team of analysts to provide in-depth industry expertise, and uses
both qualitative and quantitative analysis, to look for companies that will
position the fund to benefit from potential future technological advances and
increasing worldwide demand in the health care sector. In addition, the
manager evaluates companies on factors such as strength and quality of
management, strategic positioning in its industry and globally competitive
advantages.

[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.

HEALTH CARE COMPANIES By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. Government actions may affect
health care companies in many ways. For example, foreign, U.S. federal, or
state governments could discontinue subsidies of certain research or other
activities of some companies. Stocks held by the fund may also be affected by
government policies on health care reimbursements, regulatory approval for
new drugs and medical instruments, or legislative reform of a health care
system. Health care companies are also subject to the risks of product
liability lawsuits and the risk that their products and services may rapidly
become obsolete.

[Begin callout]
Because the stocks the fund holds fluctuate in price with global 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]

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, industries, or securities markets. 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. Growth stock
prices reflect projections of future earnings or revenues, and can,
therefore, fall dramatically if the company fails to meet those projections.

FOREIGN SECURITIES Securities of companies located outside the U.S. 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.

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.

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.

[Insert graphic of bull and bear] Performance

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

[Insert graphic of briefcase] Management

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

Kurt von Emster, CFA
Vice President, Advisers

Mr. Von Emster has been a manager of the fund since its inception in 1998,
and has been with the Franklin Templeton Group since 1989.

Evan McCulloch, CFA
Vice President, Advisers

Mr. McCulloch has been a manager of the fund since its inception in 1998, and
has been with the Franklin Templeton Group since 1992.

Rupert H. Johnson, Jr.
President, Advisers

Mr. Johnson has been a manager of the fund since its inception in 1998, and
has been with the Franklin Templeton Group since 1965.

The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is an amount equal to an annual rate of 0.60%
of the average daily net assets up to and including $200 million; 0.50% of
the average daily net assets up to $1.3 billion; and 0.40% of the average
daily net assets over $1.3 billion.

Mutual Discovery Securities Fund

[Insert graphic of bullseye and arrows] Goal and Strategies

GOAL The fund's principal 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 of any
nation 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:

o UNDERVALUED STOCKS Stocks trading at a discount to asset value.

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

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

The fund invests primarily in companies with market capitalization values
(share price times the number of common stock shares outstanding) greater
than $1.5 billion, but may invest a lesser amount in small-cap companies.
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 may invest 50% or more of its total assets in foreign equity and
debt securities, which may include sovereign debt and participation in
foreign government debt, 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. 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).

The fund may invest in debt securities rated in any rating category by an
independent rating agency, including high yield, lower rated or defaulted
debt securities ("junk bonds"), or in comparable unrated debt securities. 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 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.

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, 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.

[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.

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 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.

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 devaluation 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
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluation. 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.

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 are also generally 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.

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 its 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.
Illiquid securities have the 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

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.

MUTUAL DISCOVERY SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

19.25% -5.00%

97 98

Year

[Begin callout]
Best
Quarter:

Q1 '98
10.85%

Worst
Quarter:

Q3 '98
- -20.97%
[End callout]

Average Annual Total Returns

For the periods ended December 31, 1998

Since Inception
Past 1 Year (11/08/96)
- ------------------------------------------------------------------------------
Mutual Discovery Securities

Fund - Class 11 -5.00% 7.02%
S&P 500(R)Index2 28.58% 30.66%

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

[Insert graphic of briefcase] Management

Franklin Mutual Advisers, LLC (Franklin Mutual) is the fund's investment
manager.

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

Robert L. Friedman
Chief Investment Officer
Senior Vice President
Franklin Mutual

Mr. Friedman has been a manager of the fund since its inception in 1996.
Before joining the Franklin Templeton Group in 1996, he was a research
analyst for Heine Securities Corporation, the predecessor of Franklin Mutual
(Heine).

David E. Marcus
Senior Vice President
Franklin Mutual

Mr. Marcus has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.

The team also includes:

Peter A. Langerman
President and
Chief Executive Officer
Franklin Mutual

Mr. Langerman has been involved with the management of the fund since its
inception in 1996. Before joining the Franklin Templeton Group in 1996, he
was a research analyst for Heine.

Lawrence N. Sondike
Senior Vice President
Franklin Mutual

Mr. Sondike has been a manager of the fund since its inception in 1996.
Before joining the Franklin Templeton Group in 1996, he was a research
analyst for Heine.

Jeffrey A. Altman
Senior Vice President
Franklin Mutual

Mr. Altman has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.

Raymond Garea
Senior Vice President
Franklin Mutual

Mr. Garea has been a manager of the fund since its inception in 1998. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.

David J. Winters
Senior Vice President
Franklin Mutual

Mr. Winters has been a manager of the fund since 1996. Before joining the
Franklin Templeton Group in 1996, he was a research analyst for Heine.

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

Jim Agah
Assistant Portfolio Manager
Franklin Mutual

Mr. Agah has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1997, he was vice president of equity sales at
Keefe, Bryette & Woods.

Jeff Diamond
Assistant Portfolio Manager
Franklin Mutual

Mr. Diamond has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1998, he was a vice president and co-manager of
Prudential Conservative Stock Fund.

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 0.80% of its average daily net assets to the manager.

Natural Resources Securities Fund

[Insert graphic of bullseye and arrows] Goals and Strategies

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

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies
principally engaged in the natural resources sector. These are companies that
own, produce, refine, process or market natural resources. They may also
provide support services for natural resources companies, for example,
develop technologies or provide services, supplies or equipment related to
natural resources. The natural resources sector includes industries such as
integrated oil; oil and gas exploration and production; gold and precious
metals; steel, iron ore, and aluminum production; forest, farming, and paper
products; chemicals; building materials; energy services and technology; and
environmental services. The manager expects to invest substantially in the
energy industries, because of their larger weighting in the natural resources
sector itself.

The fund generally invests a substantial portion of its assets in mid-cap
companies with market capitalization values (share price times the number of
common stock shares outstanding) greater than $1.5 billion, but may invest
significantly in small-cap companies. 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 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 concentrates in common stocks of U.S. and non-U.S. companies in the
natural resources sector.
[End callout]

The fund may buy natural resource companies anywhere in the world, including
emerging markets, but generally invests a greater percentage of its assets in
U.S. companies than any other single country. In addition, the fund will be
exposed to emerging markets through developed market companies, which often
own or depend on natural resource assets in countries with emerging markets.

In addition to its principal investments, and depending upon market
conditions, the fund may invest significantly in equity securities outside
the natural resources sector or in debt securities, of U.S. or non-U.S.
issuers. 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 may invest up to 5% in commodities (including gold
bullion or gold coins) or futures on commodities related to the natural
resources sector as defined above.

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
looks for companies 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 choose companies it believes are
highly profitable with skilled management, and that have strong growth
profiles and solid financials, as well as companies with sustainable
competitive advantages either through strategic asset bases or technological
expertise. These are all factors the manager believes point to strong
long-term growth potential.

[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.

NATURAL RESOURCES By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. The securities of companies in
the natural resources sector may experience more price volatility than
securities of companies in other industries. For example, commodity prices
and the supply or demand for commodities change dramatically for reasons
beyond a company's control. In addition, supply and demand factors may
dictate the prices at which a company acquires raw materials or sells its
products or services. These factors can affect the profitability of companies
in the natural resources sector and, as a result, the value of their
securities.

In addition, the fund may from time to time invest significantly in a
particular industry or group of industries within the natural resources
sector; such a strategy may expose the fund to greater investment risk than a
more diversified strategy within the sector.

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.

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 foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.

SMALLER COMPANIES While smaller companies, and to a lesser extent mid-size
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 have fluctuated
independently from larger company securities, especially over the
shorter-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, their growth prospects are less
certain, and their securities are less liquid. These companies may suffer
significant losses, and can be considered speculative.

[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.

NATURAL RESOURCES SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

- -13.97% 3.86% -10.13% 55.62% -2.01% 2.35% 4.00% -18.98% -25.38%

90 91 92 93 94 95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q4 '93 21.92%

Worst
Quarter:

Q3 '98 -19.12%
[End callout]

Average Annual Total Returns

For the periods ended December 31, 1998

Since Inception
Past 1 year Past 5 years (01/24/89)
- ------------------------------------------------------------------------------

Natural Resources Securities

Fund - Class 11 -25.38% -8.81% -0.25%
S&P 500(R)Index2 28.58% 24.06% 18.70%
FT/S&P/Actuaries World:
Energy 50%/Basic Industries 50%
Composite Index2 -0.11% 8.56% 7.04%

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

2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Financial Times/S&P Actuaries World (Energy 50%/Basic Industries 50%)
Composite Index is a composite of companies of which 50% are in the energy
sector and 50% are in the basic industries sectors. Indices include
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 briefcase] Management

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

Michael R. Ward
Portfolio Manager, Advisers

Mr. Ward has been a manager of the fund since 1999, and has been with the
Franklin Templeton Group since 1992.

Steve Land
Portfolio Manager, Advisers

Mr. Land has been a manager of the fund since 1999, and has been with the
Franklin Templeton Group since 1997.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.62% of its average daily net assets to the manager.

Small Cap Fund

[Insert graphic of bullseye and arrows] Goal 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 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.

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.

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 have 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 erratic or abrupt price movements.

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

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.

SMALL CAP FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

28.95% 17.42% -0.98%

96 97 98

Year

[Begin callout]
Best
Quarter:

Q4 '98 24.39%

Worst
Quarter:

Q3 '98 -24.40%
[End callout]

Average Annual Total Returns

For the periods ended December 31, 1998

Since Inception
Past 1 Year (11/01/95)
- ------------------------------------------------------------------------------

Small Cap Fund - Class 11 -0.98% 14.51%
S&P 500(R)Index2 28.58% 29.09%
Russell 2500(R)Index2 0.38% 15.45%

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

2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks, whereas the Russell 2500(R) Index is an
index of 2,500 companies with small market capitalizations, both covering a
variety of industries. Indices include 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 briefcase] Management

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

Edward B. Jamieson
Executive Vice President, Advisers

Mr. Jamieson has been a manager of the fund since its inception in 1995, and
has been with the Franklin Templeton Group since 1987.

Aidan O'Connell
Portfolio Manager, Advisers

Mr. O'Connell has been a manager of the fund since September 1998. Before
joining Franklin Templeton in May 1998, Mr. O'Connell was a research analyst
and a corporate financial analyst at Hambrecht & Quist.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.75% of its average daily net assets to the manager.

Templeton Developing Markets Equity Fund

[Insert graphic of bullseye and arrows] Goal 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 markets 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 stock, and securities convertible into common stock. The
fund also invests in American, European and Global Depositary Receipts, which
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.

[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 or
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 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 companies and
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.

[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.

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]

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.

[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.

TEMPLETON DEVELOPING MARKETS EQUITY FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

2.77% 21.59% -8.72% -21.61%

95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q4 '98
20.59%

Worst
Quarter:

Q4 '97
- -23.44%
[End callout]

Average Annual Total Returns

For the periods ended December 31, 1998

Since Inception
1 year (03/15/94)
- ------------------------------------------------------------------------------
Templeton Developing Markets

Equity Fund - Class 11 -21.61% -3.22%
MSCI Emerging Markets Free Index2 -25.34% -8.80%
IFC Investable Composite Index2 -22.01% -9.24%

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

2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI Emerging Markets
Free Index measures the performance of securities located in 25 emerging
market countries such as Brazil, China, Korea and Poland. 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 and/or
interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.

[Insert graphic of briefcase] Management

Templeton Asset Management Ltd. (TAML) is the fund's investment manager.

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

Dr. J. Mark Mobius.
Managing Director, TAML

Dr. Mobius has been a manager of the fund since its inception in 1994, and
has been with the Franklin Templeton Group since 1987.

Tom Wu
Director, TAML

Mr. Wu has been a manager of the fund since its inception in 1994, and has
been with the Franklin Templeton Group since 1987.

H. Allan Lam
Portfolio Manager, TAML

Mr. Lam has been a manager of the fund since its inception in 1994, and has
been with the Franklin Templeton Group since 1987.

Eddie Chow
portfolio manager, TAML

Mr. Chow has been a manager of the fund since 1996, and has been with the
Franklin Templeton Group since 1994.

Dennis Lim
director, TAML

Mr. Lim has been a manager of the fund since 1996, and has been with the
Franklin Templeton Group since 1990.

Tek-Khoan Ong
Portfolio Manager, TAML

Mr. Ong has been a manager if the fund since 1996, and has been with the
Franklin Templeton Group since 1993.

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

Templeton Global Growth Fund

[Insert graphic of bullseye and arrows] Goal 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 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 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,
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 stocks 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 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.

[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.

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.

[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]

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.

[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.

TEMPLETON GLOBAL GROWTH FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

12.72% 21.28% 13.50% 8.98%

95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q4 '98
16.30%

Worst
Quarter:

Q3 '98
- -13.78%
[End callout]

Average Annual Total Returns

For the periods ended December 31, 1998

Since Inception
Past 1 Year (03/15/94)
- ------------------------------------------------------------------------------

Templeton Global Growth Fund - Class 11 8.98% 12.30%
MSCI All Country World Free(R)Index2 21.97% 14.79%

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

2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI All Country World
Free(R) Index measures the performance of securities located in 48 countries,
including emerging markets in Latin America, Asia and Eastern Europe. Indices
include 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 briefcase] Management

Templeton Global Advisors Limited (TGAL) is the fund's investment manager.

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

Richard Sean Farrington, CFA
Senior Vice President, TGAL

Mr. Farrington has been a manager of the fund since 1995, and has been with
the Franklin Templeton Group since 1990.

Jeffrey A. Everett, CFA
Executive Vice President, TGAL

Mr. Everett has been a manager of the fund since its inception in 1994, and
has been with the Franklin Templeton Group since 1990.

The fund pays the manager a fee for managing its assets, making its
investment decisions and providing certain administrative facilities and
services to the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.83%
of its average daily net assets to the manager.

Templeton International Equity Fund

[Insert graphic of bullseye and arrows] Goal 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 that trade in non-U.S.
markets, including emerging markets, and that are issued by companies that
have their principal activities outside the U.S. 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
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 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.

[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.

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.

[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.

TEMPLETON INTERNATIONAL EQUITY FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

28.56% 0.87% 10.59% 22.98% 11.69% 5.56%

93 94 95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q4 '93
13.64%

Worst
Quarter:

Q3 '98
- -16.86%
[End callout]

Average Annual Total Returns

For the periods ended December 31, 1998

Since Inception
Past 1 year Past 5 years (01/27/92)
- ------------------------------------------------------------------------------

Templeton International Equity

Fund - Class11 5.56% 10.09% 10.75%
MSCI All Country World
Ex-U.S. Free Index2 14.46% 7.87% 8.64%

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

2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI All Country World
Ex-U.S. Free Index measures the performance of securities located in 48
countries, both developed and emerging markets, except the U.S. Indices
include 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 briefcase] Management

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

Under an agreement with Advisers, Templeton Investment Counsel, Inc., (TICI)
is the fund's sub-advisor. TICI provides Advisers with investment management
advice and assistance.

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

Howard J. Leonard CFA
Executive Vice President, TICI

Mr. Leonard has been a manager of the fund since 1997, and has been with the
Franklin Templeton Group since 1989.

Mark R. Beveridge CFA
Senior Vice President, TICI

Mr. Beveridge has been a manager of the fund since 1994, and has been with
the Franklin Templeton Group since 1994

Juan J. Benito
Vice President, TICI

Mr. Benito has been a manager of the fund since 1999. Before joining the
Franklin Templeton Group in 1996, he was a management consultant and case
team leader with Monitor Company, a leading global strategy consulting firm.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.80% of its average daily net assets to the manager.

Templeton International Smaller Companies Fund

[Insert graphic of bullseye and arrows] Goal 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 the equity securities of smaller
companies located outside the U.S., including in emerging markets. Smaller
companies generally are those with market capitalization 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. The fund also invests in American, European,
and Global Depositary Receipts, which 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.

[Begin callout]
The fund invests primarily in an internationally diversified portfolio of
smaller companies' common stocks.
[End callout]

In addition to its principal investments, the fund may invest significantly
in equity securities of larger capitalized companies located outside the
U.S., equity securities of U.S. companies (though currently not more than 5%
of its assets), and depending upon current market conditions, 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
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.

[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.

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 suffer significant losses,
their securities can be less liquid, and investments in these companies can
be speculative. 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.

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.

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.

[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.

TEMPLETON INTERNATIONAL SMALLER
COMPANIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

[Insert bar graph]

97 98

- -1.50% -12.27%

Year

[Begin callout]
Best
Quarter:

Q1 '98
10.34%

Worst
Quarter:

Q3 '98
- -19.96%
[End callout]

Average Annual Total Returns

For the periods ended December 31, 1998

Since Inception
Past 1 Year (05/01/96)
- ------------------------------------------------------------------------------

Templeton International Smaller Companies

Fund - Class 11 -12.27% -1.06%
Salomon Global Ex-U.S.
Less Than $1 Billion Index2 1.26% -6.86%

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

2. Source: Standard & Poor's(R) Micropal. The Salomon Global Ex-U.S. Less Than
$1 Billion Index includes companies from developed and emerging markets,
excluding the U.S., with a market capitalization below U.S. $1 billion.
Indices include 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 briefcase] Management

Templeton Investment Counsel, Inc. (TICI) is the fund's investment manager.

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

Simon Rudolph
Senior Vice President, TICI

Mr. Rudolph has been a manager of the fund since 1997. Before joining the
Franklin Templeton Group in 1997, he was an executive director with Morgan
Stanley.

Peter A. Nori, CFA
Senior Vice President, TICI
Mr. Nori has been a manager of the fund since 1997, and has been with the
Franklin Templeton Group since 1987.

Juan J. Benito
Vice President, TICI

Mr. Benito has been a manager of the fund since 1997. Before joining the
Franklin Templeton Group in 1996, he was a management consultant and case
team leader with Monitor Company, a leading global strategy consulting firm.

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 0.85% of its average daily net assets to the manager.

Templeton Pacific Growth Fund

[Insert graphic of bullseye and arrows] Goal 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 that trade in Pacific
Rim markets, including emerging markets, and are issued by companies that
have their principal activities in the Pacific Rim. Pacific Rim countries
include Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New
Zealand, Pakistan, Philippines, Singapore, South Korea, and Thailand.
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 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 Pacific Rim companies.
[End callout]

In addition to the fund's principal investments, the fund may invest
significantly in securities of issuers domiciled outside the Pacific Rim,
including the U.S., and those that are linked by tradition, economic markets,
geography or political events to countries in the Pacific Rim. Depending upon
current market conditions, the fund may also invest 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 and 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 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.
While the manager intends to manage the fund's exposure to countries and
their currencies based on its assessment of changing market and political
conditions, it is limited to certain geographic regions.

[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 Pacific Rim 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]

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.

REGION Because the fund invests a significant amount of its assets in issuers
located in a particular region of the world, and because the correlation among
the Singapore, Malaysia, Thailand and Hong Kong markets is very high, the fund
is subject to much greater risks of adverse events, including currency
devaluations, and may experience greater volatility than a fund that is more
broadly diversified geographically.

[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.

TEMPLETON PACIFIC GROWTH FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS1

47.87% -8.79% 7.97% 11.10% -35.95% -13.13%

93 94 95 96 97 98

Year

[Begin callout]
Best
Quarter:

Q4 '98
34.11%

Worst
Quarter:

Q4 '97
- -28.67%
[End callout]

Average Annual Total Returns

For the periods ended December 31, 1998

Since Inception
Past 1 year Past 5 years (01/27/92)
- ------------------------------------------------------------------------------
Templeton Pacific Growth

Fund - Class 11 -13.13% -9.45% -1.68%
MSCI Pacific Index2 2.69% -3.95% -0.88%

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

2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI Pacific Index
tracks approximately 450 companies in Australia, Hong Kong, Japan, New
Zealand, and Singapore. This is a total return index in U.S. dollars, with
gross dividends reinvested. One cannot invest directly in an index, nor is an
index representative of the fund's investments.

[Insert graphic of briefcase] Management

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

Under an agreement with Advisers, Templeton Investment Counsel, Inc., (TICI)
is the fund's sub-advisor. TICI provides Advisers with investment management
advice and assistance.

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

William T. Howard, Jr., CFA
Senior Vice President, TICI

Mr. Howard has been a manager of the fund since 1993, and has been with the
Franklin Templeton Group since 1993.

Mark R. Beveridge, CFA
Senior Vice President, TICI

Mr. Beveridge has been a manager of the fund since 1994, and has been with
the Franklin Templeton Group since 1985.

Juan J. Benito
Vice President, TICI

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.99% of its average daily net assets to the manager.

[ Insert graphic of starburst] Important Recent Developments

o Year 2000 problem The funds' business operations depend on 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 similar impact on the fund's performance.

The funds' 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.

o Euro On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for
participating member countries.

Because this change to a single currency is new and untested, 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.

[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. Except for the Money Fund,
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.

The Money Fund declares a dividend each day the fund's NAV is calculated,
equal to all of its daily net income, payable as of the close of business the
preceding day. The amount of dividend may fluctuate from day to day and may
be omitted on some days, depending on changes in the factors that comprise
the fund's net income.

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.

[Insert graphic of dollar bill] Financial Highlights

The financial highlights table provides further details to help you
understand the financial performance of Class 1 of each fund for the past
five years or since the fund's 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 expense ratios.
This information has been audited by PricewaterhouseCoopers LLP, independent
auditors. Their report - along with the financial statements - are included
in the fund's Annual Report (available upon request).

PER SHARE OPERATING PERFORMANCE ($) RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------- -------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of
Net Net Total Distri- Distri- Net Net Ratio of net invest-
asset Net realized & from butions butions asset assets, expenses ment income Port-
value, invest- unrealized invest- from net from net Total value, Total end of to average to average folio
Period beginning ment gains ment investment realized distri- end of return+ year net net turnover
ended of period income (losses) operations income gains butions period (%) (000's)($) assets (%) assets (%) rate (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Growth Fund
19964 10.00 .03 1.33 1.36 - - - 11.36 13.60 44,667 .77* .96* 3.91
1997 11.36 .06 2.02 2.08 (.02) - (.02) 13.42 18.31 109,355 .77 .72 19.90
1998 13.42 .10 2.62 2.72 (.06) - (.06) 16.08 20.29 220,952 .77 1.00 12.17
Global Health Care Securities Fund
19986 10.00 .03 .68 .71 - - - 10.71 7.10 8,990 .84* .84* 40.80
Global Utilities Securities Fund
1994 17.14 .95 (2.94) (1.99) (.62) (.11) (.73) 14.42 (11.56) 1,155,110 .52 5.58 11.74
1995 14.42 .84 3.54 4.38 (.90) - (.90) 17.90 31.35 1,423,446 .50 5.14 13.27
1996 17.90 .91 .29 1.20 (.92) - (.92) 18.18 7.07 1,202,290 .50 4.20 29.69
1997 18.18 .90 3.54 4.44 (.96) (1.33) (2.29) 20.33 26.76 1,129,904 .50 3.91 17.00
1998 20.33 .76 1.41 2.17 (.83) (1.22) (2.05) 20.45 11.19 986,755 .50 3.15 33.85
Growth and Income Fund
1994 13.99 .19 (.47) (.28) (.09) (.20) (.29) 13.42 (3.41) 517,877 .54 1.81 99.21
1995 13.42 .41 3.92 4.33 (.20) (.41) (.61) 17.14 32.83 889,487 .52 3.30 116.54
1996 17.14 .62 1.64 2.26 (.41) (1.44) (1.85) 17.55 14.19 1,077,989 .50 4.06 23.01
1997 17.55 .67 4.05 4.72 (.64) (.62) (1.26) 21.01 27.74 1,338,476 .49 3.53 36.71
1998 21.01 .69 .99 1.68 (.69) (1.64) (2.33) 20.36 8.33 1,318,743 .49 3.27 27.32
High Income Fund
1994 13.13 .88 (1.18) (.30) (.55) (.07) (.62) 12.21 (2.26) 255,036 .60 9.45 22.94
1995 12.21 1.06 1.30 2.36 (.91) - (.91) 13.66 19.76 360,904 .56 9.63 20.65
1996 13.66 1.20 .56 1.76 (1.20) (.06) (1.26) 14.16 13.90 446,096 .54 9.63 27.16
1997 14.16 1.33 .22 1.55 (1.22) (.04) (1.26) 14.45 11.47 496,036 .53 9.64 36.38
1998 14.45 1.43 (1.25) .18 (1.27) (.08) (1.35) 13.28 .99 446,609 .53 9.96 41.71
Income Securities Fund
1994 15.80 .82 (1.80) (.98) (.44) (.07) (.51) 14.31 (6.27) 1,000,002 .54 7.27 13.33
1995 14.31 1.16 1.96 3.12 (.89) (.07) (.96) 16.47 22.40 1,266,538 .51 8.05 33.14
1996 16.47 1.32 .44 1.76 (.87) (.15) (1.02) 17.21 11.28 1,350,659 .50 7.96 15.28
1997 17.21 1.40 1.38 2.78 (1.33) (.29) (1.62) 18.37 17.09 1,406,787 .50 7.53 14.68
1998 18.37 1.37 (1.07) .30 (1.42) (.33) (1.75) 16.92 1.64 1,185,840 .49 6.94 12.22
Money Market Fund
1994 1.00 .04 - .04 (.04) - (.04) 1.00 3.82 518,618 .467 4.05 -
1995 1.00 .06 - .06 (.06) - (.06) 1.00 5.74 429,547 .407 5.58 -
1996 1.00 .05 - .05 (.05) - (.05) 1.00 5.16 408,930 .437 5.04 -
1997 1.00 .05 - .05 (.05) - (.05) 1.00 5.24 367,449 .457 5.11 -
1998 1.00 .05 - .05 (.05) - (.05) 1.00 5.22 414,341 .457 5.08 -
Mutual Discovery Securities Fund
19965 10.00 .02 .19 .21 - - - 10.21 2.10 15,418 1.37* 2.11* .14
1997 10.21 .13 1.84 1.97 (.01) - (.01) 12.17 19.25 198,653 1.06 1.19 55.93
1998 12.17 .20 (.76) (.56) (.17) (.15) (.32) 11.29 (5.00) 224,656 1.00 1.94 93.99
Mutual Shares Securities Fund
19965 10.00 .02 .33 .35 - - - 10.35 3.50 27,677 1.00* 2.56* 1.31
1997 10.35 .13 1.71 1.84 (.01) - (.01) 12.18 17.73 387,787 .80 2.10 49.01
1998 12.18 .28 (.25) .03 (.13) (.12) (.25) 11.96 .09 482,444 .77 2.60 70.19

</TABLE>

PER SHARE OPERATING PERFORMANCE ($) RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------- -------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of
Net Net Total Distri- Distri- Net Net Ratio of net invest-
asset Net realized & from butions butions asset assets, expenses ment income Port-
value, invest- unrealized invest- from net from net Total value, Total end of to average to average folio
Period beginning ment gains ment investment realized distri- end of return+ year net net turnover
ended of period income (losses) operations income gains butions period (%) (000's)($) assets (%) assets (%) rate (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Natural Resources Securities Fund
1994 14.46 .16 (.45) (.29) (.08) - (.08) 14.09 (2.01) 125,078 .68 1.63 7.66
1995 14.09 .22 .12 .34 (.20) (.15) (.35) 14.08 2.35 105,109 .66 1.40 15.66
1996 14.08 .15 .44 .59 (.20) (.18) (.38) 14.29 4.00 109,579 .65 1.00 21.77
1997 14.29 .15 (2.83) (2.68) (.20) - (.20) 11.41 (18.98) 74,924 .69 1.00 85.22
1998 11.41 .15 (3.02) (2.87) (.15) - (.15) 8.39 (25.38) 45,927 .64 1.21 64.68
Real Estate Securities Fund
1994 15.04 .38 .06 .44 (.17) - (.17) 15.31 2.89 195,697 .62 4.00 11.73
1995 15.31 .78 1.83 2.61 (.52) - (.52) 17.40 17.53 213,473 .59 4.74 22.15
1996 17.40 .79 4.74 5.53 (.78) - (.78) 22.15 32.82 322,721 .57 4.80 10.32
1997 22.15 .72 3.72 4.44 (.67) (.32) (.99) 25.60 20.70 440,554 .54 3.59 11.62
1998 25.60 1.45 (5.60) (4.15) (.94) (.58) (1.52) 19.93 (16.82) 282,290 .54 5.44 13.21
Rising Dividends Fund
1994 10.57 .26 (.69) (.43) (.17) - (.17) 9.97 (4.08) 309,929 .80 2.71 24.07
1995 9.97 .27 2.66 2.93 (.24) - (.24) 12.66 29.74 463,253 .78 2.72 18.72
1996 12.66 .25 2.77 3.02 (.28) - (.28) 15.40 24.18 597,424 .76 1.96 27.97
1997 15.40 .22 4.77 4.99 (.26) (.45) (.71) 19.68 33.03 780,298 .74 1.24 37.04
1998 19.68 .23 1.07 1.30 (.22) (2.65) (2.87) 18.11 6.92 751,869 .72 1.20 26.44
Small Cap Fund
19953 10.00 .03 .21 .24 - - - 10.24 2.30 13,301 .90* 2.70* 16.04
1996 10.24 .02 2.95 2.97 (.01) - (.01) 13.20 28.95 170,969 .77 .63 63.72
1997 13.20 .01 2.24 2.25 (.03) (.37) (.40) 15.05 17.42 313,462 .77 .06 64.07
1998 15.05 .07 (.20) (.13) (.01) (1.19) (1.20) 13.72 (.98) 315,460 .77 .51 53.01
Templeton Developing Markets Equity Fund
19941 10.00 .07 (.51) (.44) - - - 9.56 (4.40) 98,189 1.53* 1.85* 1.15
1995 9.56 .09 .18 .27 (.04) (.01) (.05) 9.78 2.77 158,084 1.41 2.01 19.96
1996 9.78 .12 1.97 2.09 (.10) (.18) (.28) 11.59 21.59 272,098 1.49 1.68 12.42
1997 11.59 .18 (1.10) (.92) (.15) (.23) (.38) 10.29 (8.72) 279,680 1.42 1.57 20.59
1998 10.29 .20 (2.35) (2.15) (.29) (.94) (1.23) 6.91 (21.61) 162,433 1.41 2.04 36.58
Templeton Global Asset Allocation Fund
19952 10.00 .18 .52 .70 (.18) - (.18) 10.52 7.01 14,729 .90* 3.84* 30.00
1996 10.52 .34 1.75 2.09 (.01) (.01) (.02) 12.59 19.84 56,274 .86 4.21 52.35
1997 12.59 .42 1.04 1.46 (.26) (.07) (.33) 13.72 11.71 93,402 .94 4.22 61.93
1998 13.72 .61 (.59) .02 (.49) (.58) (1.07) 12.67 (.04) 81,670 .84 4.32 59.03
Templeton Global Growth Fund
19941 10.15 .07 .26 .33 - - - 10.48 3.25 158,856 1.14* 2.49* 7.14
1995 10.48 .16 1.17 1.33 (.06) - (.06) 11.75 12.72 338,755 .97 2.46 30.92
1996 11.75 .25 2.22 2.47 (.21) (.21) (.42) 13.80 21.28 579,877 .93 2.20 12.32
1997 13.80 .33 1.53 1.86 (.24) (.08) (.32) 15.34 13.50 758,445 .88 2.49 24.81
1998 15.34 .35 .98 1.33 (.41) (1.49) (1.90) 14.77 8.98 747,080 .88 2.27 32.30
Templeton Global Income Securities Fund
1994 13.31 .86 (1.52) (.66) (.33) (.13) (.46) 12.19 (4.99) 254,311 .71 7.99 79.38
1995 12.19 .29 1.47 1.76 (.49) - (.49) 13.46 14.68 243,194 .64 7.59 152.89
1996 13.46 1.02 .17 1.19 (1.04) - (1.04) 13.61 9.56 221,722 .61 7.30 140.96
1997 13.61 1.05 (.73) .32 (.96) - (.96) 12.97 2.55 185,016 .62 7.03 181.61
1998 12.97 1.07 (.19) .88 (.98) - (.98) 12.87 7.08 150,941 .63 6.86 84.17
Templeton International Equity Fund
1994 12.50 .19 (.07) .12 (.04) (.07) (.11) 12.51 .87 785,124 .99 2.17 12.22
1995 12.51 .37 .94 1.31 (.22) (.28) (.50) 13.32 10.59 850,117 .92 2.87 16.42
1996 13.32 .40 2.58 2.98 (.38) (.47) (.85) 15.45 22.98 1,108,099 .89 3.07 27.52
1997 15.45 .30 1.51 1.81 (.45) (.69) (1.14) 16.12 11.69 1,161,430 .89 3.01 26.96
1998 16.12 .56 .42 .98 (.53) (1.05) (1.58) 15.52 5.56 955,900 .88 2.90 5.98
Templeton International Smaller Companies Fund
19964 10.00 .10 1.15 1.25 - - - 11.25 12.50 16,255 1.16* 2.51* -
1997 11.25 .23 (.39) (.16) (.07) - (.07) 11.02 (1.50) 32,201 1.06 2.74 21.38
1998 11.02 .25 (1.52) (1.27) (.25) (.30) (.55) 9.20 (12.27) 24,999 1.10 2.26 18.45

</TABLE>

PER SHARE OPERATING PERFORMANCE ($) RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of
Net Net Total Distri- Distri- Net Net Ratio of net invest-
asset Net realized & from butions butions asset assets, expenses ment income Port-
value, invest- unrealized invest- from net from net Total value, Total end of to average to average folio
Period beginning ment gains ment investment realized distri- end of return+ year net net turnover
ended of period income (losses) operations income gains butions period (%) (000's)($) assets (%) assets (%) rate (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Templeton Pacific Growth Fund
1994 14.61 .22 (1.50) (1.28) (.03) (.06) (.09) 13.24 (8.79) 375,832 1.07 2.04 4.29
1995 13.24 .33 .71 1.04 (.26) (.11) (.37) 13.91 7.97 331,936 1.01 2.08 36.06
1996 13.91 .21 1.34 1.55 (.44) (.26) (.70) 14.76 11.10 356,759 .99 1.51 12.85
1997 14.76 .29 (5.49) (5.20) (.28) - (.28) 9.28 (35.95) 165,404 1.03 1.97 11.87
1998 9.28 .21 (1.52) (1.31) (.35) (.11) (.46) 7.51 (13.13) 98,769 1.10 2.60 12.55
U.S. Government Securities Fund
1994 13.92 .96 (1.59) (.63) (.67) (.05) (.72) 12.57 (4.55) 579,039 .53 6.87 18.25**
1995 12.57 .93 1.46 2.39 (.96) - (.96) 14.00 19.46 643,165 .52 6.72 18.68**
1996 14.00 .75 (.31) .44 (.97) - (.97) 13.47 3.62 843,858 .51 6.66 12.93***
1997 13.47 1.00 .21 1.21 (.76) - (.76) 13.92 9.31 765,084 .50 6.49 16.84
1998 13.92 .99 .01 1.00 (1.03) - (1.03) 13.89 7.44 710,832 .50 6.22 31.34
Value Securities Fund
19986 10.00 .02 (2.23) (2.21) - - - 7.79 (22.10) 9,013 .83* .95* 22.79
Zero Coupon Fund - 2000
1994 15.44 .68 (1.71) (1.03) (.69) (.10) (.79) 13.62 (6.76) 94,230 .407 6.37 -
1995 13.62 .75 2.03 2.78 (.67) - (.67) 15.73 20.67 137,357 .407 6.14 1.63
1996 15.73 .98 (.65) .33 (.86) (.01) (.87) 15.19 2.43 129,601 .407 6.14 .58
1997 15.19 1.15 (.12) 1.03 (1.06) (.02) (1.08) 15.14 7.11 111,650 .407 6.47 6.16
1998 15.14 1.22 (.15) 1.07 (1.21) (.19) (1.40) 14.81 7.50 93,543 .407 6.67 17.70
Zero Coupon Fund - 2005
1994 16.08 .71 (2.24) (1.53) (.60) (.19) (.79) 13.76 (9.60) 51,499 .407 6.53 2.00
1995 13.76 .78 3.53 4.31 (.69) - (.69) 17.38 31.76 83,222 .407 6.19 1.72
1996 17.38 .96 (1.13) (.17) (.86) - (.86) 16.35 (.50) 82,603 .407 6.15 2.06
1997 16.35 1.14 .63 1.77 (1.06) (.01) (1.07) 17.05 11.37 77,296 .407 6.16 4.52
1998 17.05 1.01 1.03 2.04 (1.10) (.25) (1.35) 17.74 12.53 84,487 .407 5.82 3.87
Zero Coupon Fund - 2010
1994 15.68 .55 (2.27) (1.72) (.63) (.31) (.94) 13.02 (10.97) 45,361 .407 6.57 4.34
1995 13.02 .76 4.75 5.51 (.49) - (.49) 18.04 42.79 85,633 .407 6.41 31.45
1996 18.04 1.02 (1.65) (.63) (.88) (.24) (1.12) 16.29 (2.69) 78,816 .407 6.24 16.10
1997 16.29 1.02 1.54 2.56 (1.01) (.01) (1.02) 17.83 16.57 85,515 .407 6.21 12.20
1998 17.83 1.09 1.39 2.48 (1.11) (.15) (1.26) 19.05 14.45 93,515 .407 5.55 15.92
</TABLE>

*Annualized

**The portfolio turnover rate excludes mortgage dollar roll transactions.

***The portfolio turnover rate excludes transactions related to the
liquidation of the Investment Grade Intermediate Bond Fund and the Adjustable
U.S. Government Fund and mortgage dollar roll transactions.

+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative changes, mortality and
expense risk charges or other charges that may be incurred under the variable
insurance contracts for which the funds serve as underlying investments. If
they had been included, total return would be lower. Total return is not
annualized.

1. For the period March 15, 1994 (effective date) to December 31, 1994.
2. For the period April 19, 1995 (seed date) to December 31, 1995.
3. For the period November 1, 1995 (effective date) to December 31, 1995.
4. For the period May 1, 1996 (effective date) to December 31, 1996.
5. For the period November 8, 1996 (effective date) to December 31, 1996.
6. For the period May 1, 1998 (effective date) to December 31, 1998.
7. During the periods indicated below, Franklin Advisers, Inc., the
investment manager, agreed in advance to waive a portion of its management
fees incurred by the Funds in the Trust. Had such action not been taken, the
ratio of expenses to average net assets would have been as follows:

Money Market Fund
1994 .54%
1995 .53
1996 .53
1997 .53
1998 .53
Zero Coupon Fund - 2000
1994 .66%
1995 .63
1996 .62
1997 .63
1998 .66
Zero Coupon Fund - 2005
1994 .68%
1995 .66
1996 .65
1997 .65
1998 .66
Zero Coupon Fund - 2010
1994 .68%
1995 .66
1996 .65
1997 .65
1998 .66

Fund Account Information

[Insert graphic of paper with lines and someone writing] Buying Shares

Shares of each fund are sold at net asset value (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 shareholder sells shares of the applicable fund to
make benefit or surrender payments or to execute exchanges (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 fund 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' 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, except that the
Money Fund's assets are generally valued at their amortized cost. 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 shareholders 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.

STATEMENTS AND REPORTS Contract owners will receive confirmations and
account statements that show account transactions. Insurance company
shareholders will receive the fund's financial reports every six months. To
reduce fund expenses, if you need additional copies, please call
1-800/342-3863.

If there is a dealer or other investment representative of record on the
account, he or she will also receive confirmations, account statements and
other information about the contract owner's account directly from the
contract's administrator.

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 (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 reserves certain rights, including:

o Each fund may refuse any order to buy shares.

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

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

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

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

o 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 777 Mariners Island
Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You can also call us at
1-800/342-3863 or the Valuemark Service Center at 1-800/624-0197. For your
protection and to help ensure we provide you with quality service, all calls
may be monitored or recorded.

FOR MORE INFORMATION

The funds of Franklin Valuemark Funds (the Trust) are only available as
investment options in variable annuity or variable life insurance contracts.
Please consult the accompanying contract prospectus for information about the
terms of an investment in a contract.

You can learn more about the funds 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(R)Templeton(R)
1-800/342-3863

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 #811-5583

PROSPECTUS
FRANKLIN
VALUEMARK
FUNDS
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

FRANKLIN VALUEMARK FUNDS

Information about each fund
you should know before
investing

1 Overview

INDIVIDUAL FUND DESCRIPTIONS

Capital Preservation and Income
2 Money Market Fund

Income
4 High Income Fund

7 Templeton Global Income Securities Fund

10 U.S. Government Securities Fund

Growth and Income
13 Global Utilities Securities Fund

16 Growth and Income Fund

19 Income Securities Fund

22 Mutual Shares Securities Fund

26 Real Estate Securities Fund

29 Rising Dividends Fund

32 Templeton Global Asset Allocation Fund

35 Value Securities Fund

Capital Growth
38 Capital Growth Fund

41 Global Health Care Securities Fund

44 Mutual Discovery Securities Fund

49 Natural Resources Securities Fund

52 Small Cap Fund

54 Templeton Developing Markets Equity Fund

57 Templeton Global Growth Fund

60 Templeton International Equity Fund

63 Templeton International Smaller Companies Fund

66 Templeton Pacific Growth Fund

ADDITIONAL INFORMATION, ALL FUNDS

69 Important Recent Developments

69 Distributions and Taxes

FUND ACCOUNT INFORMATION

Information about fund
account transactions
and services

70 Buying Shares

70 Selling Shares

70 Exchanging Shares

70 Fund Account Policies

71 Questions

For More Information

Where to learn more about
each fund

Back Cover

FRANKLIN VALUEMARK FUNDS

[Insert graphic of pyramid] OVERVIEW

FRANKLIN VALUEMARK FUNDS (THE TRUST) CURRENTLY CONSISTS OF TWENTY-FIVE
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 INDICATES WHICH FUNDS AND CLASSES ARE
AVAILABLE TO YOU.

INVESTMENT CONSIDERATIONS

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

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

RISKS

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

o 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

o Franklin Advisers, Inc., 777 Mariners Island Blvd., P.O. Box 7777, San
Mateo, California, 94403-7777.

o Franklin Advisory Services, LLC, One Parker Plaza, Ninth Floor, Fort Lee,
New Jersey, 07024.

o Franklin Mutual Advisers, LLC, 51 John F. Kennedy Parkway, Short Hills, New
Jersey, 07078.

o Templeton Asset Management Ltd., 7 Temasek Blvd. #38-03, Suntec Tower One,
Singapore, 038987.

o Templeton Global Advisors Limited, Lyford Cay Nassau, N.P., Bahamas.

o Templeton Investment Counsel, Inc., Broward Financial Centre, Suite 2100,
Fort Lauderdale, Florida, 33394.

MONEY MARKET FUND

[Insert graphic of bullseye and arrows] GOAL AND STARTEGIES

GOAL The fund's goal is high current income, consistent with liquidity and
capital preservation. The fund also tries to maintain a stable share price of
$1.00.

PRINCIPAL INVESTMENTS The fund invests exclusively in U.S. dollar
denominated money market debt instruments, including those issued by:

o U.S. or foreign corporations;

o U.S. and foreign banks;

o the U.S. Government, its agencies or authorities; and

o foreign governments or multinational organizations such as the World Bank.

[begin callout]
The fund invests exclusively in money market securities.
[end callout]

Under the SEC's money fund rules, the fund maintains a dollar-weighted
average portfolio maturity of 90 days or less and only buys securities:

o with remaining maturities of 397 days or less, and

o that the fund's Board of Trustees determines present minimal credit risks,
and

o that are rated in the top two short-term rating categories by independent
rating agencies or, if unrated, determined by the fund's Board of Trustees
to be comparable.

[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.

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. In that case, the fund would receive
less income, resulting in lower total return. Since the fund limits its
investments to high-quality, short-term securities, it will generally earn
lower yields than a fund with lower-quality, longer-term securities subject
to more risk.

FOREIGN SECURITIES The fund's investments in foreign money market securities
are always dollar denominated. Nonetheless, securities or credit support,
issued by a foreign entity are subject to possible adverse foreign economic,
political or legal developments that may affect the ability of that entity to
meet its obligations. In addition, non-U.S. companies are not subject to the
same disclosure, accounting, auditing and financial reporting standards and
practices as 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.

[begin callout]
An investment in the fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the fund tries
to keep a $1 share price, it is possible to lose money by investing in the
fund.
[end callout]

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

MONEY MARKET FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[Insert bar graph]

7.62% 5.48% 3.06% 2.54% 3.82% 5.74% 5.16% 5.24% 5.22%
90 91 92 93 94 95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q4 '89
1.96 %

WORST
QUARTER:

Q2 '93
0.61%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR PAST 5 YEARS (01/24/89)
- -------------------------------------------------------------------------------

MONEY MARKET FUND - CLASS 1 1 5.22% 5.04% 5.16%

1. All fund performance assumes reinvestment of dividends and capital gains.
Because class 2 shares were not offered until January 6th, 1999, performance
shown represents class 1 shares, which are not offered in this prospectus.
Although invested in the same portfolio of securities as class 1, class 2
performance will differ because of class 2's higher annual fees and expenses
resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.30%.
Past expense reductions by the manager increased returns.

To obtain the fund's current yield information, please call 1-800/342-3863.

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

HIGH INCOME FUND

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

GOALS The fund's principal investment goal is to earn a high level of
current income. Its secondary goal is capital appreciation.

[begin callout]
The fund invests primarily in high yield, lower rated bonds.
[end callout]

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in debt securities. The fund seeks to invest
in debt securities that are offering the highest yield and expected total
return. 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; zero coupon bonds; notes; and short-term investments,
including cash or cash equivalents. While the fund may also invest in
dividend-paying common or preferred stocks, it more typically holds equity as
a result of receiving those securities in a corporate restructuring. 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.

o a security's relative value based on such factors as anticipated cash flow,
interest or dividend coverage, asset coverage, and earnings prospects;

o the experience and managerial strength of the company;

o responsiveness to changes in interest rates and business conditions;

o debt maturity schedules and borrowing requirements; and

o the company's changing financial condition and market recognition of the
change.

[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]
Changes in 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]

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.

FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. 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, 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.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

HIGH INCOME FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[INSERT BAR GRAPH]

-8.67% 30.15% 16.21% 15.71% -2.26% 19.76% 13.90% 11.47% 0.99%
90 91 92 93 94 95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q1 '91 11.19%

WORST
QUARTER:

Q3 '90 -8.87%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR PAST 5 YEARS (01/24/89 )
- -------------------------------------------------------------------------------

HIGH INCOME FUND - CLASS 1 1 0.99% 8.46% 9.35%
CSFIRST BOSTON HIGH YIELD INDEX 2 0.58% 8.16% 10.65%

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

JEFF HOLBROOK, CFA
VICE PRESIDENT, ADVISERS

Mr. Holbrook has been a manager of the fund since 1997, and has been with the
Franklin Templeton Group since 1992.

CHRIS MOLUMPHY, CFA
SENIOR VICE PRESIDENT, ADVISERS

Mr. Molumphy has been a manager of the fund since its inception in 1989, and
has been with the Franklin Templeton Group since 1988.

R. MARTIN WISKEMANN
VICE PRESIDENT, ADVISERS

Mr. Wiskemann has been a manager of the fund since its inception in 1989. Mr.
Wiskemann has more than 30 years' experience in the securities industry.

Templeton Global Income Securities Fund

[Insert graphic of bullseye and arrows] GOAL 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]

[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.

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.

FOREIGN SECURITIES Securities of governments and companies located outside
the U.S. 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.

[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]

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.

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.

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.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

TEMPLETON GLOBAL INCOME FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[Insert bar graph]

9.83% 12.34% -0.40% 16.68% -4.99% 14.68% 9.56% 2.55% 7.08%
90 91 92 93 94 95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q1 '93
5.33%

WORST
QUARTER:

Q3 '92
- -4.84%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR PAST 5 YEARS (01/24/89)
- -------------------------------------------------------------------------------

TEMPLETON GLOBAL INCOME
SECURITIES FUND - CLASS 1 1 7.08% 5.56% 7.52%

JP MORGAN GLOBAL
GOVERNMENT BOND INDEX 2 15.31% 8.09% 9.23%

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

U.S. Government Securities Fund

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

GOAL The fund's investment goal is income.

[begin callout]
The fund invests primarily in mortgage-backed U.S. Government securities.
[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 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.

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. Zero coupon bonds are more
sensitive to interest rate changes and their price will fluctuate more than
the prices of interest-paying bonds or notes for comparable maturities. 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.

GINNIE MAES Ginnie Maes, and other mortgage- and asset-backed securities,
differ from conventional debt securities because principal is paid back over
the life of the security rather than at maturity. The fund may receive
unscheduled prepayments of principal due to voluntary prepayments,
refinancing or foreclosure on the underlying mortgage or other loans. During
periods of declining interest rates, the volume of principal prepayments
generally increases as borrowers refinance their mortgages at lower rates.
The fund may be forced to reinvest returned principal at lower interest
rates, reducing the fund's income. For this reason, Ginnie Maes may be less
effective than other types of securities as a means of "locking in" long-term
interest rates and may have less potential for capital appreciation during
periods of falling interest rates than other investments with similar
maturities. A reduction in the anticipated rate of principal prepayments,
especially during periods of rising interest rates, may increase the
effective maturity of Ginnie Maes making them more susceptible than other
debt securities to a decline in market value when interest rates rise. This
could increase volatility of the fund's returns and share price.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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 calendar years or since the fund's inception. The table shows how the
fund's average annual total returns compare with those of a broad-based
index. Of course, past performance cannot predict or guarantee future results.

U.S. GOVERNMENT SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[Insert bar graph]

8.92% 15.93% 7.69% 9.71% -4.55% 19.46% 3.62% 9.31% 7.44%
90 91 92 93 94 95 96 97 98

YEAR
[Begin callout]
BEST
QUARTER:

Q2 '95
6.53%

WORST
QUARTER:

Q1 '94
- -4.24%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR PAST 5 YEARS (03/14/89 )
- -------------------------------------------------------------------------------

U.S. GOVERNMENT SECURITIES
FUND - CLASS1 1 7.44% 6.77% 8.29%

LEHMAN BROTHERS INTERMEDIATE
GOVERNMENT BOND INDEX 2 8.49% 6.45% 8.43%

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

JACK LEMEIN
EXECUTIVE VICE PRESIDENT, ADVISERS

Mr. Lemein has been a manager of the fund since its inception in 1989. Mr.
Lemein has more than 30 years experience in the securities industry.

DAVID CAPURRO
SENIOR VICE PRESIDENT, ADVISERS

Mr. Capurro has been a manager of the fund since its inception in 1989, and
has been with the Franklin Templeton Group since 1983.

ROGER BAYSTON, CFA
SENIOR VICE PRESIDENT, ADVISERS

Mr. Bayston has been a manager of the fund since 1993, and has been with the
Franklin Templeton Group since 1991.

T. ANTHONY COFFEY, CFA
VICE PRESIDENT, ADVISERS

Mr. Coffey has been a manager of the fund since 1996, and has been with the
Franklin Templeton Group since 1989.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.48% of its average daily net assets to the manager.

ZERO COUPON FUNDS:
MATURING IN DECEMBER 2000, 2005, 2010

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

GOAL Each fund's investment goal is to provide as high an investment return
as is consistent with capital preservation.

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

Each fund's main risks can affect its 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. Because zero coupon securities do
not pay interest, the market value of zeros can fall more dramatically than
interest-paying securities of similar maturities when interest rates rise.
When interest rates fall, however, zeros rise more rapidly in value. In
general, securities with longer maturities usually are more sensitive to
price changes. Thus, the Zero Coupon Fund 2010 may experience more volatility
in its share price than the Zero Coupon Fund 2000. 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.

[Insert graphic of bull and bear] PAST PERFORMANCE

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.

ZERO COUPON FUND - 2000 CLASS 1
Calendar Year Total Returns 1

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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 calendar years or since the fund's inception. The table shows how the
fund's average annual total returns compare with those of a broad-based
index. Of course, past performance cannot predict or guarantee future results.

[Insert bar graph]

5.91% 20.19% 9.04% 16.15% -6.76% 20.67% 2.43% 7.11% 7.50%
90 91 92 93 94 95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q4 '90
9.51%

WORST
QUARTER:

Q1 '94
- -5.18%

[End callout]

Average Annual Total Returns
For the periods ended December 31, 1998

SINCE INCEPTION
PAST 1 YEAR PAST 5 YEARS (3/14/89)
- -------------------------------------------------------------------------------

ZERO COUPON - 2000 CLASS 1 1 7.50% 5.82% 9.21%
MERRILL LYNCH ZERO COUPON 1-YEAR
BOND TOTAL RETURN INDEX 2 6.22% 5.82% 6.81%
Merrill Lynch Zero Coupon 5-Year
BOND TOTAL RETURN INDEX 2 10.57% 6.88% 9.89%

ZERO COUPON FUND - 2005 CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[INSERT BAR GRAPH]

2.69% 20.37% 10.81% 22.21% -9.60% 31.76% -0.50% 11.37% 12.53%
90 91 92 93 94 95 96 97 98

YEAR
[Begin callout]
BEST
QUARTER:

Q1 '89
13.10%

WORST
Quarter:

Q1 '94
- -8.15%
[End callout]

Average Annual Total Returns
For the periods ended December 31, 1998

SINCE INCEPTION
PAST 1 YEAR PAST 5 YEARS (3/14/89)
- -------------------------------------------------------------------------------

ZERO COUPON - 2005 CLASS 1 1 12.53% 8.24% 11.35%
MERRILL LYNCH ZERO COUPON 5-YEAR
BOND TOTAL RETURN INDEX 2 10.57% 6.88% 9.89%
MERRILL LYNCH ZERO COUPON 10-YEAR
BOND TOTAL RETURN INDEX 2 15.53% 9.52% 12.55%

Zero Coupon Fund - 2010 Class 1
CALENDAR YEAR TOTAL RETURNS 1

[INSERT BAR GRAPH]

0.57% 20.09% 10.31% 25.47% -10.97% 42.79% -2.69% 16.57% 14.45%
90 91 92 93 94 95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q2 '95
16.03%

WORST
QUARTER:

Q1 '90
- -10.43%
[End callout]

Average Annual Total Returns
For the periods ended December 31, 1998

SINCE INCEPTION
PAST 1 YEAR PAST 5 YEARS (3/14/89)
- -------------------------------------------------------------------------------

ZERO COUPON - 2010 CLASS 1 1 14.45% 10.54% 12.61%
MERRILL LYNCH ZERO COUPON 10-YEAR
BOND TOTAL RETURN INDEX 2 15.53% 9.52% 12.55%
MERRILL LYNCH ZERO COUPON 20-YEAR
BOND TOTAL RETURN INDEX 2 15.98% 12.80% 15.41%

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the funds' investment manager.

MANAGEMENT TEAM The team responsible for the funds' management is:

DAVID CAPURRO
SENIOR VICE PRESIDENT, ADVISERS

Mr. Capurro has been a manager of the fund since its inception in 1989, and
has been with the Franklin Templeton Group since 1983.

JACK LEMEIN
EXECUTIVE VICE PRESIDENT, ADVISERS

Mr. Lemein has been a manager of the fund since its inception in 1989. Mr.
Lemein has more than 30 years' experience in the securities industry.

T. ANTHONY COFFEY, CFA
VICE PRESIDENT, ADVISERS

Mr. Coffey has been a manager of the fund since 1989, and has been with the
Franklin Templeton Group since 1989.

Global Utilities Securities Fund

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

GOALS The fund's investment goals are capital appreciation and current
income.

o electricity

o natural gas

o telecommunications services (including telephone communications, cable and
internet, satellite and other pay television services, and wireless
telecommunications)

o water

[begin callout]
The fund concentrates in common stocks of U.S. and non-U.S. companies engaged
in the public utilities industry.
[end callout]

The manager expects to invest substantially in the electricity and
telecommunications sectors.

[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 global market
conditions, currencies, and interest rate movements, 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. 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.

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 foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

GLOBAL UTILITIES SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[Insert bar graph]

1.84% 24.56% 9.69% 10.54% -11.56% 31.35% 7.07% 26.76% 11.19%
90 91 92 93 94 95 96 97 98

YEAR
[Begin callout]
BEST
QUARTER:

Q4 '97
13.45%

WORST
QUARTER:

Q1 '94
- -10.27%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR PAST 5 YEARS (01/24/89 )
- -------------------------------------------------------------------------------

GLOBAL UTILITIES SECURITIES
Fund - Class 1 1 11.19% 11.88% 12.57%

S&P 500(R)Index 2 28.58% 24.06% 18.70%

FT/S&P Actuaries World
Utilities Index 2 36.67% 15.96% 12.95%

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

IAN LINK, CFA
VICE PRESIDENT, ADVISERS

Mr. Link has been a manager of the fund since 1995, and has been with the
Franklin Templeton Group since 1989.

ALEX W. PETERS
PORTFOLIO MANAGER, ADVISERS

Mr. Peters has been a manager of the fund since 1999, and has been with the
Franklin Templeton Group since 1992.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.47% of its average daily net assets to the manager.

GROWTH AND INCOME FUND

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

GOALS The fund's principal investment goal is capital appreciation. Its
secondary goal is to provide current income.

[begin callout]
The fund invests primarily in common stocks offering above market current
dividend yields.
[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 goals.

[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]

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, 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.

REITS A REIT's performance depends on the types and locations of the
properties it owns and on how well it manages those properties. The value of
a REIT may also be affected by factors that affect the underlying properties,
the real estate industry, or local or general economic conditions.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

Growth and Income Fund - Class 1
Calendar Year Total Returns 1

[Insert bar graph]

-2.35% 23.63% 6.73% 10.32% -3.41% 32.83% 14.19% 27.74% 8.33%
90 91 92 93 94 95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q1 '91
10.93%

WORST
QUARTER:

Q3 '90
- -12.63%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR PAST 5 YEARS (01/24/89 )
- -------------------------------------------------------------------------------

GROWTH AND INCOME FUND -
CLASS 1 1 8.33% 15.51% 11.72%

S&P 500(R)INDEX 2 28.58% 24.06% 18.70%

[Insert graphic of briefcase] Management

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

FRANK FELICELLI, CFA
SENIOR VICE PRESIDENT, ADVISERS

Mr. Felicelli has been a manager of the fund since 1995, and has been with
the Franklin Templeton Group since 1986.

WILLIAM HAWES
PORTFOLIO MANAGER, ADVISERS

Mr. Hawes has been a manager of the fund since 1999, and has been with the
Franklin Templeton Group since 1998.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.47% of its average daily net assets to the manager.

Income Securities Fund

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

GOAL The fund's investment goal is to maximize income while maintaining
prospects for capital appreciation.

[begin callout]
The fund invests primarily in a diversified portfolio of high yield lower
rated bonds, and stocks.
[end callout]

o a security's relative value based on such factors as anticipated cash flow,
interest or dividend coverage, asset coverage, and earnings prospects;

o the experience and managerial strength of the company;

o responsiveness to changes in interest rates and business conditions;

o debt maturity schedules and borrowing requirements; and

o the company's changing financial condition and market recognition of the
change.

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

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

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 funds seek to reinvest interest payments, or the
proceeds from a matured debt security, resulting in less income received by
the fund.

[begin callout]
Because the bonds and stocks the fund holds fluctuate in price with interest
rate changes and market conditions, the value of your investment in the fund
will go up and down. 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, 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.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

INCOME SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[Insert bar graph]

-7.42% 39.93% 13.20% 18.59% -6.27% 22.40%11.28% 17.09% 1.64%
90 91 92 93 94 95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q1 '91
16.48%

WORST
QUARTER:

Q3 '90
- -8.42%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR PAST 5 YEARS (01/24/89 )
- -------------------------------------------------------------------------------

INCOME SECURITIES FUND - CLASS 1 1 1.64% 8.73% 11.23%

LEHMAN BROTHERS GOVERNMENT/
CORPORATE BOND INDEX 2 9.47% 7.30% 9.29%

S&P 500(R)INDEX 2 28.58% 24.06% 18.70%

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

CHARLES B. JOHNSON
CHAIRMAN OF THE BOARD, ADVISERS

Mr. Johnson has been a manager of the fund since its inception in 1989, and
has been with the Franklin Templeton Group since 1957.

MATTHEW F. AVERY
SENIOR VICE PRESIDENT, ADVISERS

Mr. Avery has been a manager of the fund since its inception in 1989, and has
been with the Franklin Templeton Group since 1987.

FREDERICK G. FROMM
VICE PRESIDENT, ADVISERS

Mr. Fromm has been a manager of the fund since 1998, and has been with the
Franklin Templeton Group since 1992.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.47% of its average daily net assets to the manager.

Mutual Shares Securities Fund

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

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

o UNDERVALUED STOCKS Stocks trading at a discount to asset value.

o 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]

[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.

REORGANIZING ORDISTRESSED 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 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.

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.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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

MUTUAL SHARES SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[Insert bar graph]

17.73% 0.09%
97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q4 '98
12.94%

WORST
QUARTER:

Q3 '98
- -17.65%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR (11/08/96)
- -------------------------------------------------------------------------------

MUTUAL SHARES SECURITIES
FUND - CLASS 1 1 0.09% 9.70%

S&P 500(R)INDEX 2 28.58% 30.66%

[Insert graphic of briefcase] MANAGEMENT

Franklin Mutual Advisers, LLC (Franklin Mutual) is the fund's investment
manager.

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

LAWRENCE N. SONDIKE
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL

DAVID E. MARCUS
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL

Mr. Marcus has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.

The team also includes:

PETER A. LANGERMAN
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
FRANKLIN MUTUAL

Mr. Langerman has been involved with the management of the fund since its
inception in 1996. Before joining the Franklin Templeton Group in 1996, he
was a research analyst for Heine.

ROBERT L. FRIEDMAN
CHIEF INVESTMENT OFFICER
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL

Mr. Friedman has been involved with the management of the fund since its
inception in 1996. Before joining the Franklin Templeton Group in 1996, he
was a research analyst for Heine.

JEFFREY A. ALTMAN
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL

Mr. Altman has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.

RAYMOND GAREA
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL

Mr. Garea has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.

DAVID J. WINTERS
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL

Mr. Winters has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1996, he was a research analyst for Heine.

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

JIM AGAH
ASSISTANT PORTFOLIO MANAGER
FRANKLIN MUTUAL

Mr. Agah has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1997, he was vice president of equity sales at
Keefe, Bryette & Woods.

JEFF DIAMOND
ASSISTANT PORTFOLIO MANAGER
FRANKLIN MUTUAL

Mr. Diamond has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1998, he was a vice president and co-manager of
Prudential Conservative Stock Fund.

Real Estate Securities Fund

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

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

o companies qualifying under federal tax law as REITs,

[begin callout]
The fund concentrates in securities of companies in the real estate industry,
primarily equity REITs.
[end callout]

REITs are real estate investment trust companies, usually publicly traded,
that manage a portfolio of income-producing real estate properties such as
apartments, hotels, office buildings, or shopping centers. Equity REITs take
ownership positions in real estate and shareholders receive income from the
rents received, and receive capital gains on the properties sold at a profit.
Other types, for example mortgage REITs, specialize in lending money to
developers and pass interest income on to shareholders. Still others are
hybrid REITs, having a mix of equity and debt investments. The fund generally
invests in medium-cap (less than $5 billion) to small-cap (less than $1.5
billion) REITs, because that is reflective of the industry itself. Market
capitalization is defined as share price times the number of common stock
shares outstanding.

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 goals.

[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.

REITS Equity REITs can be affected by any changes in the value of the
properties owned, while mortgage REITs can be affected by the quality of any
credit extended. A REIT's performance depends on the types and locations of
the properties it owns and on how well it manages those properties or loan
financings. A decline in rental income could occur because of extended
vacancies, increased competition from other properties, tenants' failure to
pay rent or poor management.

[begin callout]
Because the securities the fund holds fluctuate in price with real estate
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]

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

REAL ESTATE SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[Insert bar graph]

-11.98% 33.47% 12.12% 19.01% 2.89% 17.53% 32.82% 20.70% -16.82%
90 91 92 93 94 95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q1 '91
20.13%

WORST
QUARTER:

Q3 '90
- -14.14%
[End callout]

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

SINCE INCEPTION
1 YEAR 5 YEARS (01/24/89 )
- -------------------------------------------------------------------------------

REAL ESTATE SECURITIES FUND -
CLASS 1 1 -16.82% 10.03% 10.30%

S&P 500(R)INDEX 2 28.58% 24.06% 18.70%

WILSHIRE REAL ESTATE
SECURITIES INDEX 2 -17.43% 9.36% 4.57%

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

MATTHEW F. AVERY
SENIOR VICE PRESIDENT, ADVISERS

Mr. Avery has been a manager of the fund since its inception in 1989, and has
been with the Franklin Templeton Group since 1987.

DOUGLAS BARTON, CFA
VICE PRESIDENT, ADVISERS

Mr. Barton has been a manager of the fund since 1998, and has been with the
Franklin Templeton Group since 1988.

Rising Dividends Fund

[Insert graphic of bullseye and arrows] GOAL 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 the securities of companies that have:

o consistently increased dividends in at least 8 out of the last 10 years and
have not decreased dividends during that time;

o increased dividends substantially (at least 100%) over the past ten years;

o reinvested earnings, paying out less than 65% of current earnings in
dividends (except for utility companies);

o strong balance sheets, with long-term debt representing no more than 30% of
total capitalization (except for utility companies); and

[begin callout]
The fund will invest primarily in the common stocks of financially sound
companies that have paid consistently rising dividends.
[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 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.

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.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

RISING DIVIDENDS FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[Insert bar graph]

-3.48% -4.08% 29.74% 24.18% 33.03% 6.92%
93 94 95 96 97 98

YEAR
[Begin callout]
BEST
QUARTER:

Q4 '98
19.38%

WORST
QUARTER:

Q3 '98
- -14.78%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR PAST 5 YEARS (01/27/92 )
- -------------------------------------------------------------------------------

RISING DIVIDENDS FUND - CLASS 1 1 6.92% 17.06% 12.98%

WILSHIRE MIDCAP COMPANY
GROWTH INDEX 2 -1.08% 13.83% 13.61%

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisory Services, LLC (Advisory Services) is the fund's investment
manager.

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

DONALD G. TAYLOR
SENIOR VICE PRESIDENT,
ADVISORY SERVICES

Mr. Taylor has been a manager of the fund since 1996. Before joining the
Franklin Templeton Group in 1996, he was a Portfolio Manager for Fidelity
Management & Research Co.

WILLIAM J. LIPPMAN
PRESIDENT, ADVISORY SERVICES

Mr. Lippman has been a manager of the fund since its inception in 1992. He
has more than 30 years' experience in the securities industry and joined the
Franklin Templeton Group in 1988.

BRUCE C. BAUGHMAN
SENIOR VICE PRESIDENT,
ADVISORY SERVICES

Mr. Baughman has been a manager of the fund since its inception in 1992, and
has been with the Franklin Templeton Group since 1988.

MARGARET MCGEE
VICE PRESIDENT,
ADVISORY SERVICES

Ms. McGee has been a manager of the fund since its inception in 1992, and has
been with the Franklin Templeton Group since 1988.

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

Templeton Global Asset Allocation Fund

[Insert graphic of bullseye and arrows] GOAL 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]

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 may also invest up to 25% of its total assets in high
yield, medium and lower rated debt securities ("junk bonds"), or, if unrated,
determined by the fund's manager to be comparable. The fund will not invest
in defaulted securities. During 1998, about 10.2% 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.

[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 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]

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.

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.

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.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

TEMPLETON GLOBAL ASSET ALLOCATION FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[Insert bar graph]

19.84% 11.71% -0.04%
96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q4 '98
11.93%

WORST
QUARTER:

Q3 '98
- -13.12%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR (05/01/95 )
- -------------------------------------------------------------------------------

TEMPLETON GLOBAL ASSET
ALLOCATION FUND - CLASS 1 1 -0.04% 10.25%

MSCI WORLD INDEX(R) 2 24.80% 18.24%

JP MORGAN GLOBAL GOVERNMENT
BOND INDEX 2 15.31% 7.49%

[Insert graphic of briefcase] MANAGEMENT

Templeton Global Advisors Limited (TGAL) is the fund's investment manager.

Under an agreement with TGAL, Templeton Investment Counsel, Inc. (TICI)
through its Templeton Global Bond Managers division (Global Bond Managers),
is the fund's sub-advisor.

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

DALE WINNER, CFA
PORTFOLIO MANAGER, TGAL

Mr. Winner has been a manager of the fund since 1997. Before joining Franklin
Templeton in 1995, he was a trust officer at J.P. Morgan.

JEFFREY A. EVERETT, CFA
EXECUTIVE VICE PRESIDENT, TGAL

Mr. Everett has been a manager of the fund since its inception in 1995, and
has been with the Franklin Templeton Group since 1990.

MARK G. HOLOWESKO, CFA
PRESIDENT, TGAL

Mr. Holowesko has been a manager of the fund since 1999, and has been with
the Franklin Templeton Group since 1985.

A team from Global Bond Managers is responsible for managing the debt portion
of the fund's investments.

Value Securities Fund

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

GOAL The fund's investment goal is long-term total return.

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

PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined value-oriented strategy for this fund. As a
"bottom-up" investor focusing primarily on individual securities, the 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. The manager seeks bargains among the "under researched and
unloved" - out of favor companies that offer, in the manager's opinion,
excellent long-term potential that might include former growth companies that
have stumbled recently, dropping sharply in price, but with significant
potential ("fallen angels") or companies that are a potential turnaround or
takeover target.

[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.

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, industries, or securities markets. 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. 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.

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.

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.

[Insert graphic of bull and bear] PERFORMANCE

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

[Insert graphic of briefcase] Management

Franklin Advisory Services, LLC (Advisory Services) is the fund's investment
manager.

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

WILLIAM J. LIPPMAN
PRESIDENT, ADVISORY SERVICES

Mr. Lippman has been a manager of the fund since its inception in 1998. He
has more than 30 years' experience in the securities industry and joined the
Franklin Templeton Group in 1988.

BRUCE C. BAUGHMAN
SENIOR VICE PRESIDENT,
ADVISORY SERVICES

Mr. Baughman has been a manager of the fund since its inception in 1998, and
has been with the Franklin Templeton Group since 1988.

GERARD P. SULLIVAN
SENIOR VICE PRESIDENT,
ADVISORY SERVICES

MARGARET MCGEE
VICE PRESIDENT, ADVISORY SERVICES

Ms. McGee has been a manager of the fund since its inception in 1998 and has
been with the Franklin Templeton Group since 1988.

Capital Growth Fund

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

GOAL The fund's investment goal is capital appreciation.

[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 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.

[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.

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.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

CAPITAL GROWTH FUND - CLASS 1

CALENDAR YEAR TOTAL RETURNS 1

[Insert bar graph]

18.31% 20.29%
97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q4 '98
19.73%

WORST
QUARTER:

Q3 '98
- -10.47%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR (05/01/96)
- -------------------------------------------------------------------------------

CAPITAL GROWTH FUND - CLASS 1 1 20.29% 19.72%

S&P 500(R) 2 INDEX 28.58% 29.00%

RUSSELL 1000 INDEX(R) 2 27.02% 27.92%

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

CONRAD B. HERRMANN, CFA
SENIOR VICE PRESIDENT, ADVISERS

Mr. Herrmann has been a manager of the fund since its inception in 1996, and
has been with the Franklin Templeton Group since 1989.

VIVIAN J. PALMIERI
PORTFOLIO MANAGER, ADVISERS

Mr. Palmieri has been a manager of the fund since its inception in 1996, and
has been with the Franklin Templeton Group since 1965.

KENT SHEPHERD, CFA
VICE PRESIDENT, ADVISERS

Mr. Shepherd has been a manager of the fund since its inception in 1999, and
has been with the Franklin Templeton Group since 1991.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.75% of its average daily net assets to the manager.

Global Health Care Securities Fund

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

GOAL The fund's investment goal is capital appreciation.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 70% of its total assets in equity securities of companies in the
health care industry. These are companies whose principal assets or
activities are in research, development, production or distribution of
products and services in industries such as pharmaceutical; biotechnology;
health care facilities, information systems and personal products; medical
supplies, technology and services; and managed care companies. 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 concentrates in common stocks of U.S. and non-U.S. companies in the
health care industry.
[end callout]

[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 global 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]

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, industries, or securities markets. 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. Growth stock
prices reflect projections of future earnings or revenues, and can,
therefore, fall dramatically if the company fails to meet those projections.

FOREIGN SECURITIES Securities of companies located outside the U.S. 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.

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.

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.

[Insert graphic of bull and bear] PERFORMANCE

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

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

KURT VON EMSTER, CFA
VICE PRESIDENT, ADVISERS

Mr. Von Emster has been a manager of the fund since its inception in 1998,
and has been with the Franklin Templeton Group since 1989.

EVAN MCCULLOCH, CFA
VICE PRESIDENT, ADVISERS

Mr. McCulloch has been a manager of the fund since its inception in 1998, and
has been with the Franklin Templeton Group since 1992.

RUPERT H. JOHNSON, JR.
PRESIDENT, ADVISERS

Mr. Johnson has been a manager of the fund since its inception in 1998, and
has been with the Franklin Templeton Group since 1965.

Mutual Discovery Securities Fund

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

GOAL The fund's principal goal is capital appreciation.

o UNDERVALUED STOCKS STOCKS trading at a discount to asset value.

o Distressed Companies Securities of companies that are distressed or even in
bankruptcy.

The fund invests primarily in common stocks of non-U.S. and U.S. companies
the manager believes are significantly undervalued.

The fund invests primarily in companies with market capitalization values
(share price times the number of common stock shares outstanding) greater
than $1.5 billion, but may invest a lesser amount in small-cap companies.
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 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.

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, 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.

[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.

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 devaluation 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
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluation. 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.

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 are also generally 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.

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 its position because the trading market becomes illiquid.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

MUTUAL DISCOVERY SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[Insert bar graph]

19.25% -5.00%
97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q1 '98
10.85%

WORST
QUARTER:

Q3 '98
- -20.97%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR (11/08/96)
- -------------------------------------------------------------------------------

MUTUAL DISCOVERY SECURITIES
FUND - CLASS 1 1 -5.00% 7.02%

S&P 500(R)INDEX 2 28.58% 30.66%

[Insert graphic of briefcase] MANAGEMENT

Franklin Mutual Advisers, LLC (Franklin Mutual) is the fund's investment
manager.

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

ROBERT L. FRIEDMAN
CHIEF INVESTMENT OFFICER
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL

DAVID E. MARCUS
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL

Mr. Marcus has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.

The team also includes:

PETER A. LANGERMAN
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
FRANKLIN MUTUAL

Mr. Langerman has been involved with the management of the fund since its
inception in 1996. Before joining the Franklin Templeton Group in 1996, he
was a research analyst for Heine.

LAWRENCE N. SONDIKE
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL

Mr. Sondike has been a manager of the fund since its inception in 1996.
Before joining the Franklin Templeton Group in 1996, he was a research
analyst for Heine.

JEFFREY A. ALTMAN
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL

Mr. Altman has been a manager of the fund since its inception in 1996. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.

RAYMOND GAREA
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL

Mr. Garea has been a manager of the fund since its inception in 1998. Before
joining the Franklin Templeton Group in 1996, he was a research analyst for
Heine.

DAVID J. WINTERS
SENIOR VICE PRESIDENT
FRANKLIN MUTUAL

Mr. Winters has been a manager of the fund since 1996. Before joining the
Franklin Templeton Group in 1996, he was a research analyst for Heine.

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

JIM AGAH
ASSISTANT PORTFOLIO MANAGER
FRANKLIN MUTUAL

Mr. Agah has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1997, he was vice president of equity sales at
Keefe, Bryette & Woods.

JEFF DIAMOND
ASSISTANT PORTFOLIO MANAGER
FRANKLIN MUTUAL

Mr. Diamond has been a manager of the fund since 1998. Before joining the
Franklin Templeton Group in 1998, he was a vice president and co-manager of
Prudential Conservative Stock Fund.

Natural Resources Securities Fund

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

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

[begin callout]
The fund concentrates in common stocks of U.S. and non-U.S. companies in the
natural resources sector.
[end callout]

[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.

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.

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 foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.

SMALLER COMPANIES While smaller companies, and to a lesser extent mid-size
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 have fluctuated
independently from larger company securities, especially over the
shorter-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, their growth prospects are less
certain, and their securities are less liquid. These companies may suffer
significant losses, and can be considered speculative.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

NATURAL RESOURCES SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[Insert bar graph]

-13.97% 3.86% -10.13% 55.62% -2.01% 2.35% 4.00% -18.98% -25.38%
90 91 92 93 94 95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q4 '93
21.92%

WORST
QUARTER:

Q3 '98
- -19.12%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR PAST 5 YEARS (01/24/89)
- -------------------------------------------------------------------------------

NATURAL RESOURCES SECURITIES
FUND - CLASS 1 1 -25.38% -8.81% -0.25%

S&P 500(R)INDEX 2 28.58% 24.06% 18.70%

FT/S&P/ACTUARIES WORLD:
ENERGY 50%/BASIC INDUSTRIES 50%
COMPOSITE INDEX 2 -0.11% 8.56% 7.04%

2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Financial Times/S&P Actuaries World (Energy 50%/Basic Industries 50%)
Composite Index is a composite of companies of which 50% are in the energy
sector and 50% are in the basic industries sectors. Indices include
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 briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

MICHAEL R. WARD
PORTFOLIO MANAGER, ADVISERS

Mr. Ward has been a manager of the fund since 1999, and has been with the
Franklin Templeton Group since 1992.

STEVE LAND
PORTFOLIO MANAGER, ADVISERS

Mr. Land has been a manager of the fund since 1999, and has been with the
Franklin Templeton Group since 1997.

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.62% of its average daily net assets to the manager.

Small Cap Fund

[Insert graphic of bullseye and arrows]GOAL 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]

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.

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 erratic or abrupt price movements.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

SMALL CAP FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[INSERT BAR GRAPH]

28.95% 17.42% -0.98%
96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q4 '98
24.39%

WORST
QUARTER:

Q3 '98
- -24.40%
[End callout]

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

Since Inception
Past 1 Year (11/01/95)
- -------------------------------------------------------------------------------

SMALL CAP FUND - CLASS 1 1 -0.98% 14.51%

S&P 500(R)INDEX 2 28.58% 29.09%

RUSSELL 2500(R)INDEX 2 0.38% 15.45%

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.

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

EDWARD B. JAMIESON
EXECUTIVE VICE PRESIDENT, ADVISERS

Mr. Jamieson has been a manager of the fund since its inception in 1995, and
has been with the Franklin Templeton Group since 1987.

AIDAN O'CONNELL
PORTFOLIO MANAGER, ADVISERS

The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.75% of its average daily net assets to the manager.

Templeton Developing Markets Equity Fund

[Insert graphic of bullseye and arrows] GOAL 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]

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.

[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 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]

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.

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.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

TEMPLETON DEVELOPING MARKETS EQUITY FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[INSERT BAR GRAPH]

2.77% 21.59% -8.72% -21.61%
95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q4 '98
20.59%

WORST
QUARTER:

Q4 '97
- -23.44%
[End callout]

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

SINCE INCEPTION
1 YEAR (03/15/94)
- -------------------------------------------------------------------------------

TEMPLETON DEVELOPING MARKETS
EQUITY FUND - CLASS 1 1 -21.61% -3.22%

MSCI EMERGING MARKETS FREE INDEX 2 -25.34% -8.80%

IFC INVESTABLE COMPOSITE INDEX 2 -22.01% -9.24%

[Insert graphic of briefcase] MANAGEMENT

Templeton Asset Management Ltd. (TAML) is the fund's investment manager.

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

DR. J. MARK MOBIUS.
MANAGING DIRECTOR, TAML

Dr. Mobius has been a manager of the fund since its inception in 1994, andhas
been with the Franklin Templeton Group since 1987.

TOM WU
DIRECTOR, TAML

Mr. Wu has been a manager of the fund since its inception in 1994, and has
been with the Franklin Templeton Group since 1987.

H. ALLAN LAM
PORTFOLIO MANAGER, TAML

Mr. Lam has been a manager of the fund since its inception in 1994, and has
been with the Franklin Templeton Group since 1987.

EDDIE CHOW
PORTFOLIO MANAGER, TAML

Mr. Chow has been a manager of the fund since 1996, and has been with the
Franklin Templeton Group since 1994.

DENNIS LIM
DIRECTOR, TAML

Mr. Lim has been a manager of the fund since 1996, and has been with the
Franklin Templeton Group since 1990.

TEK-KHOAN ONG
PORTFOLIO MANAGER, TAML

Mr. Ong has been a manager if the fund since 1996, and has been with the
Franklin Templeton Group since 1993.

Templeton Global Growth Fund

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

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

[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, 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 stocks 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 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.

[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.

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.

[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]

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.

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.

[Insert graphic of bull and bear] PAST PERFORMANCE

Because class 2 shares were not offered until January 6th, 1999, the fund's
class 1 performance is shown.

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.

TEMPLETON GLOBAL GROWTH FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS 1

[INSERT BAR GRAPH]

12.72% 21.28% 13.50% 8.98%
95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q4 '98
16.30%

WORST
QUARTER:

Q3 '98
- -13.78%
[End callout]

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

SINCE INCEPTION
PAST 1 YEAR (03/15/94)
- -------------------------------------------------------------------------------

TEMPLETON GLOBAL GROWTH FUND - CLASS 1 1 8.98% 12.30%

MSCI ALL COUNTRY WORLD FREE(R)INDEX 2 21.97% 14.79%

[Insert graphic of briefcase] MANAGEMENT

Templeton Global Advisors Limited (TGAL) is the fund's investment manager.

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

RICHARD SEAN FARRINGTON, CFA
SENIOR VICE PRESIDENT, TGAL

Mr. Farrington has been a manager of the fund since 1995, and has been with
the Franklin Templeton Group since 1990.

JEFFREY A. EVERETT, CFA
EXECUTIVE VICE PRESIDENT, TGAL

Mr. Everett has been a manager of the fund since its inception in 1994, and
has been with the Franklin Templeton Group since 1990.

The fund pays the manager a fee for managing its assets, making its
investment decisions and providing certain administrative facilities and
services to the fund. For the fiscal year ended December 31, 1998, the fund
paid 0.83% of its average daily net assets to the manager.

Templeton International Equity Fund

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

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

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