FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, 485APOS, 2000-02-16

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
485APOS, 2000-02-16

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As filed with the Securities and Exchange Commission on February 16, 2000

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. 31 (X)

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 32 (X)

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
----------------------------------------------------
(formerly 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
--------------
KAREN L. SKIDMORE, ESQ., 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)
[ ] on [ ] pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[X] on May 1, 2000 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.

<PAGE>

FRANKLIN TECHNOLOGY SECURITIES FUND - CLASS 1

Franklin Templeton Variable Insurance Products Trust

MAY 1, 2000

[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.

1
<PAGE>

Contents

THE FUND

[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]

[insert page #] Goal and Strategies

[insert page #] Main Risks

[insert page #] Past Performance

[insert page #] Fees and Expenses

[insert page #] Management

[insert page #] Important Recent Developments

[insert page #] Distributions and Taxes

[insert page #] Overview

FUND ACCOUNT INFORMATION

[Begin callout]
INFORMATION ABOUT FUND ACCOUNT TRANSACTIONS AND SERVICES
[End callout]

[insert page #] Buying Shares

[insert page #] Selling Shares

[insert page #] Exchanging Shares

[insert page #] Fund Account Policies

[insert page #] Questions

FOR MORE INFORMATION

[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]

BACK COVER

2
<PAGE>

THE 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 invests at least
65% of its total assets in equity securities of companies expected to benefit
from the development, advancement, and use of technology. These may include, for
example, companies in the following industries:

o technology services, including computer software, data services, and internet
services;
o electronic technology, including computers, computer products, and
electronic components;
o telecommunications, including networking, wireless, and wire-line services and
equipment;
o media and information services;
o semiconductors and semiconductor equipment; and
o precision instruments.

The fund may invest in companies of any size and may invest a significant
portion of its assets in smaller companies. The fund may invest up to 25% of its
total assets in foreign securities (which may include those in emerging
markets), but currently intends to limit such investment to 15%.

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

PORTFOLIO SELECTION

The manager is a research driven, fundamental investor, pursuing a disciplined
growth strategy. As a "bottom-up" investor focusing primarily on individual
securities, the manager chooses companies that it believes 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 distinct and sustainable
competitive advantages. Such advantages as a particular marketing niche, proven
technology, and industry leadership are all factors the manager believes point
to strong growth 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 U.S. or non-U.S. currency short-term investments, including cash or cash
equivalents. Under these circumstances, the fund may 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.

3
<PAGE>

TECHNOLOGY COMPANIES By focusing on technology industries, the fund carries much
greater risks of adverse developments among such industries than a fund that
invests in a wider variety of industries. Prices often change collectively
without regard to the merits of individual companies. Technology company stocks
can be subject to abrupt or erratic price movements and have been volatile,
especially over the short term, due to the rapid pace of product change and
development affecting such companies. Technology companies are subject to
significant competitive pressures, such as new market entrants, aggressive
pricing and competition or market share and the potential for falling profit
margins. These companies also face the risks that new services, equipment or
technologies will not be accepted by consumers and businesses or will become
rapidly obsolete. These factors can affect the profitability of technology
companies and, as a result, the value of their securities. In addition, many
internet-related companies are in the emerging stage of development and are
particularly vulnerable to the risks of rapidly changing technologies. Prices of
these companies' securities historically have been more volatile than other
securities, especially over the short term.

[Begin callout]
Because the securities the fund holds fluctuate in price, 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 this may not be the case in foreign markets, in the U.S., stocks
historically have outperformed other asset classes over the long term (over the
short term they tend to go up and down more dramatically). These price movements
may result from factors affecting individual companies or industries, or the
securities market as a whole. Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company fails
to meet those projections.

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 can be subject to abrupt or erratic price movements.

Initial public offerings of securities issued by unseasoned companies with
little or no operating history are risky and their prices are highly volatile,
but they can result in very large gains in early trading. Thus, when the fund is
smaller, any such gains will have a larger impact on the fund's reported
performance than when the fund's asset size is larger.

FOREIGN SECURITIES Where the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates, including devaluation of
a currency by a country's government, will increase or decrease the fund's
returns from its foreign portfolio holdings. 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 restrictions on removal of currency and other assets, exchange controls,
foreign ownership limitations, expropriation, restrictions on removal of
currency and other assets, nationalization of assets, punitive taxes and certain
custody and settlement risks. Non-U.S. markets or securities may be, or become,
less liquid. Non-U.S. stock exchanges, trading systems, brokers, and companies
generally are subject to less government supervision, regulation, disclosure,
and financial reporting requirements than in the U.S. Emerging market countries
have additional, heightened risks including a greater likelihood of currency
devaluations, less liquidity and greater volatility.

4
<PAGE>

DIVERSIFICATION The fund is non-diversified under the federal securities laws.
As such, it may invest a greater portion of its assets in one issuer and have a
smaller number or 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.

LIQUIDITY 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, can only be
resold at a price significantly lower than their value, or are difficult to
value accurately.

PORTFOLIO TURNOVER Because of the fund's emphasis on technology stocks, the
fund's portfolio turnover rate may exceed 100% annually, which may involve
additional expenses to the fund, including portfolio transaction costs.

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 Statement of Additional Information.

[Insert graphic of a bull and a bear]
PAST PERFORMANCE

Because the fund is new, it has no performance history.

[insert graphic of percentage sign]
FEES AND EXPENSES

Franklin Technology Securities Fund

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's estimated expenses for the current
fiscal year. THE TABLE AND THE EXAMPLE DO NOT INCLUDE ANY FEES OR SALES CHARGES
IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT
OPTION. If they were included, your costs would be higher. Investors should
consult the contract prospectus or disclosure document for more information.

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 1
Maximum sales charge (load) imposed on purchases None
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)(2) 0.00%

CLASS 1
- ---------------------------------------------------------------------
Management fees 0.55%
Distribution and service (12b-1) fees 0.00%
Other expenses 0.38%
-----
Total annual fund operating expenses 0.93%

1. This fee is only for market timers (see page [#]).
2. The administrator and manager have agreed in advance to waive or limit their
respective fees and assume as their own expense certain expenses otherwise
payable by the fund so that total annual fund operating expenses do not exceed
1.05% of the fund's class 1 net assets during the current fiscal year. The
administrator and manager is

5
<PAGE>

contractually obligated to continue this arrangement through December 2001.
After December 2001, the administrator and manager may end the arrangement at
any time.

EXAMPLE

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

1 YEAR 3 YEARS

Class 1 $95 $296

[Insert graphic of briefcase] MANAGEMENT

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

The team responsible for the fund's management is:

MANAGEMENT TEAM

IAN LINK, CFA
Vice President, Advisers
Mr. Link has been a manager of the fund since its inception, and has been with
the Franklin Templeton group since 1989.

CANYON CHAN, CFA
VICE PRESIDENT, Advisers
Mr. Chan has been a manager of the fund since its inception, and has been with
the Franklin Templeton group since 1991.

CONRAD HERRMANN, CFA
Senior Vice President, Advisers
Mr. Herrmann has been a manager of the fund since its inception, and has been
with the Franklin Templeton group since 1989.

The fund pays the manager a fee for managing its assets, and making its
investment decisions. The fee is equal to an annual rate of:

o 0.550% of the value of net assets up to and including $500 million;
o 0.450% of the value of net assets over $500 million, up to and
including $1 billion;
o 0.400% of the value of net assets over $1 billion, up to and including
$1.5 billion;
o 0.350% of the value of net assets over $1.5 billion, up to and
including $6.5 billion;
o 0.325% of the value of net assets over $6.5 billion, up to and
including $11.5 billion;
o 0.300% of the value of net assets over $11.5 billion, up to and
including $16.5 billion;
o 0.290% of the value of net assets over $16.5 billion, up to and
including $19 billion;
o 0.280% of the value of net assets over $19 billion, up to and including
$21.5 billion; and
o 0.270% of the value of net assets over $21.5 billion.

6
<PAGE>

[Insert graphic of starburst]
IMPORTANT RECENT DEVELOPMENTS

YEAR 2000 At this date, it appears neither the fund's operations nor those of
the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If a
company in which the fund is invested develops problems related to Year 2000,
the price of its securities may be adversely affected, and this may have an
adverse effect on the fund's performance. Year 2000 has been one of the many
factors the managers consider when making investment decisions. The managers
reviewed public filings and other statements made by companies about their Year
2000 readiness, but could not audit each company to verify its readiness.
Although the risk of the Year 2000 problem should decrease over time, the
possibility remains that the funds and the companies in which they are invested
may be adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.

EURO On January 1, 1999, the European Monetary Union introduced a single new
currency, the euro, which will replace 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 fund may hold in its
portfolio, and their impact on fund performance. To the extent the 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 The fund will declare as dividends
substantially all of its net investment income. The 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 fund will
reduce the per share net asset value (NAV) by the per share amount paid.

Dividends paid by the fund will be automatically reinvested in additional shares
of the 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 fund. For more information, please consult the
accompanying contract prospectus.

[insert graphic of a pyramid]
OVERVIEW

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST (THE TRUST), FORMERLY
FRANKLIN VALUEMARK FUNDS, CURRENTLY CONSISTS OF TWENTY-NINE (29) SEPARATE FUNDS,
OFFERING A WIDE VARIETY OF INVESTMENT CHOICES. EACH FUND GENERALLY HAS TWO
CLASSES OF SHARES, CLASS 1 AND CLASS 2. THE FUNDS ARE GENERALLY 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.

7
<PAGE>

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.

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 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.

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.

Management

The fund's investment managers and their affiliates manage over $224 billion in
assets. In 1992, Franklin joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers organization became part of the
Franklin Templeton organization four years later. Today, 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.

FUND ACCOUNT INFORMATION

[Insert graphic of a 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 a certificate] SELLING SHARES
--------------
8

<PAGE>

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 going in different directions] 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 fund calculates its 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 fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the value, assets may be valued at their fair value. If
the 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 fund is 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 from their insurance
company.

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 fund is not designed for market timers, large or frequent
transfers. The fund 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 fund maintains additional policies and
reserve certain rights, including:

o The fund may refuse any order to buy shares.

<PAGE>

o At any time, the fund may establish or change investment minimums.
o The fund may modify or discontinue the exchange privilege on 60 days' notice
to insurance company shareholders.
o You may only buy shares of the 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 The 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 fund's account policies can be
found in the fund's Statement of Additional Information. If you have any
questions about the fund, 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. For
your protection and to help ensure we provide you with quality service, all
calls may be monitored or recorded.

10
<PAGE>

FOR MORE INFORMATION

The funds of Franklin Templeton Variable Insurance Products Trust (the Trust),
formerly Franklin Valuemark Funds, 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 fund in the following documents:

ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION

Contains more information about the fund, its 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 fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: [email protected].

Investment Company Act file #811-5583

<PAGE>

Prospectus

FRANKLIN TECHNOLOGY SECURITIES FUND - CLASS 2

Franklin Templeton Variable Insurance Products Trust

MAY 1, 2000

[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.

1
<PAGE>

Contents

THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]

[insert page #] Goal and Strategies

[insert page #] Main Risks

[insert page #] Past Performance

[insert page #] Fees and Expenses

[insert page #] Management

[insert page #] Important Recent Developments

[insert page #] Distributions and Taxes

[insert page #] Overview

FUND ACCOUNT INFORMATION

[Begin callout]
INFORMATION ABOUT FUND ACCOUNT TRANSACTIONS AND SERVICES
[End callout]

[insert page #] Buying Shares

[insert page #] Selling Shares

[insert page #] Exchanging Shares

[insert page #] Fund Account Policies

[insert page #] Questions

FOR MORE INFORMATION

[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]

BACK COVER

2
<PAGE>

THE FUND

[Insert graphic of bullseye and arrows]
GOAL AND STRATEGIES

GOAL The fund's investment goal is capital appreciation.

o technology services, including computer software, data services, and internet
services;
o electronic technology, including computers, computer products, and
electronic components;
o telecommunications, including networking, wireless, and
wire-line services and equipment;
o media and information services;
o semiconductors and semiconductor equipment; and
o precision instruments.

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

PORTFOLIO SELECTION

TEMPORARY INVESTMENTS

[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.

<PAGE>

[Insert graphic of a bull and a bear]
PAST PERFORMANCE

Because the fund is new, it has no performance history.

[insert graphic of percentage sign]
FEES AND EXPENSES

Franklin Technology Securities Fund

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 2
Maximum sales charge (load) imposed on purchases None
Maximum deferred sales charge (load) 0.00%

ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)2 0.00%
CLASS 2
- ------------------------------------------------------------------------------
Management fees 0.55%
Distribution and service (12b-1) fees 0.25%
Other expenses 0.38%
-----
Total annual fund operating expenses 1.18%

1. This fee is only for market timers (see page [#]).
2.The administrator and manager have agreed in advance to waive or limit their
respective fees and assume as their own expense certain expenses otherwise
payable by the fund so that total annual fund operating expenses do not exceed
1.30% of the fund's class 2 net assets during the current fiscal year. The
administrator and manager is

<PAGE>

contractually obligated to continue this arrangement through December 2001.
After December 2001, the administrator and manager may end the arrangement at
any time.

EXAMPLE

1 YEAR 3 YEARS

Class 2 $120 $375

[Insert graphic of briefcase] MANAGEMENT

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

The team responsible for the fund's management is:

MANAGEMENT TEAM

IAN LINK, CFA
Vice President, Advisers
Mr. Link has been a manager of the fund since its inception, and has been with
the Franklin Templeton group since 1989.

CANYON CHAN, CFA
VICE PRESIDENT, ADVISERS
Mr. Chan has been a manager of the fund since its inception, and has been with
the Franklin Templeton group since 1991.

CONRAD HERRMANN, CFA
Senior Vice President, Advisers
Mr. Herrmann has been a manager of the fund since its inception, and has been
with the Franklin Templeton group since 1989.

The fund pays the manager a fee for managing its assets, and making its
investment decisions. The fee is equal to an annual rate of:

o 0.550% of the value of net assets up to and including $500 million;
o 0.450% of the value of net assets over $500 million, up to and including
$1 billion;
o 0.400% of the value of net assets over $1 billion, up to and including
$1.5 billion;
o 0.350% of the value of net assets over $1.5 billion, up to and including
$6.5 billion;
o 0.325% of the value of net assets over $6.5 billion, up to and including
$11.5 billion;
o 0.300% of the value of net assets over $11.5 billion, up to and including
$16.5 billion;
o 0.290% of the value of net assets over $16.5 billion, up to and including
$19 billion;
o 0.280% of the value of net assets over $19 billion, up to and including
$21.5 billion; and
o 0.270% of the value of net assets over $21.5 billion.

<PAGE>

[Insert graphic of starburst]
IMPORTANT RECENT DEVELOPMENTS

YEAR 2000 At this date, it appears neither the fund's operations nor those of
the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If a
company in which the fund is invested develops problems related to Year 2000,
the price of its securities may be adversely affected, and this may have an
adverse effect on the fund's performance. Year 2000 has been one of the many
factors the managers consider when making investment decisions. The managers
reviewed public filings and other statements made by companies about their Year
2000 readiness, but could not audit each company to verify its readiness.
Although the risk of the Year 2000 problem should decrease over time, especially
after the leap day of February 29, 2000, the possibility remains that the funds
and the companies in which they are invested may be adversely affected by Year
2000 problems until all of their various data processing activities for the year
have been completed.

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

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

[insert graphic of a pyramid]
OVERVIEW

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.

<PAGE>

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.

MANAGEMENT

FUND ACCOUNT INFORMATION

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

8
<PAGE>

[Insert graphic of a certificate] SELLING SHARES
--------------

[Insert graphic of two arrows going in different directions] EXCHANGING SHARES
-----------------

[Insert graphic of paper and pen] FUND ACCOUNT POLICIES
---------------------

CALCULATING SHARE PRICE The fund calculates its 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.

Requests to buy and sell shares are processed on any day the fund is 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 from their insurance
company.

MARKET TIMERS The fund is not designed for market timers, large or frequent
transfers. The fund may restrict or refuse purchases or exchanges made as a
result of market timing decisions. The fund will determine whether a separate
account purchase or sale order is the result of market timing activity.

ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserve certain rights, including:

o The fund may refuse any order to buy shares.
o At any time, the fund may establish or change investment minimums.

<PAGE>

o The fund may modify or discontinue the exchange privilege on 60 days' notice
to insurance company shareholders.
o You may only buy shares of the 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 The 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 below.

DISTRIBUTION AND SERVICE (12B-1) FEES Class 2 has a distribution plan, sometimes
known as a rule 12b-1 plan, that allows the fund to pay distribution fees of up
to 0.25% per year to those who sell and distribute class 2 shares and provide
services to shareholders and contract owners. Because these fees are paid out of
class 2's assets on an on-going basis, over time these fees will increase the
cost of an investment, and may cost more than paying other types of sales
charges.

[Insert graphic of question mark]QUESTIONS

More detailed information about the Trust and the fund's account policies can be
found in the fund's Statement of Additional Information. 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.
For your protection and to help ensure we provide you with quality service, all
calls may be monitored or recorded.

10
<PAGE>

FOR MORE INFORMATION

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

ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION

Contains more information about the fund, its 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

Investment Company Act file #811-5583

<PAGE>

Prospectus

FRANKLIN S&P 500 INDEX FUND - CLASS 1

Franklin Templeton Variable Insurance Products Trust

MAY 1, 2000

[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.

1
<PAGE>

Contents

THE FUND

[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]

[insert page #] Goal and Strategies

[insert page #] Main Risks

[insert page #] Past Performance

[insert page #] Fees and Expenses

[insert page #] Management

[insert page #] Important Recent Developments

[insert page #] Distributions and Taxes

[insert page #] Overview

FUND ACCOUNT INFORMATION

[Begin callout]
INFORMATION ABOUT FUND ACCOUNT TRANSACTIONS AND SERVICES
[End callout]

[insert page #] Buying Shares

[insert page #] Selling Shares

[insert page #] Exchanging Shares

[insert page #] Fund Account Policies

[insert page #] Questions

FOR MORE INFORMATION

[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]

BACK COVER

<PAGE>

THE FUND

[Insert graphic of bullseye and arrows]
GOAL AND STRATEGIES

GOAL The fund's investment goal is to match the performance of the Standard &
Poor's 500 Composite Stock Price Index (S&P 500 Index) before the deduction of
fund expenses.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund uses investment
"indexing" strategies designed to track the performance of the S&P 500 Index.
The S&P 500 Index is a widely recognized, unmanaged stock market index, which is
dominated by the securities of large U.S. companies. This index includes the
securities of 500 companies from leading industrial sectors which represent a
substantial portion of the market value of all common stocks publicly traded in
the U.S. The S&P 500 Index weights stocks according to their market
capitalization (the number of common stock shares outstanding multiplied by the
stock's current price). Standard & Poor's determines the composition of the S&P
500 Index and may change the composition from time to time.

[Begin callout]
This index fund invests to match the performance of the S&P 500 Composite Stock
Price Index.
[End callout]

The fund may invest in the common stocks in the S&P 500 Index in approximately
the same proportions as the S&P 500 Index. For example, if one company's
securities made up 5% of the S&P 500 Index, the fund may invest 5% of its total
assets in that company. This is called the "replication" method. Over time, the
fund will seek to invest at least 80% of its total assets in the common stocks
of companies included in the S&P 500 Index. The fund may also invest in a sample
of stocks found in the S&P 500 Index, selected on the basis of
computer-generated statistical data to resemble the full index in terms of
industry weighting, market capitalization, and other characteristics such as
beta, price-to-book ratios, price-to-earnings ratios and dividend yield. This is
called the "optimization" method. Stocks represent ownership interests in
individual companies and give shareholders a claim in the company's earnings and
assets.

When the manager determines that it would be cost-effective or otherwise
beneficial for the fund to do so, particularly during the early stages of the
fund's growth, the fund may invest in derivative securities, such as stock index
futures and stock index options, as a method of gaining market exposure in
addition to, or instead of, investing in securities in the S&P 500 Index. In
such a circumstance, all or substantially all of the fund's assets may be
invested in derivative securities, with the remainder of assets in short-term
debt securities. Such short-term debt securities may include U.S. government
securities, certificates of deposit, high-grade commercial paper, repurchase
agreements, other money market securities, and money market funds.

Derivative securities are used as an efficient, low-cost method of gaining
immediate exposure to a particular securities market without investing directly
in the underlying securities. The fund may also invest in derivative securities
to keep cash on hand to meet shareholder redemptions or other needs while
maintaining exposure to the stock market. The fund will not use derivative
securities for speculative purposes or as leveraged investments that magnify the
gains or losses of an investment.

3
<PAGE>

The manager uses various "indexing" strategies designed to track the performance
of the S&P 500 Index and does not seek to outperform the market as a whole by
researching and selecting individual securities. The manager also does not
attempt to manage market volatility or use of defensive strategies to reduce the
effects of market downturns on the fund's performance. The manager determines
the mix of investments that it believes will, in a cost-effective manner,
achieve the fund's investment goal and manages cash flows into and out of the
fund.

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

4
<PAGE>

MAIN RISKS

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 the securities market as a whole. Large-capitalization stocks
tend to go through cycles of doing better -- or worse -- than the stock market
in general. In the past, these periods have lasted for several years.

[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]

INDEX TRACKING The fund's ability to track its targeted index may be affected by
transaction costs and fund expenses, cash flows, and changes in the composition
of that index. In addition, the fund's performance may not precisely track the
performance of its targeted index if the securities the manager has selected do
not precisely track that index. If securities the fund owns underperform those
in that index, the fund's performance will be lower than that index. Unlike an
unmanaged index, the fund pays operating expenses that may prevent the fund from
precisely tracking an index's performance. Cash inflows from investors buying
shares could create large balances of cash, while cash outflows from investors
selling shares may require ready reserves of cash. Either situation would likely
cause the fund's performance to deviate from the "fully invested" targeted
index.

DERIVATIVE SECURITIES Stock index futures and stock index options are considered
derivative investments, since their value depends on the value of the underlying
asset to be purchased or sold. The fund's investment in derivatives may involve
a small investment relative to the amount of risk assumed. To the extent the
fund enters into these transactions, their success will depend on the manager's
ability to predict market movements. The fund could suffer losses if its
derivative securities do not correlate well with the indexes or securities for
which they are acting as a substitute or if the fund cannot close out a position
because the trading markets become illiquid.

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

See "Important Recent Developments" in this prospectus for a discussion of Year
2000 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
Statement of Additional Information.

5
<PAGE>

[Insert graphic of a bull and a bear]
PAST PERFORMANCE

Because the fund is new, it has no performance history.

[insert graphic of percentage sign]
FEES AND EXPENSES

Franklin S&P 500 Index Fund - Class 1

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 1
- --------------------------------------------------------------------------------
Maximum sales charge (load) as a percentage of offering price

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

ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)(1)
CLASS 1
- --------------------------------------------------------------------------------
Management Fees 0.15%
Other Expenses 0.83%
-----
Total annual fund operating expenses 0.98%
Fee waiver/expense reductions (0.43%)
-----
Net Expenses 0.55%

1The manager has agreed in advance to assume certain fund expenses, and the
manager and the administrator have agreed in advance to waive or limit their
fees, as necessary so that Total Fund Operating Expenses do not exceed 0.55% for
class 1. The manager and the administrator are contractually obligated to
continue this arrangement through [2000].

EXAMPLE

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

1 YEAR 3 YEARS
----------------------------
Class 1 $100 $312

[Insert graphic of briefcase] MANAGEMENT

<PAGE>

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

Under an agreement with Advisers, State Street Global Advisors (SSgA), Two
International Place, Boston, Massachusetts 02110, is the fund's sub-advisor.
SSgA is a division of State Street Bank and Trust Company. A team from SSgA
provides Advisers with investment management advice and assistance.

THE FUND'S LEAD PORTFOLIO MANAGER IS:

MARK BOYADJIAN

PORTFOLIO MANAGER OF ADVISERS

Mr. Boyadjian is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in Philosophy from University of California at Berkeley. Prior to joining
the Franklin Templeton Group in 1998, Mr. Boyadjian was a portfolio manager at
Scudder, Stevens & Clark.

The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of 0.15% of the fund's
net assets. The manager and administrator have agreed in advance to waive or
limit their fees and assume certain other fund expenses as necessary so that
Total Fund Operating Expenses do not exceed 0.55% for class 1. The manager and
administrator are contractually obligated to continue this arrangement through
the year [2000].

"Standard & Poor's(R)", "S&P(R)" and "S&P 500(R)" are trademarks of The
McGraw-Hill Companies, Inc. and have been licensed fOr use by Franklin Templeton
Distributors, Inc. The fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's and Standard & Poor's makes no representation regarding the
advisability of investing in the fund. Please see the Statement of Additional
Information for more information.

[Insert graphic of starburst]
IMPORTANT RECENT DEVELOPMENTS

Year 2000 has been one of the many factors the managers consider when making
investment decisions. The managers reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, the possibility remains that the funds and the
companies in which they are invested may be adversely affected by Year 2000
problems until all of their various data processing activities for the year have
been completed.

EURO On January 1, 1999, the European Monetary Union introduced a single new
currency, the euro, which will replace 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 fund may hold in its portfolio, and their impact on
fund performance. To the extent the fund holds non-U.S. dollar (euro or other)

<PAGE>

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

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

[insert graphic of a pyramid]
OVERVIEW

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.

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.

<PAGE>

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.

Management

FUND ACCOUNT INFORMATION

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

Shares of the 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 fund's 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 the 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 fund does not issue share certificates.

[Insert graphic of a certificate] SELLING SHARES
--------------

[Insert graphic of two arrows going in different directions] EXCHANGING SHARES
-----------------

[Insert graphic of paper and pen] FUND ACCOUNT POLICIES
---------------------

<PAGE>

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

Additional policies Please note that the fund maintains additional policies and
reserve certain rights, including:

o The fund may refuse any order to buy shares.
o At any time, the fund may establish or change investment minimums.
o The fund may modify or discontinue the exchange privilege on 60 days' notice
to insurance company shareholders
o You may only buy shares of the 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 The fund has three classes of shares, class 1, class 2 and class
3. Each class is identical except that class 2 and class 3 have a distribution
plan or "rule 12b-1" plan which is described in prospectuses offering class 2
and class 3 shares.

[Insert graphic of question mark]QUESTIONS

<PAGE>

More detailed information about the Trust and the fund's account policies can be
found in the fund's Statement of Additional Information. If you have any
questions about the fund, 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 1-800/774-5001. For
your protection and to help ensure we provide you with quality service, all
calls may be monitored or recorded.

11
<PAGE>

FOR MORE INFORMATION

The funds of the Franklin Templeton Variable Insurance Products Trust (the
Trust), formerly Franklin Valuemark Funds, are only available as investment
options in variable annuity or variable life insurance contracts, except
Franklin S&P 500 Index Fund which is also available as an investment option to
defined contribution plans participating in Franklin Templeton ValuSelect(R) and
certain other qualified retirement plans.

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

ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION

Contains more information about the fund, its 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)
1-800/774-5001

Investment Company Act file #811-5583

<PAGE>

Prospectus

FRANKLIN S&P 500 INDEX FUND - CLASS 2

Franklin Templeton Variable Insurance Products Trust

MAY 1, 2000

[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.

<PAGE>

Contents

THE FUND

[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]

[insert page #] Goal and Strategies

[insert page #] Main Risks

[insert page #] Past Performance

[insert page #] Fees and Expenses

[insert page #] Management

[insert page #] Important Recent Developments

[insert page #] Distributions and Taxes

[insert page #] Overview

FUND ACCOUNT INFORMATION

[Begin callout]
INFORMATION ABOUT FUND ACCOUNT TRANSACTIONS AND SERVICES
[End callout]

[insert page #] Buying Shares

[insert page #] Selling Shares

[insert page #] Exchanging Shares

[insert page #] Fund Account Policies

[insert page #] Questions

FOR MORE INFORMATION

[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]

BACK COVER

<PAGE>

THE FUND

[Insert graphic of bullseye and arrows]
GOAL AND STRATEGIES

GOAL The fund's investment goal is to match the performance of the Standard &
Poor's 500 Composite Stock Price Index (S&P 500 Index) before the deduction of
fund expenses.

[Begin callout]
This index fund invests to match the performance of the S&P 500 Composite Stock
Price Index.
[End callout]

3
<PAGE>

PORTFOLIO SELECTION

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

<PAGE>

MAIN RISKS

<PAGE>

[Insert graphic of a bull and a bear]
PAST PERFORMANCE

Because the fund is new, it has no performance history.

[insert graphic of percentage sign]
FEES AND EXPENSES

Franklin S&P 500 Index Fund

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 2
- --------------------------------------------------------------------------------
Maximum sales charge (load) as a percentage of offering price

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

ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)(1)
CLASS 2
- --------------------------------------------------------------------------------
Management Fees 0.15%
Distribution and Service (12b-1) fees 0.25%
Other Expenses 0.83%
-----
Total annual fund operating expenses 1.23%
Fee waiver/expense reductions (0.43%)
------
Net Expenses 0.80%

1The manager has agreed in advance to assume certain fund expenses, and the
manager and the administrator have agreed in advance to waive or limit their
fees, as necessary so that Total Fund Operating Expenses do not exceed 0.80% for
class 2. The manager and the administrator are contractually obligated to
continue this arrangement through [2000].

EXAMPLE

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

1 YEAR 3 YEARS
----------------------------
Class 1 $125 $390

<PAGE>

[Insert graphic of briefcase] MANAGEMENT

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

THE FUND'S LEAD PORTFOLIO MANAGER IS:

MARK BOYADJIAN

PORTFOLIO MANAGER OF ADVISERS

"Standard & Poor's(R)", "S&P(R)" and "S&P 500(R)" are trademarks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Franklin Templeton
Distributors, Inc. The fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's and Standard & Poor's makes no representation regarding the
advisability of investing in the fund. Please see the Statement of Additional
Information for more information.

[Insert graphic of starburst]
IMPORTANT RECENT DEVELOPMENTS

Year 2000 has been one of the many factors the managers consider when making
investment decisions. The managers reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, the possibility remains that the fund and the
companies in which they are invested may be adversely affected by Year 2000
problems until all of their various data processing activities for the year have
been completed.

EURO On January 1, 1999, the European Monetary Union introduced a single new
currency, the euro, which will replace the national currency for participating
member countries.

<PAGE>

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

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

[insert graphic of a pyramid]
OVERVIEW

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.

<PAGE>

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.

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.

Management

FUND ACCOUNT INFORMATION

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

[Insert graphic of a certificate] SELLING SHARES
--------------

[Insert graphic of two arrows going in different directions] EXCHANGING SHARES
-----------------

<PAGE>

[Insert graphic of paper and pen] FUND ACCOUNT POLICIES
---------------------

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

Additional policies Please note that the fund maintains additional policies and
reserve certain rights, including:

o The fund may refuse any order to buy shares.
o At any time, the fund may establish or change investment minimums.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.
o You may only buy shares of the 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.

<PAGE>

Distribution and service (12b-1) fees Class 2 of the fund has a distribution
plan, sometimes known as a rule 12b-1 plan, that allows class 2 to pay
distribution fees of up to 0.25% per year to those who sell and distribute class
2 shares and provide services to shareholders and contract owners. Because these
fees are paid out of class 2's assets on an on-going basis, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.

[Insert graphic of question mark]QUESTIONS

More detailed information about the Trust and the fund's account policies can be
found in the fund's Statement of Additional Information. If you have any
questions about the fund, 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 1-800/774-5001. For
your protection and to help ensure we provide you with quality service, all
calls may be monitored or recorded.

<PAGE>

FOR MORE INFORMATION

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

ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION

Contains more information about the fund, its 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)
1-800/774-5001

Investment Company Act file #811-5583

<PAGE>

PROSPECTUS
FRANKLIN S&P 500
INDEX FUND-CLASS 3
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

INVESTMENT STRATEGY GROWTH

MAY 1, 2000

[Insert Franklin Templeton Logo]

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.

<PAGE>

CONTENTS
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]

THE FUND

[insert page #] Goal and Strategies

[insert page #] Main Risks

[insert page #] Past Performance

[insert page #] Fees and Expenses

[insert page #] Management

[insert page #] Overview of the Trust

Additional Information

[insert page #] Important Recent Developments

[insert page #] Distributions and Taxes

FUND ACCOUNT INFORMATION

[Begin callout]
INFORMATION ABOUT FUND ACCOUNT TRANSACTIONS AND SERVICES
[End callout]

[insert page #] Buying Shares

[insert page #] Selling Shares

[insert page #] Exchanging Shares

[insert page #] Fund Account Policies

[insert page #] Questions

For More Information

[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]

Back Cover

<PAGE>

THE FUND

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
-------------------

GOAL The fund's investment goal is to match the performance of the Standard &
Poor's 500 Composite Stock Price Index (S&P 500 Index) before the deduction of
fund expenses.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund uses investment
"indexing" strategies designed to track the performance of the S&P 500 Index.
The S&P 500 Index is a widely recognized, unmanaged stock market index, which is
dominated by the securities of large U.S. companies. This index includes the
securities of 500 companies from leading industrial sectors which represent a
substantial portion of the market value of all common stocks publicly traded in
the U.S. The S&P 500 Index weights stocks according to their market
capitalization (the number of common stock shares outstanding multiplied by the
stock's current price). Standard & Poor's Corporation determines the composition
of the S&P 500 Index and may change the composition from time to time.

[Begin callout]
This index fund invests to match the performance of the S&P 500 Composite Stock
Price Index.
[End callout]

When the manager determines that it would be cost-effective or otherwise
beneficial for the fund to do so, the fund may invest in derivative securities,
such as stock index futures and stock index options, as a method of gaining
market exposure in addition to, or instead of, investing in securities in the
S&P 500 Index. In such a circumstance, all or substantially all of the fund's
assets may be invested in derivative securities, with the remainder of assets in
short-term debt securities. Such short-term debt securities may include U.S.
government securities, certificates of deposit, high-grade commercial paper,
repurchase agreements, other money market securities, and money market funds.

PORTFOLIO SELECTION The manager uses various "indexing" strategies designed to
track the performance of the S&P 500 Index and does not seek to outperform the
market as a whole by researching and selecting individual securities. The
manager determines the mix of investments that it believes will, in a
cost-effective manner, achieve the fund's investment goal and manages cash flows
into and out of the fund.

<PAGE>

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 value of the fund's share price, its
distributions or income, and therefore, the fund's performance.

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

INDEX TRACKING The fund's ability to track its targeted index may be affected by
transaction costs and fund expenses, cash flows, and changes in the composition
of that index. In addition, the fund's performance may not precisely track the
performance of its targeted index if the securities the manager has selected do
not precisely track that index. If securities the fund owns underperforms those
in that index, the fund's performance will be lower than that index. Unlike an
unmanaged index, the fund pays operating expenses that may prevent the fund from
precisely tracking an index's performance. Cash inflows from investors buying
shares could create large balances of cash, while cash outflows from investors
selling shares may require ready reserves of cash. Either situation would likely
cause the fund's performance to deviate from the "fully invested" targeted
index.

<PAGE>

[Insert graphic of bull and bear] PAST PERFORMANCE
----------------

Because the fund is new, it has no performance history.

[insert graphic of percentage sign] FEES AND EXPENSES
-----------------

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's estimated expenses for the current
fiscal year. THE TABLE AND THE EXAMPLE DO NOT INCLUDE ANY PLAN ADMINISTRATION
FEES AND EXPENSES IMPOSED ON RETIREMENT PLANS FOR WHICH THE FUND'S CLASS 3
SHARES ARE AN INVESTMENT OPTION. If they were included, your costs would be
higher. Investors should consult the plan sponsor or the terms of their
retirement plan for more information.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 3
- ---------------------------------------------------------------------
Maximum sales charge (load) as a percentage of offering price

Load imposed on purchases 0.00%

Maximum deferred sales charge (load) 0.00%(1)

ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)(2)
CLASS 3
- ---------------------------------------------------------------------
Management Fees 0.15%

Distribution and Service (12b-1) fees 0.25%

Other Expenses 3.76%
-----

Total annual fund operating expenses 4.16%

Fee waiver/expense reductions (3.36%)
-----

Net Expenses 0.80%

1. Shares acquired through an exchange from another Franklin Templeton
fund may be subject to a contingent deferred sales charge in certain
circumstances. Please see page _.
2. The manager has agreed in advance to assume certain fund expenses, and the
manager and the administrator have agreed in advance to waive or limit
their fees, as necessary so that Total Fund Operating Expenses do not
exceed 0.80% for class 3. The manager and the administrator are
contractually obligated to continue this arrangement through [2000 .

EXAMPLE

<PAGE>

fund's operating expenses are BEFORE WAIVER as shown above and remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:

1 YEAR 3 YEARS
- ------------------------------------------------------------
Class 3 $418 $1,264

<PAGE>

[Insert graphic of briefcase] MANAGEMENT
----------

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

The fund's lead portfolio manager is:

MARK BOYADJIAN

PORTFOLIO MANAGER OF ADVISERS

The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of 0.15% of the fund's
net assets. The manager has agreed in advance to assume certain fund expenses,
and the manager and administrator have agreed in advance to waive or limit their
fees, as necessary so that Total Fund Operating Expenses do not exceed 0.80% for
class 3. The manager and administrator are contractually obligated to continue
this arrangement through [2000].

<PAGE>

Franklin Templeton Variable Insurance Products Trust

[Insert graphic of pyramid] OVERVIEW OF THE TRUST
---------------------

INVESTMENT CONSIDERATIONS

o The fund has its own investment strategies 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 the fund in relation to your personal financial
situation, investment goals, and comfort with risk. Your investment
representative can help you determine if the fund is right for you.

RISKS

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

o Because you could lose money by investing in the fund, take the time to
read this prospectus 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 THE FUND, ITS INVESTMENT POLICIES, AND ITS
PARTICULAR RISKS CAN BE FOUND IN THE TRUST'S STATEMENT OF ADDITIONAL INFORMATION
(SAI).

MANAGEMENT

<PAGE>

Additional Information

[insert graphic of a starburst] IMPORTANT RECENT DEVELOPMENTS
-----------------------------

YEAR 2000 PROBLEM At this date, it appears neither the fund's operations nor
those of the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If a
company in which the fund is invested develops problems related to Year 2000,
the price of its securities may be adversely affected, and this may have an
adverse effect on the fund's performance.

Year 2000 has been one of the many factors the managers consider when making
investment decisions. The managers reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, the possibility remains that the fund and the
companies in which they are invested may be adversely affected by Year 2000
problems until all of their various data processing activities for the year have
been completed.

EURO On January 1, 1999, the European Monetary Union introduced a single new
currency, the euro, which will replace the national currency for participating
member countries.

<PAGE>

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

TAX CONSIDERATIONS Fund distributions received by your qualified retirement
plan, such as a Section 401(k) plan or profit sharing plan, are generally
tax-deferred. This means that you are not required to report fund distributions
on your income tax return when paid, but rather, when your plan makes payments
to you.

10
<PAGE>

FUND ACCOUNT INFORMATION

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

Class 3 shares of the fund are sold at NAV to defined contribution plans
participating in Franklin Templeton ValuSelect(R) and certain other qualified
retirement plans that have executed a special agreement with the fund or its
agents to serve as an investment option for plan participants. Class 1 and class
2 shares of the fund are sold at NAV to insurance company separate accounts to
serve as investment options for variable annuity or variable life insurance
contracts. The fund's Board monitors the different share classes to be sure
there are no material conflicts of interest between the two different types of
contract owners and/or plan participants. If there were, the Board would take
corrective action.

Requests to buy shares are processed at the NAV next calculated after we receive
the request in proper form. The fund does not issue share certificates.

Investors should consult their retirement plan documents for more information
about selecting the fund as an investment option.

[Insert graphic of certificate] SELLING SHARES

Requests to sell shares are processed at the NAV next calculated after we
receive the request in proper form. A Contingent Deferred Sales Charge (CDSC)
may apply to shares of the fund acquired through an exchange of shares from
another Franklin Templeton fund if the retirement plan is transferred out of the
Franklin Templeton funds or terminated within 365 days of the retirement plan
account's initial purchase in the Franklin Templeton funds. The CDSC is 1% of
the current value of the shares being sold or the NAV at the time of the
purchase of the shares you exchanged for the fund's shares, whichever is less.
There is no CDSC on shares you acquire by reinvesting your dividends or capital
gains distributions.

[Insert graphic of two arrows] EXCHANGING SHARES

You may exchange shares of the fund for shares of other Franklin Templeton funds
offered as an investment option in your defined contribution plan, subject to
the terms, and any specific limitations on the exchange (or "transfer")
privilege, described in your plan and in the prospectus of that fund.

Frequent exchanges can interfere with fund management or operations and drive up
fund costs. To protect shareholders, there are limits on the number and amount
of exchanges that may be made (please see "Market Timers," below).

[Insert graphic of paper and pen] FUND ACCOUNT POLICIES

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

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

<PAGE>

REPORTS Investors will receive confirmations and account statements that show
account activity. Investors will also receive the fund's financial reports every
six months.

If there is a dealer or other investment representative of record on the
account, he or she may also receive confirmations, account statements and other
information about the account directly from the fund.

MARKET TIMERS The fund is not designed for market timers, large or frequent
transfers. The fund 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 fund maintains additional policies and
reserve certain rights, including:

o The fund may refuse any order to buy shares.
o At any time, the fund may establish or change investment minimums.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o Investors may only buy shares if the fund is eligible for sale in their
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 For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency.

SHARE CLASSES The fund has three classes of shares, class 1, class 2 and class
3, which differ only with respect to certain class-specific expenses. Class 2
and class 3 each have a distribution plan or "rule 12b-1 Plan" which is
described in the prospectuses offering class 2 and class 3 shares. In addition,
class 3 bears its own registration expenses under state and federal securities
laws and transfer agency (shareholder account maintenance) expenses.

DISTRIBUTION AND SERVICE (12B-1) FEES Class 3 has a distribution plan, sometimes
known as a rule 12b-1 plan, that allows the fund to pay distribution fees of up
to 0.25% per year to those who sell and distribute class 3 shares and provide
services to shareholders and plan participants. Because these fees are paid out
of class 3's assets on an on-going basis, over time these fees will increase the
cost of an investment, and may cost more than paying other types of sales
charges. A portion of the fees payable to Franklin Templeton Distributors, Inc.
(Distributors) or others under the rule 12b-1 plan may be retained by
Distributors for its distribution expenses.

[Insert graphic of question mark] QUESTIONS

More detailed information about the Trust and the fund's account policies can be
found in the fund's Statement of Additional Information (SAI). If you have any
questions about the fund, you can write to us at 777 Mariners Island Blvd., P.O.
Box 7777, San Mateo, CA, 94403-7777 or call 1-800/1-800/774-5001. For your
protection and to help ensure we provide you with quality service, all calls may
be monitored or recorded.

12
<PAGE>

FOR MORE INFORMATION

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

ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION (SAI)

Contains more information about the fund, its 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)
1-800/774-5001

You can also obtain information about the fund 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,
D.C. 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.

Investment Company Act file 811-5479 050 P 10/99

<PAGE>
Prospectus

FRANKLIN STRATEGIC INCOME SECURITIES FUND - CLASS 1

Franklin Templeton Variable Insurance Products Trust

MAY 1, 2000

[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.

<PAGE>

Contents

THE FUND

[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]

[insert page #] Goal and Strategies

[insert page #] Main Risks

[insert page #] Past Performance

[insert page #] Fees and Expenses

[insert page #] Management

[insert page #] Important Recent Developments

[insert page #] Distributions and Taxes

[insert page #] Overview

FUND ACCOUNT INFORMATION

[Begin callout]
INFORMATION ABOUT FUND ACCOUNT TRANSACTIONS AND SERVICES
[End callout]

[insert page #] Buying Shares

[insert page #] Selling Shares

[insert page #] Exchanging Shares

[insert page #] Fund Account Policies

[insert page #] Questions

FOR MORE INFORMATION

[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]

BACK COVER

2
<PAGE>

THE FUND

[Insert graphic of bullseye and arrows]
GOAL AND STRATEGIES

GOAL The fund's principal goal is to earn a high level of current income. Its
secondary goal is long-term capital appreciation. The fund is non-diversified.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in U.S. and non-U.S. debt securities. The fund
uses an active allocation strategy to seek its goals, and there are no set
percentage limitations on particular sectors. Rather, the fund actively and
flexibly shifts its investments among various sectors, including:

o High Yield Corporate Bonds

o Emerging Market Bonds

o International Bonds

o Convertible Securities, including preferred stocks and bonds convertible
into common stocks

o Mortgage Securities and other Asset-Backed Securities

o U.S. Government Bonds

o Preferred Stock (non-convertible)

[Begin callout]
Through active allocation, the fund invests primarily in U.S. and non-U.S.
bonds, including high yield, lower-rated bonds.
[End callout]

Such debt securities also include U.S. Government securities, which are
securities issued or guaranteed by the U.S. Government, its agencies,
authorities or instrumentalities. In addition to U.S. Treasury notes and bonds,
the fund invests in mortgage-backed securities such as Government National
Mortgage Association ("Ginnie Maes"), Federal National Mortgage Association, or
Federal Home Loan Mortgage Corporation obligations and other asset-backed
securities such as Small Business Administration obligations ("Sallie Maes").
Unlike Treasury securities, Ginnie Maes and Sallie Maes, the timely payment of
principal and interest on securities issued or guaranteed by FNMA, FHLMC and
certain other entities are not backed by the full faith and credit of the U.S.
Government. In addition to U.S. Government mortgage-backed securities, the fund
may invest in mortgage-backed securities issued by private entities, which are
supported by the credit of the issuer.

The fund may invest up to 100% of its assets in high yield, lower quality and
defaulted debt securities ("junk bonds"). These securities are either rated
below investment grade (below the top four long-term rating categories) by
independent rating agencies such as Standard & Poor's Corporation (S&P) and
Moody's Investors Service, Inc. (Moody's), or are comparable unrated securities.
Nevertheless, the fund generally invests in non-investment grade debt securities
rated at least Caa by Moody's or CCC by S&P or unrated securities the fund's
manager determines are of comparable quality. 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. Generally, lower-rated securities pay higher yields than more highly
rated securities to compensate investors for the higher risk.

<PAGE>

In addition to its principal investments, the fund may also invest in equity
securities, largely common stock, or may receive other equities as a result of a
corporate restructuring. Equities represent ownership interests in individual
companies and give shareholders a claim in the company's earnings and assets.

PORTFOLIO SELECTION The manager allocates its investments among the various
market sectors based on its assessment of changing economic, market, industry,
and issuer conditions. The manager uses a "top-down" analysis of macroeconomic
trends, market sectors, and industries to take advantage of varying sector
reactions to economic events. For example, the manager evaluates business
cycles, yield curves, countries' changing market, economic, and political
conditions, the relative interest rates among currencies, and values between and
within markets.

This "top-down" approach is combined with a "bottom-up" fundamental analysis of
individual securities, including factors such as a security's relative value
based on anticipated cash flow, interest or dividend coverage, asset coverage,
and earnings prospects; the experience and managerial strength of the company;
responsiveness to changes in interest rates and business conditions; debt
maturity schedules and borrowing requirements; and the company's changing
financial condition and market recognition of the change. In selecting debt
securities, the manager conducts its own analysis of the security's intrinsic
value rather than simply relying on the coupon rate or rating.

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, largely by
using forward currency exchange contracts (Hedging Instruments).

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

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

<PAGE>

MAIN RISKS

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. Stripped securities, such
as U.S. Treasury STRIPS, are extremely sensitive to changes in interest rates
(and prepayments), and their price will fluctuate more than the prices of other
interest-paying bonds or notes.

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. With respect to the fund's mortgage-backed securities, if
rates fall, mortgage holders will refinance their mortgage loans at lower
interest rates, which will reduce the fund's interest and yield.

[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]

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, even securities supported by credit
enhancements have the credit risk of the entity providing credit support.

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 is not paying or 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., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.

<PAGE>

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.

MORTGAGE SECURITIES AND ASSET-BACKED SECURITIES 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, principal prepayments
generally increase. The fund may be forced to reinvest returned principal at
lower interest rates, and there may be less potential for capital appreciation.
In periods of rising interest rates, prepayments can decline, thus extending the
security's maturity which may in turn cause the security's price to fall. Credit
enhancements, if any, may be inadequate in the event of default.

DERIVATIVE SECURITIES, INCLUDING HEDGING INSTRUMENTS Derivative investments,
such as forward currency exchange contracts, are financial instruments whose
performance depends, at least in part, on the performance of an underlying asset
such as stock prices or currency exchange rates, and are used to help manage
interest rate and currency risks, increase liquidity, or invest in a particular
stock or bond in a more efficient way. 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 the 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

6
<PAGE>

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.

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.

PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep interest
rate risk and market 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. Moreover, in shifting
assets strategically from one sector to another, there is no guarantee that the
manager will consistently select the "right" sectors.

MARKET A security's value may be reduced by market activity or the results of
supply and demand. This is a basic risk associated with all securities. When
there are more sellers than buyers, prices tend to fall. Likewise, when there
are more buyers than sellers, prices tend to rise.

[Insert graphic of a bull and a bear]
PAST PERFORMANCE

Because the fund is new, it has no performance history.

[insert graphic of percentage sign]
FEES AND EXPENSES

Franklin Strategic Income Investments Fund

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 1
[to be inserted]

ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)(1)
CLASS 1
- ---------------------------------------------------------------------
[to be inserted]

<PAGE>

EXAMPLE

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------
[to be inserted]

[Insert graphic of briefcase] MANAGEMENT

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

Under an agreement with Advisers, Templeton Investment Counsel, Inc. (TICI), 500
East Broward Blvd., Ft. Lauderdale, Florida 33394, through its Templeton Global
Bond Managers division (Global Bond Managers), is the fund's sub-advisor. A team
from Global Bond Fund Managers provides Advisers with investment management
advice and assistance.

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

ERIC G. TAKAHA, CFA
VICE PRESIDENT, ADVISERS
Mr. Takaha has been a manager of the fund since its inception in 1999, and has
been with the Franklin Templeton Group since 1989.

CHRIS MOLUMPHY, CFA
SENIOR VICE PRESIDENT, ADVISERS
Mr. Molumphy has been a manager of the fund since its inception in 1999, and has
been with the Franklin Templeton Group since 1988.

o The fund pays the manager a fee for managing its assets, and making its
investment decisions. The fee is an amount equal to an annual rate of: 0.425% of
the value of net assets up to and including $500 million; 0.325% of the value of
net assets over $500 million up to and including $1 billion; 0.280% of the value
of net assets over $1 billion up to and including $1.5 billion; 0.235% of the
value of net assets over $1.5 billion up to and including $6.5 billion; 0.215%
of the value of net assets over $6.5 billion up to and including $11.5 billion;
0.200% of the value of net assets over $11.5 billion up to and including $16.5
billion; 0.190% of the value of net assets over $16.5 billion up to and
including $19 billion; 0.180% of the value of net assets over $19 billion up to
and including $21.5 billion; 0.170% of the value of net assets over $21.5
billion. The manager agreed in advance to limit management fees and make certain
payments to reduce fund expenses as necessary so that Total Fund Operating
Expenses will not exceed 0.75% of the fund's class 1 net assets in 2000.
The manager is contractually obligated to continue this arrangement through
[2000.]

<PAGE>

[Insert graphic of starburst]
IMPORTANT RECENT DEVELOPMENTS

Year 2000 has been one of the many factors the managers consider when making
investment decisions. The managers reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, especially after the leap day of February 29, 2000,
the possibility remains that the fund and the companies in which it is invested
may be adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.

EURO On January 1, 1999, the European Monetary Union introduced a single new
currency, the euro, which will replace the national currency for participating
member countries.

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

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

[insert graphic of a pyramid]
OVERVIEW

INVESTMENT CONSIDERATIONS

9
<PAGE>

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.

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.

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.

Management

FUND ACCOUNT INFORMATION

[Insert graphic of a 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 fund's 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.

<PAGE>

[Insert graphic of a certificate] SELLING SHARES
--------------

[Insert graphic of two arrows going in different directions] EXCHANGING SHARES
-----------------

[Insert graphic of paper and pen] FUND ACCOUNT POLICIES
---------------------

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

11
<PAGE>

ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserve certain rights, including:

o The fund may refuse any order to buy shares.
o At any time, the fund may establish or change investment minimums.
o The fund may modify or discontinue the exchange privilege on 60 days' notice
to insurance company shareholders.
o You may only buy shares of the 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.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of a fund, in the case of an
emergency.

SHARE CLASSES The 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

12
<PAGE>

FOR MORE INFORMATION

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

ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION

Contains more information about the fund, its 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)
1-800/774-5001

Investment Company Act file #811-5583

13
<PAGE>

Prospectus

FRANKLIN STRATEGIC INCOME SECURITIES FUND - CLASS 2

Franklin Templeton Variable Insurance Products Trust

MAY 1, 2000

[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.

1
<PAGE>

Contents

THE FUND

[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]

[insert page #] Goal and Strategies

[insert page #] Main Risks

[insert page #] Past Performance

[insert page #] Fees and Expenses

[insert page #] Management

[insert page #] Important Recent Developments

[insert page #] Distributions and Taxes

[insert page #] Overview

FUND ACCOUNT INFORMATION

[Begin callout]
INFORMATION ABOUT FUND ACCOUNT TRANSACTIONS AND SERVICES
[End callout]

[insert page #] Buying Shares

[insert page #] Selling Shares

[insert page #] Exchanging Shares

[insert page #] Fund Account Policies

[insert page #] Questions

FOR MORE INFORMATION

[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]

BACK COVER

2
<PAGE>

THE FUND

[Insert graphic of bullseye and arrows]
GOAL AND STRATEGIES

GOAL The fund's principal goal is to earn a high level of current income. Its
secondary goal is long-term capital appreciation. The fund is non-diversified.

o High Yield Corporate Bonds

o Emerging Market Bonds

o International Bonds

o Convertible Securities, including preferred stocks and bonds convertible
into common stocks

o Mortgage Securities and other Asset-Backed Securities

o U.S. Government Bonds

o Preferred Stock (non-convertible)

[Begin callout]
Through active allocation, the fund invests primarily in U.S. and non-U.S.
bonds, including high yield, lower-rated bonds.
[End callout]

3
<PAGE>

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]

4
<PAGE>

MAIN RISKS

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.

5
<PAGE>

6
<PAGE>

[Insert graphic of a bull and a bear]
PAST PERFORMANCE

Because the fund is new, it has no performance history.

[insert graphic of percentage sign]
FEES AND EXPENSES

Franklin Strategic Income Investments Fund

SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 2
[to be inserted]

ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)(1)
CLASS 2
- ---------------------------------------------------------------------
[to be inserted]

EXAMPLE

7
<PAGE>

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------
[to be inserted]

[Insert graphic of briefcase] MANAGEMENT

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

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

ERIC G. TAKAHA, CFA
VICE PRESIDENT, ADVISERS
Mr. Takaha has been a manager of the fund since its inception in 1999, and has
been with the Franklin Templeton Group since 1989.

CHRIS MOLUMPHY, CFA
SENIOR VICE PRESIDENT, ADVISERS
Mr. Molumphy has been a manager of the fund since its inception in 1999, and has
been with the Franklin Templeton Group since 1988.

The fund pays the manager a fee for managing its assets, and making its
investment decisions. The fee is an amount equal to an annual rate of: 0.425% of
the value of net assets up to and including $500 million; 0.325% of the value of
net assets over $500 million up to and including $1 billion; 0.280% of the value
of net assets over $1 billion up to and including $1.5 billion; 0.235% of the
value of net assets over $1.5 billion up to and including $6.5 billion; 0.215%
of the value of net assets over $6.5 billion up to and including $11.5 billion;
0.200% of the value of net assets over $11.5 billion up to and including $16.5
billion; 0.190% of the value of net assets over $16.5 billion up to and
including $19 billion; 0.180% of the value of net assets over $19 billion up to
and including $21.5 billion; 0.170% of the value of net assets over $21.5
billion. The manager agreed in advance to limit management fees and make certain
payments to reduce fund expenses as necessary so that Total Fund Operating
Expenses will not exceed 0.75% of the fund's class 1 net assets in 1999. The
manager is contractually obligated to continue this arrangement through [2000.]

[Insert graphic of starburst]
IMPORTANT RECENT DEVELOPMENTS

8
<PAGE>

Year 2000 has been one of the many factors the managers consider when making
investment decisions. The managers reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, especially after the leap day of February 29, 2000,
the possibility remains that the fund and the companies in which it is invested
may be adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.

EURO On January 1, 1999, the European Monetary Union introduced a single new
currency, the euro, which will replace the national currency for participating
member countries.

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

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

[insert graphic of a pyramid]
OVERVIEW

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.

9
<PAGE>

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.

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.

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 THE FUND, ITS INVESTMENT POLICIES, AND ITS
PARTICULAR RISKS CAN BE FOUND IN THE TRUST'S STATEMENT OF ADDITIONAL
INFORMATION.

MANAGEMENT

FUND ACCOUNT INFORMATION

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

10
<PAGE>

[Insert graphic of a certificate] SELLING SHARES
--------------

[Insert graphic of two arrows going in different directions] EXCHANGING SHARES
-----------------

[Insert graphic of paper and pen] FUND ACCOUNT POLICIES
---------------------

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

ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserve certain rights, including:

11
<PAGE>

o The fund may refuse any order to buy shares.
o At any time, the fund may establish or change investment minimums.
o The 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.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of a fund, in the case of an
emergency.

DISTRIBUTION AND SERVICE (12B-1) FEES Class 2 of the fund has a distribution
plan, sometimes known as a rule 12b-1 plan, that allows class 2 to pay
distribution fees of up to 0.25% per year to those who sell and distribute class
2 shares and provide services to shareholders and contract owners. Because these
fees are paid out of class 2's assets on an on-going basis, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.

[Insert graphic of question mark]QUESTIONS

More detailed information about the Trust and the fund's account policies can be
found in the fund's Statement of Additional Information. If you have any
questions about the fund, 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 1-800/774-5001. For
your protection and to help ensure we provide you with quality service, all
calls may be monitored or recorded.

12
<PAGE>

FOR MORE INFORMATION

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

ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION

Contains more information about the fund, its 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)
1-800/774-5001

Investment Company Act file #811-5583

<PAGE>

FRANKLIN TECHNOLOGY SECURITIES FUND - CLASS 1 & 2
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000

[Insert Franklin Templeton Ben Head]

777 MARINERS ISLAND BLVD. P.O. BOX 7777 SAN MATEO, CA 94403-7777 1-800/342-3863

This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectuses. The
fund's prospectus, dated May 1, 2000 which we may amend from time to time,
contains the basic information you should know before investing in the fund. You
should read this SAI together with the fund's prospectus.

For a free copy of a current prospectus call 1-800/342-3863.

CONTENTS PAGE

Goals and Strategies
Risks
Investment Restrictions
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Pricing Shares
The Underwriter
Performance
Financial Statements
Miscellaneous Information
Description of Ratings

MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:

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

<PAGE>

GOALS AND STRATEGIES

The fund's principal investment goal is capital appreciation. Under normal
market conditions, the fund will invest at least 65% of its total assets in
equity securities of companies expected to benefit from the development,
advancement, and use of technology. This goal is fundamental, which means it may
not be changed without shareholder approval.

The fund will invest in securities of large, well-established companies, as well
as small to medium size companies that the manager believes provide good
emerging growth opportunities. The fund may invest up to 25% of its total assets
in foreign securities, including Depositary Receipts and emerging markets, but
currently intends to limit such investment to 15%. The fund will be
non-diversified.

OTHER INVESTMENT POLICIES Below is more detailed information about some of the
various types of securities the fund may buy and the fund's investment policies
and restrictions.

EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends, which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants, or rights.
Warrants or rights give the holder the right to purchase a common stock at a
given time for a specified price.

CONVERTIBLE SECURITIES The fund may invest in convertible securities without
limit, principally in preferred stocks. A convertible security is generally a
debt obligation or preferred stock that may be converted within a specified
period of time into a certain amount of common stock of the same or a different
issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Like a common stock, the value of a convertible security
also tends to increase as the market value of the underlying stock rises, and it
tends to decrease as the market value of the underlying stock declines. Because
both interest rate and market movements can influence its value, a convertible
security is not as sensitive to interest rates as a similar fixed-income
security, nor is it as sensitive to changes in share price as its underlying
stock.

When issued by an operating company, a convertible security tends to be senior
to common stock, but sub-ordinate to other types of fixed-income securities
issued by that company. When a convertible security issued by an operating
company is "converted," the operating company often issues new stock to the
holder of the convertible security, but if the parity price of the convertible
security is less than the call price, the operating company may pay out cash
instead of common stock. If the convertible security is issued by an investment
bank, the security is an obligation of and is convertible through the issuing
investment bank.

<PAGE>

The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.

While the fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.

ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles, a
number of different structures have been created to fit the characteristics of
specific investors and issuers. Examples of these enhanced characteristics for
investors include yield enhancement, increased equity exposure or enhanced
downside protection. From an issuer's perspective, enhanced structures are
designed to meet balance sheet criteria, interest/dividend payment deductibility
and reduced equity dilution. The following are descriptions of common structures
of enhanced convertible securities.

Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS-each issuer
has a different acronym for their version of these securities) are considered
the most equity like of convertible securities. At maturity these securities are
mandatorily convertible into common stock offering investors some form of yield
enhancement in return for some of the upside potential in the form of a
conversion premium. Typical characteristics of mandatories include: issued as
preferred stock, convertible at premium, pay fixed quarterly dividend (typically
500 to 600 basis points higher than common stock dividend), and are non-callable
for the life of the security (usually three to five years). An important feature
of mandatories is that the number of shares received at maturity is determined
by the difference between the price of the common stock at maturity and the
price of the common stock at issuance.

Enhanced convertible preferred securities (e.g., QUIPS, TOPrS, and TECONS) are,
from an investor's viewpoint, essentially convertible preferred securities, i.e.
they are issued as preferred stock convertible into common stock at a premium
and pay quarterly dividends. Through this structure the company establishes a
wholly owned special purpose vehicle whose sole purpose is to issue convertible
preferred stock. The proceeds of the convertible preferred stock offering pass
through to the company. The company then issues a convertible subordinated
debenture to the special purpose vehicle. This convertible subordinated
debenture has identical terms to the convertible preferred issued to investors.
Benefits to the issuer include increased equity credit from rating agencies and
the deduction of coupon payments for tax purposes.

Exchangeable securities are often used by a company divesting a holding in
another company. The primary difference between exchangeables and standard
convertible structures is that the issuing company is a different company to
that of the underlying shares.

<PAGE>

Yield enhanced stock (YES, also known as PERCS) mandatorily converts into common
stock at maturity and offers investors a higher current dividend than the
underlying common stock. The difference between these structures and other
mandatories is that the participation in stock price appreciation is capped.

Zero-coupon and deep-discount convertible bonds (OID and LYONs) include the
following characteristics: no or low coupon payments, imbedded put options
allowing the investor to put them on select dates prior to maturity, call
protection (usually three to five years), and lower than normal conversion
premiums at issuance. A benefit to the issuer is that while no cash interest is
actually paid, the accrued interest may be deducted for tax purposes. Because of
their put options, these bonds tend to be less sensitive to changes in interest
rates than either long maturity bonds or preferred stocks. The put options also
provide enhanced downside protection while retaining the equity participation
characteristics of traditional convertible bonds.

An investment in an enhanced convertible security or any other security may
involve additional risks. The fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular security
at any given time. Reduced liquidity may have an adverse impact on market price
and the fund's ability to dispose of particular securities, when necessary, to
meet the fund's liquidity needs or in response to a specific economic event,
such as the deterioration in the credit worthiness of an issuer. Reduced
liquidity in the secondary market for certain securities may also make it more
difficult for the fund to obtain market quotations based on actual trades for
purposes of valuing the fund's portfolio. The fund, however, intends to acquire
liquid securities, though there can be no assurances that this will be achieved.

DEBT SECURITIES represent a loan of money by the purchaser of the securities to
the issuer. The fund will invest less than 5% of its net assets in debt
securities. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes, and
commercial paper differ in the length of the issuer's payment schedule, with
bonds carrying the longest repayment schedule and commercial paper the shortest.

The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.

The fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the financial
soundness of the issuer. Generally, a lower rating indicates higher risk.

FOREIGN SECURITIES AND DEPOSITARY RECEIPTS Although the fund may invest up to
25% of total assets in foreign securities, it intends to limit its investments
to 15% of total assets.

<PAGE>

The fund may buy foreign securities traded in the U.S. or directly in foreign
markets. The fund may buy 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 (a) of a foreign issuer
deposited in a U.S. bank or trust company (American Depositary Receipts, ADRs);
or (b) of a foreign or U.S. issuer deposited in a foreign bank or trust company
(Global Depositary Receipts, GDRs or European Depositary Receipts, EDRs).

SMALL AND MID-CAP COMPANIES Market capitalization is defined as the total market
value of a company's outstanding stock. Small cap companies generally have
market capitalizations of up to $1.5 billion at the time of the fund's
investment. Mid-cap companies generally have market capitalizations of $1 to $8
billion at the time of the fund's investment.

Small cap companies are often overlooked by investors or undervalued in relation
to their earnings power. Because small cap companies generally are not as well
known to the investing public and have less of an investor following than larger
companies, they may provide greater opportunities for long-term capital growth
as a result of inefficiencies in the marketplace. These companies may be
undervalued because they are part of an industry that is out of favor with
investors, although the individual companies may have high rates of earnings
growth and be financially sound.

Mid-cap companies may offer greater potential for capital appreciation than
larger companies, because mid-cap companies are often growing more rapidly than
larger companies, but tend to be more stable and established than small cap or
emerging companies.

Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. The fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.

The fund may also enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the fund agrees to sell a security in its portfolio and
then to repurchase the security at an agreed-upon price, date, and interest
payment. The fund will maintain cash or high-grade liquid debt securities with a
value equal to the value of the fund's obligation under the agreement, including
accrued interest, in a segregated account with the fund's custodian bank. The
securities

<PAGE>

subject to the reverse repurchase agreement will be marked-to-market daily.
Although reverse repurchase agreements are borrowings under federal securities
laws, the fund does not treat them as borrowings for purposes of its investment
restrictions below, provided the segregated account is properly maintained.

LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may lend
certain of its portfolio securities to qualified banks and broker-dealers. These
loans may not exceed 33 1/3% of the value of the fund's total assets, measured
at the time of the most recent loan. For each loan, the borrower must maintain
with the fund's custodian collateral (consisting of any combination of cash,
securities issued by the U.S. government and its agencies and instrumentalities,
or irrevocable letters of credit) with a value at least equal to 100% of the
current market value of the loaned securities. The fund retains all or a portion
of the interest received on investment of the cash collateral or receives a fee
from the borrower. The fund also continues to receive any distributions paid on
the loaned securities. The fund may terminate a loan at any time and obtain the
return of the securities loaned within the normal settlement period for the
security involved.

Where voting rights with respect to the loaned securities pass with the lending
of the securities, the manager intends to call the loaned securities to vote
proxies, or to use other practicable and legally enforceable means to obtain
voting rights, when the manager has knowledge that, in its opinion, a material
event affecting the loaned securities will occur or the manager otherwise
believes it necessary to vote. As with other extensions of credit, there are
risks of delay in recovery or even loss of rights in collateral in the event of
default or insolvency of the borrower. The fund will loan its securities only to
parties who meet creditworthiness standards approved by the fund's board of
trustees, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the loan.

SECURITIES INDUSTRY RELATED INVESTMENTS The fund may invest its assets in
securities issued by companies engaged in securities related businesses,
including companies that are securities brokers, dealers, underwriters or
investment advisors. These companies are considered to be part of the financial
services industry. Generally, under the 1940 Act, a fund may not acquire a
security or any interest in a securities related business to the extent such
acquisition would result in the fund acquiring in excess of 5% of a class of an
issuer's outstanding equity securities or 10% of the outstanding principal
amount of an issuer's debt securities, or investing more than 5% of the value of
the fund's total assets in securities of the issuer. In addition, any equity
security of a securities-related business must be a marginable security under
Federal Reserve Board regulations and any debt security of a securities-related
business must be investment grade as determined by the Board. The fund does not
believe that these limitations will impede the attainment of its investment
goals.

WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The fund may buy equity securities
on a "when-issued" or "delayed delivery" basis. These transactions are
arrangements whereby the fund buys securities with payment and delivery
scheduled for a future time, generally within 15 to 60 days.

If the fund buys securities on a when-issued basis, it will do so for the
purpose of acquiring securities consistent with its investment objective and
polices and not for investment leverage.

<PAGE>

The fund may sell securities purchased on a when-issued basis before the
settlement date, however, if the manager believes it is advisable to do so.

When the fund is the buyer in one of these transactions, it relies on the seller
to complete the transaction. If the seller fails to do so, the fund may miss an
advantageous price or yield for the underlying security. When the fund is the
buyer, it will keep cash or high-grade marketable securities in a segregated
account with its custodian bank until payment is made. The amount held in the
account will equal the amount the fund must pay for the securities at delivery.

STANDBY COMMITMENT AGREEMENTS The fund may buy equity securities under a standby
commitment agreement. If the fund enters into a standby commitment agreement, it
will be obligated, for a set period of time, to buy a certain amount of a
security that may be issued and sold to the fund at the option of the issuer.
The price of the security is set at the time of the agreement. The fund will
receive a commitment fee typically equal to 0.5% of the purchase price of the
security. The fund will receive this fee regardless of whether the security is
actually issued.

The fund may enter into a standby commitment agreement to invest in the security
underlying the commitment at a yield or price that Advisers believes is
advantageous to the fund. The fund will not enter into a standby commitment if
the remaining term of the commitment is more than 45 days. If the fund enters
into a standby commitment, it will keep cash or high-grade marketable securities
in a segregated account with its custodian bank in an amount equal to the
purchase price of the securities underlying the commitment.

The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the fund's books on the date the
security can reasonably be expected to be issued. The value of the security will
then be reflected in the calculation of the fund's net asset value. The cost
basis of the security will be adjusted by the amount of the commitment fee. If
the security is not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.

OPTIONS, FUTURES, AND OPTIONS ON FUTURES A stock option is a contract that
provides the holder the right to buy or sell shares of the stock at a fixed
price, within a specified period of time. An option on a stock index is a
contract that allows the buyer of the option the right to receive from the
seller cash, in an amount equal to the difference between the index's closing
price and the option's exercise price. A futures contract is an obligation to
buy or sell a specified security or currency at a set price on a specified
future date. A stock index futures contract is an agreement to take or make
delivery of an amount of cash based on the difference between the value of the
index at the beginning and end of the contract period. Options, futures, and
options on futures are considered "derivative securities."

The fund may buy and sell options on securities and securities indices. The fund
may only buy options if the premiums paid for such options total 5% or less of
net assets.

The fund may buy and sell futures contracts for securities and currencies. The
fund may also buy and sell securities index futures and options on securities
index futures. The fund may invest in futures contracts only to hedge against
changes in the value of its securities or those it intends to

<PAGE>

buy. The fund will not enter into a futures contract if the amounts paid for
open contracts, including required initial deposits, would exceed 5% of net
assets.

OPTIONS. The fund may buy or write (sell) put and call options on securities
listed on a national securities exchange and in the over-the-counter (OTC)
market. All options written by the fund will be covered. The fund may also buy
or write put and call options on securities indices.

A call option written by the fund is covered if the fund (a) owns the underlying
security that is subject to the call or (b) has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian
bank) upon conversion or exchange of other securities held in its portfolio. A
call option is also covered if the fund holds a call on the same security and in
the same principal amount as the call written where the exercise price of the
call held is (a) equal to or less than the exercise price of the call written or
(b) greater than the exercise price of the call written if the difference is
held in cash or high-grade debt securities in a segregated account with the
fund's custodian bank.

A put option written by the fund is covered if the fund maintains cash or
high-grade debt securities with a value equal to the exercise price of the
written put in a segregated account with its custodian bank. A put is also
covered if the fund holds a put on the same security and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written.

The premium paid by the buyer of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand, and
interest rates.

The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since the writer may be assigned an exercise notice at any time prior to
the termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer experiences a profit or loss from the sale of the underlying security. If
a put option is exercised, the writer must fulfill the obligation to buy the
underlying security at the exercise price, which will usually exceed the market
value of the underlying security at that time.

If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction" by buying an option of the same series
as the option previously written. The effect of the purchase is that the
clearing corporation will cancel the writer's position. However, a writer may
not effect a closing purchase transaction after being notified of the exercise
of an option. Likewise, the holder of an option may liquidate its position by
effecting a "closing sale transaction" by selling an option of the same series
as the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction may be made at the time desired by the
fund.

<PAGE>

Effecting a closing transaction in the case of a written call option allows the
fund to write another call option on the underlying security with a different
exercise price, expiration date or both. In the case of a written put option, a
closing transaction allows the fund to write another covered put option.
Effecting a closing transaction also allows the cash or proceeds from the sale
of any securities subject to the option to be used for other fund investments.
If the fund wants to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or at
the same time as the sale of the security.

The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option. Likewise, the fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to buy
the option. Increases in the market price of a call option will generally
reflect increases in the market price of the underlying security. As a result,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by appreciation of the underlying security owned by the
fund.

The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the fund may elect to close the
position or take delivery of the security at the exercise price. The fund's
return will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price.

The fund may buy call options on securities it intends to buy in order to limit
the risk of a substantial increase in the market price of the security before
the purchase is effected. The fund may also buy call options on securities held
in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the call option plus any related transaction costs.

The fund may buy put options on securities in an attempt to protect against a
decline in the market value of the underlying security below the exercise price
less the premium paid for the option. The ability to buy put options allows the
fund to protect the unrealized gain in an appreciated security in its portfolio
without actually selling the security. In addition, the fund continues to
receive interest or dividend income on the security. The fund may sell a put
option it has previously purchased prior to the sale of the security underlying
the option. The sale of the option will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid for the put option. Any gain or loss may be wholly
or partially offset by a change in the value of the underlying security that the
fund owns or has the right to acquire.

The fund may write covered put and call options and buy put and call options
that trade in the OTC market to the same extent that it may engage in exchange
traded options. Like exchange traded options, OTC options give the holder the
right to buy, in the case of OTC call options, or sell, in the case of OTC put
options, an underlying security from or to the writer at a stated

<PAGE>

exercise price. However, OTC options differ from exchange traded options in
certain material respects.

OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from market
makers. OTC options are available for a greater variety of securities and in a
wider range of expiration dates and exercise prices, however, than exchange
traded options, and the writer of an OTC option is paid the premium in advance
by the dealer.

Call and put options on stock indices are similar to options on securities
except, rather than the right to buy or sell stock at a specified price, options
on a stock index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the underlying stock index is
greater than (or less than, in the case of a put) the exercise price of the
option, expressed in dollars multiplied by a specified number. Thus, unlike
stock options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.

When the fund writes an option on a stock index, the fund will establish a
segregated account with its custodian bank containing cash or high quality
fixed-income securities in an amount at least equal to the market value of the
underlying stock index. The fund will maintain the account while the option is
open or will otherwise cover the transaction.

FINANCIAL FUTURES. The fund may enter into contracts for the purchase or sale of
futures contracts based upon financial indices (financial futures). Financial
futures contracts are commodity contracts that obligate the long or short holder
to take or make delivery of the cash value of a securities index during a
specified future period at a specified price. A "sale" of a futures contract
means the acquisition of a contractual obligation to deliver such cash value
called for by the contract on a specified date. A "purchase" of a futures
contract means the acquisition of a contractual obligation to take delivery of
the cash value called for by the contract at a specified date. The purpose of
the acquisition or sale of a futures contract is to attempt to protect the fund
from fluctuations in price of portfolio securities without actually buying or
selling the underlying security. Futures contracts have been designed by
exchanges designated "contracts markets" by the Commodity Futures Trading
Commission (CFTC) and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market.

The fund will not engage in transactions in futures contracts or related options
for speculation, but only as a hedge against changes resulting from market
conditions in the values of its securities or securities that they intend to buy
and, to the extent consistent therewith, to accommodate cash flows. The fund
will not enter into any stock index or financial futures contract or related
option if, immediately thereafter, more than one third of total assets would be
represented by futures contracts or related options. In addition, the fund may
not buy or sell futures contracts or buy or sell related options if, immediately
thereafter, the sum of the amount of initial deposits on existing financial
futures and premiums paid on options on financial futures contracts would exceed
5% of total assets (taken at current value). To the extent the fund enters into
a futures contract or related call option, it will maintain with its custodian
bank, to the extent required by the rules of the Securities and Exchange
Commission (SEC), assets in a segregated account to cover its obligations with
respect to such contract which will consist of cash, cash equivalents or high

<PAGE>

quality debt securities from its portfolio in an amount equal to the market
value of such futures contract or related option.

STOCK INDEX FUTURES. The fund may buy and sell stock index futures contracts. A
stock index futures contract obligates the seller to deliver (and the buyer to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made.

The fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of their equity
securities that might otherwise result. When the fund is not fully invested in
stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.

OPTIONS ON STOCK INDEX FUTURES. The fund may buy and sell call and put options
on stock index futures to hedge against risks of market price movements. The
need to hedge against these risks will depend on the extent of diversification
of the fund's common stock portfolio and the sensitivity of such investments to
factors influencing the stock market as a whole.

Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy or sell stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day before the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.

FUTURES CONTRACTS - GENERAL. Although financial futures contracts by their terms
call for the actual delivery or acquisition of securities, or the cash value of
the index, in most cases the contractual obligation is fulfilled before the date
of the contract without having to make or take delivery of the securities or
cash. A contractual obligation is offset by buying (or selling, as the case may
be) on a commodities exchange an identical financial futures contract calling
for delivery in the same month. This transaction, which is effected through a
member of an exchange, cancels the obligation to make or take delivery of the
securities or cash. Since all transactions in the futures market are made,
offset or fulfilled through a clearinghouse associated with the exchange on
which the contracts are traded, the fund will incur brokerage fees when it buys
or sells financial futures contracts.

FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area of
options, futures, and options on futures and any other derivative investments
that are not presently contemplated for use by the fund or that are not
currently available but which may be developed, to the extent such opportunities
are consistent with the fund's investment goals and legally permissible for the
fund.

<PAGE>

ILLIQUID SECURITIES The fund's policy is not to invest more than 15% of its net
assets in illiquid securities. Generally, an illiquid security is any security
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the fund has valued it.

The fund does not consider securities that it acquires outside of the U.S. and
that are publicly traded in the U.S. or on a foreign securities market to be
illiquid assets if: (a) the fund reasonably believes it can readily dispose of
the securities for cash in the U.S. or foreign market, or (b) current market
quotations are readily available. The fund will not acquire the securities of
foreign issuers outside of the U.S. if, at the time of acquisition, the fund has
reason to believe that it could not resell the securities in a public trading
market.

The fund's board of trustees has authorized the fund to invest in restricted
securities. To the extent the manager determines there is a liquid institutional
or other market for these securities, the fund considers them to be liquid
securities. An example of these securities are restricted securities that may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. The fund's board of trustees will review any
determination by the manager to treat a restricted security as a liquid security
on an ongoing basis, including the manager's assessment of current trading
activity and the availability of reliable price information. In determining
whether a restricted security is properly considered a liquid security, the
manager and the fund's board of trustees will take into account the following
factors: (i) the frequency of trades and quotes for the security; (ii) the
number of dealers willing to buy or sell the security and the number of other
potential buyers; (iii) dealer undertakings to make a market in the security;
and (iv) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer). To the extent the fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
in the fund may increase if qualified institutional buyers become uninterested
in buying these securities or the market for these securities contracts.

TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolios in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of assets in short-term debt instruments. The fund may
also invest cash, including cash resulting from purchases and sales of fund
shares, temporarily in short-term debt instruments. Short-term debt instruments
include high-grade commercial paper, repurchase agreements, and other money
market equivalents. To the extent permitted by exemptions granted under the 1940
Act and the fund's other investment policies and restrictions, the fund may also
invest in shares of one or more money market funds managed by Franklin Advisers,
Inc. or its affiliates.

INVESTMENT RESTRICTIONS

The fund has adopted the following restrictions as fundamental policies. This
means they may only be changed if the change is approved by (i) more than 50% of
the fund's outstanding shares or (ii)

<PAGE>

67% or more of the fund's shares present at a shareholder meeting if more than
50% of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.

The fund may not:

1. borrow money, except that the fund may borrow money from banks or
affiliated investment companies to the extent permitted by the 1940 Act, or
any exemptions therefrom which may be granted by the U.S. Securities and
Exchange Commission, or for temporary or emergency purposes and then in an
amount not exceeding 33-1/3% of the value of the fund's total assets
(including the amount borrowed);

2. act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares;

3. make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance with
its investment objectives and policies, and (c) to the extent the entry
into a repurchase agreement is deemed to be a loan. The fund may also make
loans to affiliated investment companies to the extent permitted by the
1940 Act or any exemptions therefrom which may be granted by the U.S.
Securities and Exchange Commission;

4. purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase
or sell currencies, may enter into futures contracts on securities,
currencies, and other indices or any other financial instruments, and may
purchase and sell options on such futures contracts; and

5. issue securities senior to the fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans,
mortgages or pledges, (b) entering into options, futures contracts, forward
contracts, repurchase transactions or reverse repurchase transactions, or
(c) making short sales of securities to the extent permitted by the 1940
Act and any rule or order thereunder, or SEC staff interpretations thereof.

If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.

Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation is met at the time of investment, a later increase or
decrease in the percentage due to a change in the value or liquidity of
portfolio securities will not be considered a violation of the restriction or
limitation.

RISKS

<PAGE>

NON-DIVERSIFICATION RISK Because the fund is not diversified, there is no
restriction under the Investment Company Act of 1940 on the percentage of its
assets that it may invest at any time in the securities of any issuer.
Nevertheless, the fund's non-diversified status may expose it to greater risk or
volatility than diversified funds with otherwise similar investment policies,
since the fund may invest a larger portion of its assets in securities of a
small number of issuers.

CONCENTRATION The fund will invest more than 25% of its total assets in equity
securities of companies expected to benefit from the development, advancement,
and use of technology. Investing in a fund that concentrates its investments in
a specialized market sector involves increased risks.

TECHNOLOGY COMPANIES The securities of technology companies have historically
been volatile in price due to the rapid pace of product change and development
affecting such companies. Prices of the securities of such companies
historically have been more volatile than other securities, especially over the
short term, and can be subject to abrupt or erratic price movements. By focusing
on technology companies the fund carries much greater risks of adverse
developments among such companies than a fund that invests in a wider variety of
companies.

SMALLER COMPANIES Historically, smaller company stocks have been more volatile
in price than larger company stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the market for such stocks, and the
greater sensitivity of smaller companies to changing economic conditions.
Besides exhibiting greater volatility, smaller company stocks may, to a degree,
fluctuate independently of larger company stocks. Small company stocks may
decline in price as large company stocks rise, or rise in price as large company
stocks decline. Investors should therefore expect that the net asset value of a
fund that invests a substantial portion of its net assets in smaller company
stocks may be more volatile than the shares of a fund that invests solely in
larger company stocks.

FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments in
emerging markets. Investments in depositary receipts also involve some or all of
the risks described below.

The political, economic, and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the imposition
of exchange controls, expropriation, restrictions on removal of currency or
other assets, nationalization of assets, and punitive taxes.

There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the

<PAGE>

U.S. Transaction costs on foreign securities markets are generally higher than
in the U.S. The settlement practices may be cumbersome and result in delays that
may affect portfolio liquidity. 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 domestic issuers in U.S. courts.

The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies that would prevent the fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization, or confiscatory taxation,
withholding, and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.

The fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded.

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

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

<PAGE>

Investments in emerging countries may involve risks of nationalization,
expropriation and confiscatory taxation. For example, the Communist governments
of a number of Eastern European countries expropriated large amounts of private
property in the past, in many cases without adequate compensation, and there can
be no assurance that such expropriation will not occur in the future. In the
event of expropriation, each fund could lose a substantial portion of any
investments it has made in the affected countries. Further, no accounting
standards exist in certain emerging countries. Finally, even though the
currencies of some emerging countries, such as certain Eastern European
countries may be convertible into U.S. dollars, the conversion rates may be
artificial to the actual market values and may be adverse to a funds'
shareholders.

Repatriation, that is, the return to an investor's homeland, of
investment income, capital and proceeds of sales by foreign investors may
require governmental registration or approval in some developing countries.
Delays in or a refusal to grant any required governmental registration or
approval for such repatriation could adversely affect the funds. Further, the
economies of emerging countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be adversely
affected by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries with which they
trade.

LOWER-RATED SECURITIES Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy of the issuers of the securities. In
addition, the markets in which low rated and unrated debt securities are traded
are more limited than those in which higher rated securities are traded. The
existence of limited markets for particular securities may diminish the fund's
ability to sell the securities at fair value either to meet redemption requests
or to respond to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
low rated or unrated debt securities may also make it more difficult for the
fund to obtain accurate market quotations for the purposes of valuing the fund's
portfolio. Market quotations are generally available on many low rated or
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.

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

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

<PAGE>

payments on its debt securities. If the issuer of low rated debt securities
defaults, the fund may incur additional expenses to seek recovery.

DERIVATIVE SECURITIES The fund's transactions in options, futures, and options
on futures involve certain risks. These risks include, among others, the risk
that the effectiveness of a transaction depends on the degree that price
movements in the underlying securities, index, or currency correlate with price
movements in the relevant portion of the fund's portfolio. The fund bears the
risk that the prices of its portfolio securities will not move in the same
amount as the option or future it has purchased, or that there may be a negative
correlation that would result in a loss on both the underlying securities and
the derivative security.

In addition, adverse market movements could cause the fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the fund of margin deposits in the event of bankruptcy of a broker with whom the
fund has an open position.

Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular option or futures contract
at any specific time. Thus, it may not be possible to close an option or futures
position. The inability to close options or futures positions may have an
adverse impact on the fund's ability to effectively hedge its securities.
Furthermore, if the fund is unable to close out a position and if prices move
adversely, the fund will have to continue to make daily cash payments to
maintain its required margin. If the fund does not have sufficient cash to do
this, it may have to sell portfolio securities at a disadvantageous time. The
fund will enter into an option or futures position only if there appears to be a
liquid secondary market for the options or futures.

Similarly, there can be no assurance that a continuous liquid secondary market
will exist for any particular OTC option at any specific time. Consequently, the
fund may be able to realize the value of an OTC option it has purchased only by
exercising it or by entering into a closing sale transaction with the dealer
that issued it. When the fund writes an OTC option, it generally can close out
that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the fund originally wrote it.

WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The securities underlying these
transactions are subject to market fluctuation prior to delivery and generally
do not earn interest until their scheduled delivery date. There is the risk that
the value or yield of the security at the time of delivery may be more or less
than the price paid for the security or the yield available when the transaction
was entered into.

STANDBY COMMITMENT AGREEMENTS There can be no assurance that the securities
underlying a standby commitment agreement will be issued. If issued, the value
of the security may be more or less than its purchase price. Since the issuance
of the security is at the option of the issuer, the fund may bear the risk of a
decline in value of the security and may not benefit if the security appreciates
in value during the commitment period.

<PAGE>

EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. While the implementation of the
euro could have a negative effect on the fund, the fund's manager and its
affiliated services providers are taking steps they believe are reasonably
designed to address the euro issue.

OFFICERS AND TRUSTEES

The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors the fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.

The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.

Frank H. Abbott, III (79)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE

President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).

Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE

Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).

Edward J. Bonach (46)
Allianz Life Insurance Company, 1750 Hennepin Avenue
Minneapolis, MN 55403-2195
TRUSTEE

Senior Vice President and Chief Financial Officer, Allianz Life Insurance
Company of North America; President and Chief Executive Officer, Canadian
American Financial Corporation; and Director, Preferred Life Insurance Company
of New York and Life USA Holding, Inc.

<PAGE>

Robert F. Carlson (72)
2120 Lambeth Way, Carmichael, CA 95608
TRUSTEE

Member and past President, Board of Administration, California Public Employees
Retirement Systems (CALPERS); director or trustee, as the case may be, of nine
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, member and Chairman of the Board, Sutter Community Hospitals, member,
Corporate Board, Blue Shield of California, and Chief Counsel, California
Department of Transportation.

S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE

Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 49 of the investment companies in the Franklin Templeton
Group of Funds.

*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE

Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Vice
President, Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton
Investor Services, Inc. and Franklin Templeton Services, Inc.; officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 48 of the investment companies in the Franklin
Templeton Group of Funds.

*Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE

President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and Franklin
Investment Advisory Services, Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 32 of the investment companies in the Franklin
Templeton Group of Funds.

*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE

<PAGE>

Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory
Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 51 of the investment companies in the Franklin
Templeton Group of Funds.

Frank W.T. LaHaye (71)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE

Chairman, Peregrine Venture Management Company (venture capital); Director, The
California Center for Land Reclamation (redevelopment); director or trustee, as
the case may be, of 27 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, General Partner, Miller & LaHaye and Peregrine
Associates, the general partners of Peregrine Venture funds.

Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE

Director, Martek Biosciences Corporation, MCI WorldCom, Inc. (information
services), MedImmune, Inc. (biotechnology), Overstock.com (internet services),
White Mountains Insurance Group, Ltd. (holding company) and Spacehab, Inc.
(aerospace services); director or trustee, as the case may be, of 47 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman, White River Corporation (financial services) and Hambrecht & Quist
Group (investment banking), and President, National Association of Securities
Dealers, Inc.

*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT

Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc. and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc. and
Franklin/Templeton Investor Services, Inc.; and officer and/or director or
trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 51 of the investment companies in the Franklin Templeton
Group of Funds.

Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice

<PAGE>

President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive
Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.;
Executive Vice President, Chief Operating Officer and Director, Templeton
Investment Counsel, Inc.; Executive Vice President and Chief Financial Officer,
Franklin Advisers, Inc.; Chief Financial Officer, Franklin Advisory Services,
LLC and Franklin Investment Advisory Services, Inc.; President and Director,
Franklin Templeton Services, Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 51 of the investment companies in the Franklin
Templeton Group of Funds.

Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY

Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 33 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Senior Vice
President and General Counsel, Franklin Resources, Inc., Senior Vice President,
Franklin Templeton Services, Inc. and Franklin Templeton Distributors, Inc.,
Executive Vice President, Franklin Advisers, Inc., Vice President, Franklin
Advisory Services, LLC and Franklin Mutual Advisers, LLC, and Vice President,
Chief Legal Officer and Chief Operating Officer, Franklin Investment Advisory
Services, Inc. (until January 2000).

Edward V. McVey (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT

Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.

*This board member is considered an "interested person" under federal securities
laws.

Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.

The trust pays noninterested board members $675 per month plus $550 per meeting
attended. Board members who serve on the audit committee of the trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members may also serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.

21
<PAGE>

NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
NAME TRUST(1)($) FUNDS2 ($) EACH SERVES(3)
- -------------------------------------------------------------------------------

Frank H. Abbott 156,060 27
Harris Ashton 363,165 47
Robert F. Carlson 89.690 9
S. Joseph Fortunato 363.238 49
Frank W.T. LaHaye 138,700 27
Gordon Macklin 363,165 47

1. For the fiscal year ended December 31, 1999.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the
total number of series or funds within each investment company for which the
board members are responsible. The Franklin Templeton Group of Funds
currently includes 53 registered investment companies, with approximately 155
U.S. based funds or series.

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

Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.

MANAGEMENT AND OTHER SERVICES

MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
(Advisers), a wholly owned subsidiary of Franklin Resources, Inc. (Resources), a
publicly owned company

<PAGE>

engaged in the financial services industry through its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Resources.

The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager also
selects the brokers who execute the fund's portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.

The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the fund. Similarly, with respect to the fund,
the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages.

The fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal securities
transactions, including transactions involving securities that are being
considered for the fund or that are currently held by the fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics.

MANAGEMENT FEES The fund pays the manager a fee equal an annual rate of:

o 0.550% of the value of net assets up to $500 million;
o 0.450% of the value of net assets over $500 million, up to and including
$1 billion;
o 0.400% of the value of net assets over $1 billion, up to and including
$1.5 billion;
o 0.350% of the value of net assets over $1.5 billion, up to and including
$6.5 billion;
o 0.325% of the value of net assets over $6.5 billion, up to and including
$11.5 billion;
o 0.300% of the value of net assets over $11.5 billion, up to and including
$16.5 billion;
o 0.290% of the value of net assets over $16.5 billion, up to and including
$19 billion;
o 0.280% of the value of net assets over $19 billion, up to and including
$21.5 billion; and
o 0.270% of the value of net assets over $21.5 billion.

The fee is computed according to the terms of the management agreement. Each
class of the fund's shares pays its proportionate share of the fee.

ADMINISTRATOR AND SERVICES PROVIDED The fund has an agreement with Franklin
Templeton Services, Inc. (FT Services) to provide certain administrative
services and facilities. Under this agreement, FT Services is responsible for
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services subcontracts
with Templeton Funds Annuity Company (TFAC) to provide certain of these
services. FT Services and TFAC are direct or indirect wholly owned subsidiaries
of Resources and are affiliates of Advisers and the fund's principal
underwriter.

<PAGE>

ADMINISTRATION FEES The fund pays FT Services a monthly fee equal to an annual
rate of 0.25% of the average daily net assets of the fund during the preceding
month.

SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.

CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.

AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco CA 94105,
is the trust's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders and
reviews the trust's registration statement filed with the U.S. Securities and
Exchange Commission (SEC).

RESEARCH SERVICES The manager may receive services from various affiliates. The
services may include information, analytical reports, computer screening
studies, statistical data, and factual resumes pertaining to securities eligible
for purchase by the fund. Such supplemental research, when utilized, is subject
to analysis by the managers before being incorporated into the investment
advisory process.

PORTFOLIO TRANSACTIONS

The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.

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

<PAGE>

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

To the extent the fund invests in bonds or participates in other principal
transactions at net prices, the fund incurs little or no brokerage costs. The
fund deals directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on its behalf, unless it is
determined that a better price or execution may be obtained by using the
services of a broker.

Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. The fund seeks to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.

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

Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.

<PAGE>

deemed equitable to all by the manager, taking into account the respective sizes
of the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that the
ability to participate in volume transactions may improve execution and reduce
transaction costs to the fund.

DISTRIBUTIONS AND TAXES

The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
differences in the distribution and service (rule 12b-1) fees, subtransfer
agency (shareholder account maintenance) and state and federal registration fees
of the classes of shares. The fund does not pay "interest" or guarantee any
fixed rate of return on an investment in their shares.

EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be treated as ordinary dividends, and any losses
will reduce the fund's ordinary income otherwise available for distribution.
This treatment could increase or reduce the fund's ordinary income
distributions, and may cause some or all of the fund's previously distributed
income to be classified as a return of capital.

The fund may be subject to foreign withholding taxes on income from certain of
its foreign securities.

ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund intends to elect
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code. As regulated investment companies, the fund generally
will pay no federal income tax on the income and gains it distributes. To ensure
that individuals holding the Contracts whose assets are invested in the fund
will not be subject to federal income tax on distributions made by the fund
prior to receipt of payments under the Contracts, the fund intends to comply
with the additional requirements of Section 817(h) of the Internal Revenue Code
relating to diversification of its assets. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such case,
the fund will be subject to federal, and possibly state, corporate taxes on its
taxable income and gains.

EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to make certain minimum distributions by December
31 of each year. Federal excise taxes will not apply to the fund in a given
calendar year, however, if all of its shareholders at all times during the
calendar year are segregated asset accounts of life insurance companies where
the shares are held in connection with variable products.

ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS

<PAGE>

The Trust is an open-end management investment company, commonly called a mutual
fund. The Trust was organized as a Massachusetts business trust on April 26,
1988 and is registered with the SEC. The fund is non-diversified.

As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the fund. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of the
fund's assets if you are held personally liable for obligations of the fund. The
Declaration of Trust provides that the fund shall, upon request, assume the
defense of any claim made against you for any act or obligation of the fund and
satisfy any judgment thereon. All such rights are limited to the assets of the
fund. The Declaration of Trust further provides that the fund may maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the fund, its shareholders, trustees, officers,
employees and agents to cover possible tort and other liabilities. Furthermore,
the activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.

The fund currently offers two classes of shares, class 1 and class 2. Additional
classes of shares may be offered in the future. The full title of each series
and class is:

Franklin Technology Securities Fund - Class 1
Franklin Technology Securities Fund - Class 2

Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the trust for matters that affect the trust as a whole. Additional series may be
offered in the future.

The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.

The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help shareholders communicate with other shareholders about the removal of a
board member. A special meeting may also be called by the board in its
discretion. For information regarding voting privileges of Contract Owners, see
the insurance company separate account SAI.

<PAGE>

As of February 1, 2000, Board members and officers, as a group, owned less than
1%, of record or beneficially, of the outstanding shares of the trust.

PRICING SHARES
- --------------------------------------------------------------------------------

When they buy and sell shares, the trust's shareholders pay and receive the net
asset value (NAV) per share.

The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding. The fund follows the procedures described below.

The fund calculate the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.

When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.

The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value

The fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices.

Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events

28
<PAGE>

materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.

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

THE UNDERWRITER

Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.

DISTRIBUTORS is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.

Distributors may be entitled to reimbursement under the rule 12b-1 plans, as
discussed below. Except as noted, Distributors receives no other compensation
from the fund for acting as underwriter.

DISTRIBUTION AND SERVICE (12b-1) FEES The board has adopted a plan pursuant to
rule 12b-1 for the fund's class 2. The plan is designed to benefit the fund and
its shareholders and thus the fund's contract-owners or plan participants. The
plan is expected to, among other things, increase advertising of the fund,
encourage sales of the fund and service to its shareholders, and increase or
maintain assets of the fund so that certain fixed expenses may be spread over a
broader asset base, resulting in lower per share expense ratios. In addition, a
positive cash flow into the fund is useful in managing the fund because the
manager has more flexibility in taking advantage of new investment opportunities
and handling shareholder redemptions.

Under the plan, the fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses also may include service fees paid to securities dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates who provide service or account maintenance to shareholders (service
fees); the expenses of printing prospectuses and reports used for sales
purposes, and of preparing and distributing sales literature and advertisements;
and a prorated portion of Distributors' overhead expenses related to these
activities. Together, these expenses, including the service fees, are "eligible
expenses." The distribution and service (12b-1) fees charged to each class are
based only on the fees attributable to that particular class.

<PAGE>

The fund may each pay up to 0.25% per year of class 2's average daily net
assets. The plan is a reimbursement plan. It allows the fund to reimburse
Distributors, the insurance companies or others for eligible expenses that they
show they have incurred. The fund will not reimburse more than the maximum
amount allowed under the plan.

Distributors must provide written reports to the board at least quarterly on the
amounts and purpose of any payment made under the plan and any related
agreements, and furnish the board with such other information as the board may
reasonably request to enable it to make an informed determination of whether the
plan should be continued.

The plan has been approved according to the provisions of Rule 12b-1. The terms
and provisions of the plan also are consistent with Rule 12b-1.

PERFORMANCE

Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the fund are
based on the standardized methods of computing performance mandated by the SEC.
Performance figures reflect rule 12b-1 fees from the date of the plan's
implementation. An explanation of these and other methods used by the fund to
compute or express performance follows.

For share classes offered only to insurance company separate accounts for use in
variable annuity and variable life insurance contracts, to the extent required
by SEC rules, the advertised performance of such share classes will be displayed
no more prominently than standardized performance of the applicable insurance
company separate accounts/contracts. For information about how an insurance
company may advertise such performance, please consult the contract prospectus
which accompanies the trust prospectus.

Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the limited
historical period used.

AVERAGE ANNUAL TOTAL RETURN is determined by finding the average annual rates of
return over the periods indicated below that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes income dividends and capital gain distributions are reinvested at net
asset value. The quotation assumes the account was completely redeemed at the
end of each period and the deduction of all applicable fund charges and fees. It
does NOT however, include any fees or sales charges imposed by the variable
insurance contract for which the fund's class 1 and class 2 shares are
investment options. If they were included, performance would be lower. The
following SEC formula will be used to calculate the figures:

P(1+T)n = ERV

where:

<PAGE>

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period

CUMULATIVE TOTAL RETURN Like average annual total return, the calculation for
cumulative total return assumes income dividends and capital gain distributions
are reinvested at net asset value. It does NOT include any fees or sales charges
imposed by the variable insurance contract for which the fund's class 1 and
class 2 shares are investment options. Cumulative total return, however, is
based on the actual return for a specified period rather than on the average
return over the periods indicated in the annual report.

From time to time, the current yields of the fund may be published in
advertisements and communications to Contract Owners. The current yield for the
fund will be calculated by dividing the annualization of the income earned by
the fund during a recent 30-day period by the net asset value per share at the
end of such period. In addition, aggregate, cumulative and average total return
information for the fund over different periods of time may also be advertised.
Except as stated above, the fund will use the same methods for calculating its
performance.

A distribution rate for the fund may also be published in communications
preceded or accompanied by a copy of the trust's current prospectus. The fund's
current distribution rate will be calculated by dividing the annualization of
the total distributions made by the fund during the most recent preceding fiscal
quarter by the net asset value per share at the end of such period. The current
distribution rate may differ from current yield because the distribution rate
will be for a different period of time and may contain items of capital gain and
other items of income, while current yield reflects only earned income.
Uniformly computed yield and total return figures for the fund will also be
published along with publication of its distribution rate.

Hypothetical performance information may also be prepared for sales literature
or advertisements. Owners of contracts issued by life insurance companies should
see the appropriate insurance company separate account prospectus and SAI.

VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of the fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.

<PAGE>

COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:

o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the Dow
Jones Transportation Average (20 transportation stocks), and the Dow Jones
Utilities Average (15 utility stocks involved in the production of
electrical energy).

o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.

o The Hambrecht & Quist Technology Index is comprised of the publicly traded
stocks of approximately 275 technology companies which includes the
electronics, services and other related technology industries. The index is
market-capitalization-weighted and includes reinvested dividends.

o The Standard & Poor's Technology Index is designed to measure the
performance of all the stocks included in the technology sector of the S&P
500 Index. The index is market-capitalization-weighted and includes
reinvested dividends.

o Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.

o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.

o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.

o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.

<PAGE>

o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.

o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.

o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.

o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.

o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.

o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.

o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.

o Bond Buyer 20 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.

o Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that meet
certain requirements and deleting an equivalent number according to their
secondary market trading activity. As a result, the average par call date,
average maturity date, and average coupon rate can and have changed over
time. The average maturity generally has been about 29-30 years.

o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance
statistics over specified time periods.

o Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.

<PAGE>

o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P

o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of the
fund over specified time periods relative to other funds within its
category.

o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.

Advertisements or information also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, if any, as well as the value of its
shares that are based upon the value of such portfolio investments, can be
expected to fall. Conversely, when interest rates decrease, the value of the
fund's shares can be expected to increase. CDs are frequently insured by an
agency of the U.S. government. An investment in the fund is not insured by any
federal, state or private entity.

In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.

MISCELLANEOUS INFORMATION
- --------------------------------------------------------------------------------

The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis to have a
projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
fund cannot guarantee that these goals will be met.

<PAGE>

Templeton, a pioneer in international investing. The Mutual Series team, known
for its value-driven approach to domestic equity investing, became part of the
organization four years later. Together, the Franklin Templeton Group has over
$[___] billion in assets under management for more than [_] million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers [___] U.S. based open-end investment companies to the public. The
fund may identify itself by its NASDAQ symbol or CUSIP number.

DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------

PREFERRED STOCKS RATINGS

STANDARD & POOR'S CORPORATION (S&P)

AAA: This is the highest rating that may be assigned by S&P to a preferred stock
issue and indicates an extremely strong capacity to pay the preferred stock
obligations.

AA: A preferred stock issue rated AA also qualifies as a high quality
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.

A: An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.

BBB: An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.

BB, B and CCC: Preferred stock rated BB, B, and CCC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay preferred
stock obligations. BB indicates the lowest degree of speculation and CCC the
highest degree of speculation. While these issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.

CC: The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.

C: A preferred stock rated C is a non-paying issue.

D: A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.

NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.

<PAGE>

Plus (+) or Minus (-): To provide more detailed indications of preferred stock
quality, the ratings from "AA" to "CCC" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.

CORPORATE BOND RATINGS

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

Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.

A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.

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

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

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

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

Ca: Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.

<PAGE>

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

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

S&P

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

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

A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.

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

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

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

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

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

COMMERCIAL PAPER RATINGS

MOODY'S

<PAGE>

Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. Moody's commercial paper
ratings are opinions of the ability of issuers to repay punctually their
promissory obligations not having an original maturity in excess of nine months.
Moody's employs the following designations for both short-term debt and
commercial paper, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:

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

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

S&P

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

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

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

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

<PAGE>

<TABLE>
<CAPTION>
FRANKLIN
S&P 500
INDEX FUND
<S> <C>
Franklin Templeton Variable Insurance Products Trust - Class 1, Class 2 and Class 3
STATEMENT OF ADDITIONAL INFORMATION 777 Mariners Island Blvd. P.O. Box 7777
MAY 1, 2000 San Mateo, CA 94403-7777 1-800/774-5001
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This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectuses. The
fund's prospectuses, dated May 1, 2000, which we may amend from time to time,
contain the basic information you should know before investing in the fund. You
should read this SAI together with the fund's prospectuses.

For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/774-5001

CONTENTS
Goal and Strategies of the Fund 2
Risks 8
Fundamental Investment Restrictions 9
Officers and Trustees 10
Management and Other Services 14
Portfolio Transactions 15
Distributions and Taxes 16
Organization, Voting Rights
and Principal Holders 16
Pricing Shares 17
The Underwriter 18
Performance 18
Miscellaneous Information 20
Description of Ratings 21

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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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ZF050 SAI 10/99

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2

GOAL AND STRATEGIES OF THE FUND

WHAT IS THE FUND'S GOAL?

The fund's investment goal is to match the performance of the Standard & Poor's
500 Composite Stock Price Index (S&P 500 Index) before the deduction of fund
expenses. This goal is fundamental, which means that it may not be changed
without shareholder approval.

The following gives more detailed information about the fund's investment
policies and the types of securities that it may buy.

DEBT SECURITIES represent a loan of money by the purchaser of the securities to
the issuer. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bond, notes and
commercial paper differ in the length of the issuer's payment schedule and
commercial paper is the shortest. The fund presently intends to limit these
investments to high quality, short-term debt securities.

The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
During periods of rising interest rates, the value of such securities generally
declines. These changes in market value of securities owned by the fund will be
reflected in the fund's net asset value.

RATINGS. Various investment services publish ratings of some of the debt
securities in which the fund may invest. Higher yields are ordinarily available
from securities in the lower rating categories, such as securities rated Ba or
lower by Moody's Investors Service, Inc. (Moody's) or BB or lower by Standard &
Poor's Ratings Services (S&P) or from unrated securities deemed by the fund's
manager to be of comparable quality. These ratings represent the opinions of the
rating services with respect to the issuer's ability to pay interest and repay
principal. They do not purport to reflect other risk, such as the risk of
fluctuations in market value and are not absolute standards of quality. However,
lower rated securities typically are riskier than investment grade securities.
Bonds which are rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are securities on
which no interest is being paid. Please see the appendix for a discussion of the
ratings.

If the rating on an issue held in the fund's portfolio is changed by the rating
service or the security goes into default, this event will be considered by the
fund in its evaluation of the overall investment merits of that security but
will not generally result in an automatic sale of the security.

Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) will be carefully analyzed by the manager to assess
whether, at the time of purchase, the planned investment offers potential
returns which are reasonable in light of the risks involved.

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3

BANK OBLIGATIONS, or instruments secured by bank obligations, include fixed,
floating or variable rate CDs, letters of credit, time deposits, bank notes and
bankers' acceptances. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange normally drawn by an importer or exporter to pay for specific
merchandise and which are "accepted" by a bank, meaning, in effect, that the
bank unconditionally agrees to pay the face value of the instrument upon
maturity. Such obligations include dollar-denominated certificates of deposit
and bankers' acceptances of banks having total assets in excess of $1 billion,
certificates of deposit of federally insured savings and loan associations
having total assets in excess of $1 billion, or cash and time deposits with
banks. Time deposits are non-negotiable deposits that are held in a banking
institution for a specified time at a stated interest rate.

COMMERCIAL PAPER typically refers to short-term obligations of banks,
corporations and other borrowers with maturities of up to 270 days. Investments
in commercial paper are generally limited to obligations rated Prime-1 or
Prime-2 by Moody's or A-1 or A-2 by S&P or if unrated, issued by companies
having an outstanding debt issue currently rated Aaa or Aa by Moody's or AAA or
AA by S&P. See the Appendix for a description of commercial paper ratings.

U.S. GOVERNMENT SECURITIES The fund may invest in U.S. Government securities
including: (1) U.S. Treasury obligations with varying interest rates, maturities
and dates of issuance, such as U.S. Treasury bills (maturities of one year or
less), U.S. Treasury notes (original maturities of one to ten years) and U.S.
Treasury bonds (generally original maturities of greater than ten years); and
(2) obligations issued or guaranteed by U.S. Government agencies and
instrumentalities such as the Government National Mortgage Association, the
Export-Import Bank and the Farmers Home Administration. The fund's investments
may include obligations that are supported by the full faith and credit of the
U.S. Government. In the case of U.S. Government securities that are not backed
by the full faith and credit of the U.S. Government (e.g., obligations of the
Federal National Mortgage Association (FNMA) or a Federal Home Loan Bank), the
fund must look principally to the agency issuing or guaranteeing the obligation
for ultimate repayment and may not be able to assert a claim against the U.S.
Government itself in the event the agency or instrumentality does not meet its
commitments.

DIVERSIFICATION The fund will operate as a diversified fund under federal
securities law. A diversified fund may not, with respect to 75% of its total
assets, purchase the securities of any one issuer (except U.S. Government
securities) if more than 5% of the value of the fund's assets would be invested
in such issuer, or if the fund would hold more than 10% of the outstanding
voting securities of such issuer.

In addition, the fund intends to diversify its investments to meet the
requirements under federal tax laws relating to regulated investment companies
and variable contracts issued by insurance companies. In order to comply with
the diversification requirements related to regulated investment companies, the
fund will limit its investments so that, at the close of each quarter of the
taxable year:

(i) With respect to 50% of the market value of its assets, not more than 5% of
the market value of its assets will be invested in the securities of a single
issuer and the fund will not own more than 10% of the outstanding voting
securities of a single issuer; and (ii) Not more than 25% of the market value of
the fund's assets will be invested in the securities of a single issuer.

The fund's investments in U.S. Government securities are not subject to these
limitations.

In order to comply with the diversification requirements related to variable
contracts issued by insurance companies, the fund will diversify its investments
such that:

(i) No more than 55% of the fund's assets are represented by any one investment;
(ii) No more than 70% of the fund's assets are represented by any two
investments;
(iii) No more than 80% of the fund's assets are represented by any
three investments; and

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4

(iv) No more than 90% of the fund's assets are represented by any four
investments. To the extent the fund invests in obligations of U.S. Government
agencies or instrumentalities, each agency or instrumentality is treated as a
separate issuer for purposes of the above rules.

EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include warrants or rights. Warrants or rights give the
holder the right to purchase a common stock at a given time for a specified
price.

ILLIQUID SECURITIES The fund may invest in securities that cannot be offered to
the public for sale without first being registered under the Securities Act of
1933 (restricted securities), or in other securities which, in the opinion of
the board of trustees, may be illiquid. No restricted or illiquid securities
will be acquired by the fund if such acquisition would cause the aggregate value
of illiquid assets to exceed the limit prescribed by the Securities Exchange
Commission (SEC), which is currently up to 15% of net assets.

Illiquid securities are generally securities that cannot be sold within seven
days in the normal course of business at approximately the amount at which the
fund has value them. Subject to the percentage limitation on illiquid
securities, the board of trustees has authorized the fund to invest in
restricted securities where such investment is consistent with the fund's
investment goal. The board of trustee has authorized these securities to be
considered liquid to the extent the investment manager determines on a daily
basis that there is a liquid institutional or other market for such securities -
for example, restricted securities which may be freely transferred among
qualified institutional buyers pursuant to Rule 144A under the Securities Act of
1933, as amended, and for which a liquid institutional market has developed. In
spite of the manager's determinations in this regard, the board of trustees will
remain responsible for such determinations and will consider appropriate action,
consistent with the fund's goals and policies, if the security should become
illiquid after purchase. In determining whether a restricted security is
properly considered a liquid security, the investment manager and the board of
trustees will take into account, among others, the following factors: (i) the
frequency of trades and quotes for the security; (ii) the number of dealers
willing to buy or sell the security and the number of other potential buyers;
(iii) dealer undertakings to make a market in the security; and (iv) the nature
of the security and the nature of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of transfer). To the extent the fund invests in restricted securities that are
deemed liquid, the general level of illiquidity may be increased if qualified
institutional buyers become uninterested in buying these securities or the
market for these securities contracts.

LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may lend
certain of its portfolio securities to qualified banks and broker-dealers. These
loans may not exceed 33 and 1/3% of the value of the fund's total assets,
measured at the time of the most recent loan. For each loan, the borrower must
maintain with the fund's custodian collateral (consisting of any combination of
cash, securities issued by the U.S. government and its agencies and
instrumentalities, or irrevocable letters of credit) with a value at least equal
to 102% of the current market value of the loaned securities. The fund retains
all or a portion of the interest received on investment of the cash collateral
or receives a fee from the borrower. The fund may terminate the loan at any time
and obtain the return of the securities loaned within the normal settlement
period for the security involved. The fund will continue to receive any interest
or dividends paid on the loaned securities and to have voting rights with
respect to the securities. As with other extensions of credit, however, there
are risks of delay in recovery or even loss of rights in collateral should the
borrower fail.

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5
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES

GENERALLY. The fund may buy and sell financial futures contracts and options on
these contracts and options on securities and securities indices. The fund may
only sell covered options. As more fully explained below, the fund may not
commit more than 5% of its total assets to initial margin deposits on futures
and related options contracts and premiums paid for related options.

Financial futures contracts and options on these contracts and options on
securities and securities indices are generally considered "derivative
securities." The fund will not use derivative securities for speculative
purposes or as leveraged investments that magnify the gains or losses of an
investment.

CALL AND PUT OPTIONS ON SECURITIES. The fund reserves the right to write (sell)
covered put and call options and buy put and call options on securities that
trade on securities exchanges, although the fund has no present intention of
doing so.

WRITING CALL OPTIONS. Call options written by the fund give the holder the right
to buy the underlying securities from the fund at a stated exercise price; put
options written by the fund give the holder the right to sell the underlying
security to the fund at a stated exercise price. A call option written by the
fund is "covered" if the fund owns the underlying security which is subject to
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the fund
holds a call on the same security and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the fund in cash or
marketable securities in a segregated account with its custodian bank. The
premium paid by the buyer of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand, and
interest rates.

In the case of a call option, the writer of an option may have no control over
when the underlying securities must be sold, in the case of a call option,
since, with regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation. Whether or not an
option expires unexercised, the writer retains the amount of the premium. This
amount may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security.

The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be cancelled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.

Effecting a closing transaction in the case of a written call option will permit
the fund to write another call option on the underlying security with either a
different exercise price, expiration date or both. In addition, effecting a
closing transaction will permit the cash or proceeds from the sale of any
securities subject to the option to be used for other fund investments. If the
fund desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction prior to or at the
same time as the sale of the security.

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The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option; the fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to buy the
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation of the underlying security owned by the fund.

BUYING CALL OPTIONS. The fund may buy call options on securities that it intends
to buy in order to limit the risk of a substantial increase in the market price
of the security. The fund may also buy call options on securities held in its
portfolio and on which it has written call options. A call option gives the
holder the right to buy the underlying securities from the option writer at a
stated exercise price. Prior to its expiration, a call option may be sold in a
closing sale transaction. Profit or loss from such a sale will depend on whether
the amount received is more or less than the premium paid for the call option
plus the related transaction costs.

WRITING PUT OPTIONS. A put option gives the buyer of the option the right to
sell, and the writer (seller) the obligation to buy, the underlying security or
currency at the exercise price during the option period. The option may be
exercised at any time prior to its expiration date. The operation of put options
in other respects, including their related risks and rewards, is substantially
identical to that of call options.

The fund would write put options only on a covered basis, which means that the
fund would maintain in a segregated account cash or marketable securities in an
amount not less than the exercise price at all times while the put option is
outstanding. The rules of the clearing corporation currently require that the
assets be deposited in escrow to secure payment of the exercise price. The fund
would generally write covered put options in circumstances where the manager
wishes to buy the underlying security or currency for the fund's portfolio at a
price lower than the current market price of the security or currency. In such
event, the fund would write a put option at an exercise price which, reduced by
the premium received on the option, reflects the lower price it is willing to
pay. Since the fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The risk in
this type of transaction would be that the market price of the underlying
security or currency would decline below the exercise price less the premiums
received.

BUYING PUT OPTIONS. As the holder of a put option, the fund has the right to
sell the underlying security at the exercise price at any time during the option
period. The fund may enter into closing sale transactions with respect to put
options, exercise them, or permit them to expire.

The fund may buy a put option on an underlying security or currency owned by the
fund (a "protective put") as a hedging technique in order to protect against an
anticipated decline in the value of the security. This hedge protection is
provided only during the life of the put option when the fund, as the holder of
the put option, is able to sell the underlying security at the put exercise
price, regardless of any decline in the underlying security's market price. For
example, a put option may be purchased in order to protect unrealized
appreciation of a security when the manager deems it desirable to continue to
hold the security or currency because of tax considerations. The premium paid
for the put option and any transaction costs would reduce any capital gain
otherwise available for distribution when the security or currency is eventually
sold.

The fund may also buy put options at a time when the fund does not own the
underlying security. By buying put options on a security it does not own, the
fund seeks to benefit from a decline in the market price of the underlying
security. If the put option is not sold when it has remaining value, and if the
market price of the underlying security remains equal to or greater than the
exercise price during the life of the put option, the fund will lose its entire
investment in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs, unless the put option is sold in a closing sale transaction.

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The premium paid by the fund when buying a put option will be recorded as an
asset in the fund's statement of assets and liabilities. This asset will be
adjusted daily to the options' current market value, which will be the latest
sale price at the time at which the net asset value per share of the fund is
computed, the close of the New York Stock Exchange (NYSE), or, in the absence of
a sale, the latest bid price. The asset will be extinguished upon expiration of
the option, the writing of an identical option in a closing transaction, or the
delivery of the underlying security or currency upon the exercise of the option.

OPTIONS ON STOCK INDICES. The fund may also buy call and put options on stock
indices. Call and put options on stock indices are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on a stock index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars multiplied by a specified number. Thus, unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.

When the fund writes an option on a stock index, the fund will establish a
segregated account containing cash or marketable securities with its custodian
bank in an amount at least equal to the market value of the underlying stock
index and will maintain the account while the option is open or it will
otherwise cover the transaction.

FUTURES CONTRACTS. The fund may enter into contracts for the purchase or sale
for future delivery of securities and in such contracts based upon financial
indices (financial futures). Financial futures contracts are commodity contracts
that obligate the long or short holder to take or make delivery of a specified
quantity of a financial instrument, such as a security, or the cash value of a
securities index during a specified future period at a specified price. A "sale"
of a futures contract means the acquisition of a contractual obligation to
deliver the securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the acquisition of a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date. Futures contracts have been designed by
exchanges that have been designated "contracts markets" by the Commodity Futures
Trading Commission (CFTC) and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract market.
At the same time a futures contract is purchased or sold, the fund must allocate
cash or securities as a deposit payment ("initial deposit"). The fund may not
commit more than 5% of its total assets to initial margin deposits on futures
contracts. Daily thereafter, the futures contract is valued and the payment of
"variation margin" may be required since each day the fund would provide or
receive cash that reflects any decline or increase in the contract's value.

In addition, the fund must deposit in a segregated account additional cash or
liquid securities to ensure the futures contracts are unleveraged. The value of
assets held in the segregated account must be equal to the daily value of all
outstanding futures contracts less any amount deposited as margin.

At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different composition from that specified in the contract.
In some (but not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.

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8

Although financial futures contracts by their terms call for the actual delivery
or acquisition of securities, or the cash value of the index, in most cases the
contractual obligation is fulfilled before the date of the contract without
having to make or take delivery of the securities or cash. The obligation to
make or take delivery is ended by buying (or selling, as the case may be) on an
exchange an identical financial futures contract calling for delivery in the
same month. All transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the contracts are
traded. The fund will incur brokerage fees when it buys or sells financial
futures.

The fund will not engage in transactions in futures contracts for speculation.
When the fund buys futures contracts or related call options, marketable
instruments equal to the difference between the fluctuating market value of such
futures contract and the aggregate value of the initial and variation margin
payments made by the fund will be deposited in a segregated account with the
custodian bank to collateralize such long positions.

OPTIONS ON FUTURES CONTRACTS. The purchase of a call option on a futures
contract is similar in some respects to the purchase of a call option on an
individual security or currency. Depending on the price of the option compared
to either the price of the futures contract upon which it is based or the price
of the underlying securities or currency, the option may be less risky than
direct ownership of the futures contract or the underlying securities or
currency. As with the purchase of futures contracts, when the fund is not fully
invested, it may purchase a call option on a futures contract to hedge against a
market advance due to declining interest rates or appreciation in the value of a
foreign currency against the U.S. dollar.

If a fund writes a call option on a futures contract and the futures price at
expiration of the option is below the exercise price, the fund will retain the
full amount of the option premium, which may provide a partial hedge against any
decline that may have occurred in the value of the fund's holdings. If the
futures price at expiration of the option is higher than the exercise price, the
fund will retain the full amount of the option premium, which may provide a
partial hedge against any increase in the price of securities that the fund
intends to purchase. If a put or call option the fund has written is exercised,
the fund will incur a loss that will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
fund's losses from existing options on futures may be affected by changes in the
value of its portfolio securities.

STOCK INDEX FUTURES. A stock index futures contract obligates the seller to
deliver (and the buyer to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.

OPTIONS ON STOCK INDEX FUTURES. The fund may buy and sell call and put options
on stock index futures. Call and put options on stock index futures are similar
to options on securities except that, rather than the right to buy or sell stock
at a specified price, options on stock index futures give the holder the right
to receive cash. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
If an option is exercised on the last trading day prior to the expiration date
of the option, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing price of the
futures contract on the expiration date.

FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments which are not presently contemplated for use by the fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the fund's investment objectives and
legally permissible for the fund.

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9

REPURCHASE AGREEMENTS The fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements. Under
a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the fund's
custodian securities with an initial market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price. Repurchase agreements may involve risks in the
event of default or insolvency of the bank or broker-dealer, including possible
delays or restrictions upon the fund's ability to sell the underlying
securities. The fund will enter into repurchase agreements only with parties who
meet certain creditworthiness standards, i.e., banks or broker-dealers that the
manager has determined present no serious risk of becoming involved in
bankruptcy proceedings within the time frame contemplated by the repurchase
transaction.

REVERSE REPURCHASE AGREEMENTS. The fund may also enter into reverse repurchase
agreements, which are the opposite of repurchase agreements but involve similar
mechanics and risks. The fund sells securities to a bank or dealer and agrees to
repurchase them at a mutually agreed price and date. Cash or liquid high-grade
debt securities having an initial market value, including accrued interest,
equal to at least 102% of the dollar amount sold by the fund are segregated,
i.e., set aside, as collateral and marked-to-market daily to maintain coverage
of at least 100%. Reverse repurchase agreements involve the risk that the market
value of the securities retained by the fund may decline below the price of the
securities the fund has sold but is obligated to repurchase under the agreement.
A default by the purchaser might cause the fund to experience a loss or delay in
the liquidation costs. The fund intends to enter into reverse repurchase
agreements with domestic or foreign banks or securities dealers. The manager
will evaluate the creditworthiness of these entities prior to engaging in such
transactions and it will conduct these activities under the general supervision
of the board of trustees.

SHORT-TERM DEBT SECURITIES As discussed in the prospectus, the fund may invest
in short-term debt securities, including the following:

o short-term (less than twelve months to maturity) securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
o finance company and corporate commercial paper, and other short-term
corporate securities, in each case rated Prime-1 by Moody's or A or better
by S&P or, if unrated, of comparable quality as determined by the manager;
o obligations (including certificates of deposit, time deposits and bankers'
acceptances) of banks;
o repurchase agreements with banks and broker-dealers with respect to such
securities; and
o money market funds.

<PAGE>
10

WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED (TBA) TRANSACTIONS Although
the fund does not anticipate doing so, the fund reserves the right to buy
securities on a "when-issued," "delayed delivery" or "TBA" basis. These
transactions are arrangements under which the fund buys securities that have
been authorized but not yet issued with payment for and delivery of the security
scheduled for a future time, generally in 30 to 60 days. Purchases of securities
on a when issued or delayed delivery basis are subject to the risk that the
value or yields at delivery may be more or less than the purchase price or the
yields available when the transaction was entered into. Although the fund will
generally buy securities on a when-issued or TBA basis with the intention of
holding the securities, it may sell the securities before the settlement date if
it is deemed advisable. When the fund is the buyer in this type of transaction,
it will maintain, in a segregated account with its custodian bank, cash or
marketable securities having an aggregate value equal to the amount of the
fund's purchase commitments until payment is made. To the extent the fund
engages in when-issued, delayed delivery or TBA transactions, it will do so only
for the purpose of acquiring portfolio securities consistent with its investment
objectives and policies, and not for the purpose of investment leverage. In
when-issued, delayed delivery and TBA transactions, the fund relies on the
seller to complete the transaction. The seller's failure to do so may cause the
fund to miss a price or yield considered advantageous to the fund. Securities
purchased on a when issued or delayed delivery basis do not generally earn
interest until their scheduled delivery date. Entering into a when issued,
delayed delivery or TBA transaction is a form of leverage that may affect
changes in net asset value to a greater extent.

RISKS
- -------------------------------------------------------------------------------

FUTURES CONTRACTS entail certain risks. A purchase or sale of a futures contract
may result in losses in excess of the amount invested. The fund may not be able
to close out a futures contract where a liquid secondary market is unavailable
for the futures contract the fund wishes to close. In addition, there may be an
imperfect correlation between movements in the securities on which the futures
or options contract is based and movements in the securities held by the fund.

The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the manager may still not
result in a successful transaction.

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

The fund intends to purchase or sell futures only on exchanges or boards of
trade where there appears to be an active secondary market, but there is no
assurance that a liquid secondary market will exist for any particular contract
or at any particular time. In addition, many of the futures contracts available
may be relatively new instruments without a significant trading history. As a
result, there can be no assurance that an active secondary market will develop
or continue to exist.

<PAGE>
11

Use of stock index futures may involve risks because of imperfect correlations
between movements in prices of stock index futures on the one hand and movements
in prices on the other.

OPTIONS ON FUTURES CONTRACTS The amount of risk the fund assumes when it
purchases an option on a futures contract is the premium paid for the option
plus related transaction costs. In writing options on futures, the fund's loss
is potentially unlimited and may exceed the amount of the premium received.
Also, the fund may not be able to close out option contract positions where a
liquid secondary market is unavailable for the option the fund wishes to close.
In addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.

OPTIONS ON SECURITIES The fund's options investments involve certain risks. The
effectiveness of an options strategy depends on the degree to which price
movements in the underlying securities correlate with price movements in the
relevant portion of the fund's portfolio. In addition, the fund bears the risk
that the prices of its portfolio securities will not move in the same amount as
the option it has purchased, or that there may be a negative correlation that
would result in a loss on both the securities and the option. If the manager is
not successful in using options in managing a fund's investments, the fund's
performance will be worse than if the manager did not employ such strategies.

The purchaser of an option can lose the amount of the premium plus related
transaction costs. The fund as an option writer could lose amounts substantially
in excess of its initial investment, due to the margin and collateral
requirements associated with option writing.

Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As a
result, many of the protections provided to traders on organized exchanges will
be available with respect to such transactions. In particular, all option
positions entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.

Although the fund will generally purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time. For some options, no secondary market on an exchange may
exist and a fund may have difficulty effecting closing transactions in
particular options. Therefore, the fund would have to exercise its options in
order to realize any profit and would incur transaction costs upon the sale of
underlying securities where a buyer exercises put or call options. If the fund
as a covered call option writer is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.

<PAGE>
12

OPTIONS ON STOCK INDICES The fund's ability to use options on stock indexes
effectively depends on the degree to which price movements in the underlying
index or underlying securities correlate with price movements in the relevant
portion of the fund's portfolio. Inasmuch as these securities will not duplicate
the components of any index, the correlation will not be perfect. Consequently,
the fund bears the risk that the prices of the securities underlying the option
will not move in the same amount as the option. It is also possible that there
may be a negative correlation between the index and the securities that would
result in a loss on both the securities and the instrument. Accordingly,
successful use by a fund of options on stock indexes, will be subject to the
manager's ability to predict correctly movements in the direction of the
securities markets generally or of a particular segment. This requires different
skills and techniques than predicting changes in the price of individual stocks.

Positions in stock index options may be closed out only on an exchange that
provides a secondary market. There can be no assurance that a liquid secondary
market will exist for any particular stock index option at any specific time.
Thus, it may not be possible to close an option position. The inability to close
options positions could have an adverse impact on the fund's performance.

REPURCHASE AGREEMENTS The use of repurchase agreements involves certain risks.
For example, if the other party to the agreement defaults on its obligation to
repurchase the underlying security at a time when the value of the security has
declined, the fund may incur a loss upon disposition of the security. If the
other party to the agreement becomes insolvent and subject to liquidation or
reorganization under the bankruptcy code or other laws, a court may determine
that the underlying security is collateral for a loan by a fund not within the
control of the fund, and therefore the realization by the fund on the collateral
may be automatically stayed. Finally, it is possible that the fund may not be
able to substantiate its interest in the underlying security and may be deemed
an unsecured creditor of the other party to the agreement. While the manager
acknowledges these risks, it is expected that if repurchase agreements are
otherwise deemed useful to the fund, these risks can be controlled through
careful monitoring procedures.

REVERSE REPURCHASE AGREEMENTS are considered borrowings by the fund and as such
are subject to the investment limitations discussed under "Fundamental
Investment Restrictions." These transactions may increase the volatility of the
fund's income or net asset value. The fund carries the risk that any securities
purchased with the proceeds of the transaction will depreciate or not generate
enough income to cover the fund's obligations under the reverse repurchase
transaction. These transactions also increase the interest and operating
expenses of the fund.

FUNDAMENTAL INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------

INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.

The fund may not:

1. Borrow money, except that the fund may borrow money from banks or affiliated
investment companies to the extent permitted (a) by the 1940 Act, or (b) any
exemptions therefrom which may be granted by the SEC, or (c) for temporary or
emergency purposes and then in an amount not exceeding 331/3% of the value of
the fund's total assets (including the amount borrowed).

2. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.

<PAGE>
13

3. Make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan participations
and/or engaging in direct corporate loans in accordance with its investment
objectives and policies, and (c) to the extent the entry into a repurchase
agreement is deemed to be a loan. The fund may also make loans to affiliated
investment companies to the extent permitted by the 1940 Act or any exemptions
therefrom which may be granted by the SEC.

4. Purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase or
sell currencies, may enter into futures contracts on securities, currencies, and
other indices or any other financial instruments, and may purchase and sell
options on such futures contracts.

5. Issue securities senior to the fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans, mortgages or
pledges, (b) entering into options, futures contracts, forward contracts,
repurchase transactions or reverse repurchase transactions, or (c) making short
sales of securities to the extent permitted by the 1940 Act and any rule or
order thereunder, or SEC staff interpretations thereof.

6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities or securities of
other investment companies).

7. Purchase the securities of any one issuer (other than the U.S. Government or
any of its agencies or instrumentalities, or securities of other investment
companies) if immediately after such investment (a) more than 5% of the value of
the fund's total assets would be invested in such issuer or (b) more than 10% of
the outstanding voting securities of such issuer would be owned by the fund,
except that up to 25% of the value of the fund's total assets may be invested
without regard to such 5% and 10% limitations.

If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.

OFFICERS AND TRUSTESS
- --------------------------------------------------------------------------------

The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.

Frank H. Abbott, III (79)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE

<PAGE>
14

Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE

Edward J. Bonach (46)
Allianz Life Insurance Company, 1750 Hennepin Avenue
Minneapolis, MN 55403-2195
TRUSTEE

Robert F. Carlson (72)
2120 Lambeth Way, Carmichael, CA 95608
TRUSTEE

S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE

Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 49 of the investment companies in the Franklin Templeton
Group of Funds.

*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE

<PAGE>
15

Franklin/Templeton Investor Services, Inc. and Franklin Templeton Services,
Inc.; officer and/or director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 48 of the investment
companies in the Franklin Templeton Group of Funds.

*Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE

*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE

Frank W.T. LaHaye (71)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE

Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE

*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT

<PAGE>
16

Martin L. Flanagan (6/28/60)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer
and Director, Templeton Worldwide, Inc.; Executive Vice President, Chief
Operating Officer and Director, Templeton Investment Counsel, Inc.; Executive
Vice President and Chief Financial Officer, Franklin Advisers, Inc.; Chief
Financial Officer, Franklin Advisory Services, LLC and Franklin Investment
Advisory Services, Inc.; President and Director, Franklin Templeton Services,
Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as the case may be, of
51 of the investment companies in the Franklin Templeton Group of Funds.

Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY

Edward V. McVey (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT

Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.

*This board member is considered an "interested person" under federal securities
laws.

Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.

<PAGE>
17

NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
NAME TRUST(1)($) FUNDS(2)($) EACH SERVES(3)
- -----------------------------------------------------------------------------------
<S> <C> <C>
Frank H. Abbott 156,060 27
Harris Ashton 363,165 47
Robert F. Carlson 89,690 9
S. Joseph Fortunato 363,238 49
Frank W.T. LaHaye 138,700 27
Gordon Macklin 363,165 47
</TABLE>

1. For the fiscal year ended December 31, 1999.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 53 registered investment companies, with approximately 155 U.S. based
funds or series.

<PAGE>
18

shares of one or more Templeton funds and one-third of fees received for serving
as a director or trustee of a Franklin fund in shares of one or more Franklin
funds until the value of such investments equals or exceeds five times the
annual fees paid such board member. Investments in the name of family members or
entities controlled by a board member constitute fund holdings of such board
member for purposes of this policy, and a three year phase-in period applies to
such investment requirements for newly elected board members. In implementing
such policy, a board member's fund holdings existing on February 27, 1998, are
valued as of such date with subsequent investments valued at cost.

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

MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
(Advisers). The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(Resources), a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.

The manager provides investment research and portfolio management services. The
manager has overall responsibility for determining the mix of investments that
it believes will, in a cost-effective manner, achieve the fund's investment goal
and managing cash flows into and out of the fund. The manager provides periodic
reports to the board, which reviews and supervises the manager's investment
activities. To protect the fund, the manager and its officers, directors and
employees are covered by fidelity insurance.

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

The fund's subadvisor is State Street Global Advisors, a division of State
Street Bank and Trust Company. The subadvisor has an agreement with the manager
and provides the manager with investment management advice and assistance. The
subadvisor selects the securities for the fund to buy, hold or sell. The
subadvisor also selects the brokers who execute the fund's portfolio
transactions. The subadvisor's activities are subject to the board's review and
control, as well as the manager's instruction and supervision. To protect the
fund, the subadvisor and its officers, directors and employees are covered by
fidelity insurance.

MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of 0.15%
of its net assets. The fee is computed according to the terms of the management
agreement. Each class of the fund's shares pays its proportionate share of the
fee.

<PAGE>
19

The manager pays the subadvisor a fee equal to an annual rate of :

o 0.05% of the value of the fund's net assets up to and including $50,000,000;
and
o 0.04% of the value of the fund's net assets over $50,000,000 up to and
including $100,000,000; and
o 0.02% of the value of the fund's net assets over $100,000,0000.

The manager pays this fee from the management fees it receives from the fund.

ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the trust to provide certain administrative
services and facilities for the trust. Under this agreement, FT Services is
responsible for preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
subcontracts with Templeton Funds Annuity Company (TFAC) to provide certain of
these services. FT Services and TFAC are direct or indirect wholly owned
subsidiaries of Resources and are affiliates of Advisers and the trust's
principal underwriter.

ADMINISTRATION FEES The fund pays FT Services a monthly fee equal to an annual
rate of 0.10% of the fund's average daily net assets.

For its services, Investor Services receives a fixed fee per account. Each class
of the fund also will reimburse Investor Services for certain of its
out-of-pocket expenses, which may include payments by Investor Services to
entities, including affiliated entities, that provide sub-shareholder services,
recordkeeping and/or transfer agency services to beneficial owners of the fund.
The amount of reimbursements for these services per benefit plan participant
fund account per year will not exceed the per account fee payable by the fund to
Investor Services in connection with maintaining shareholder accounts.

CUSTODIAN The Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the securities and other assets of the
fund.

RESEARCH SERVICES The manager and subadvisor may receive services from various
affiliates. The services may include information, analytical reports, computer
screening studies, statistical data, and factual resumes pertaining to
securities eligible for purchase by the fund. Such supplemental research, when
utilized, is subject to analysis by the manager and subadvisor before being
incorporated into the investment advisory process.

PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------

Subject to oversight by the manager, the subadvisor selects brokers and dealers
to execute the fund's portfolio transactions in accordance with its fiduciary
duty, criteria set forth in the management agreement and subadvisory agreement
and any directions that the board may give.

<PAGE>
20

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

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

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

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

DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
differences in the distribution and service (Rule 12b-1) fees, subtransfer
agency (shareholder account maintenance) and state and federal registration fees
of the three classes of shares. The fund does not pay "interest" or guarantee
any fixed rate of return on an investment in its shares.

<PAGE>
21

ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund intends to elect
and qualify for its current fiscal year to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code. As regulated investment
company, the fund generally pays no federal income tax on the income and gains
it distributes. To ensure that individuals holding the variable annuity or
variable life insurance contracts whose assets are invested in the fund will not
be subject to federal income tax on distributions made by the fund prior to
receipt of payments under the contracts, the fund intends to comply with the
additional requirements of Section 817(h) of the Internal Revenue Code relating
to diversification of its assets. The board reserves the right not to maintain
the qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains.

ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- --------------------------------------------------------------------------------
The fund is a diversified series of Franklin Templeton Variable Insurance
Products Trust (the Trust), an open-end management investment company, commonly
called a mutual fund. The Trust was organized as a Massachusetts business trust
on February 25, 1988, and is registered with the SEC.

The shareholders of a Massachusetts business trust, could, under certain
circumstances, be held personally liable as partners for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of
each series' (fund's) assets for any shareholder held personally liable for
obligations of that fund or the Trust. The Declaration of Trust provides that
the Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the fund or the Trust and shall satisfy
any judgment thereon. All such rights are limited to the assets of the fund. The
Declaration of Trust further provides that the Trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the activities
of the fund as an investment company, as distinguished from an operating
company, would not likely give rise to liabilities in excess of the fund's total
assets. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to the unlikely circumstance in which both
inadequate insurance exists and the fund itself is unable to meet its
obligations.

The Fund currently offers three classes of shares, class 1, class 2, and class
3. The full title of each series and class is:

Franklin S&P 500 Index Fund - class 1
Franklin S&P 500 Index Fund - class 2
Franklin S&P 500 Index Fund - class 3

<PAGE>
22

Shares of each class represent proportionate interests in a fund's assets and
are identical except that the fund's class 2 shares and class 3 shares will bear
the expense of the class 2 and class 3 distribution plan. (See "The Underwriter"
below, for a description of these plans.) In addition, class 3 of Franklin S&P
500 Index Fund will bear its own registration expenses under state and federal
securities laws and transfer agency (shareholder account maintenance) expenses.
On matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the Trust for matters that affect the Trust as a whole. Additional series and/or
classes may be offered in the future.

The Trust has non-cumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.

The Trust does not intend to hold annual shareholder meetings. The Trust or the
fund may hold special meetings, however, for matters requiring shareholder
approval. A meeting may be called by the board to consider the removal of a
board member if requested in writing by shareholders holding at least 10% of the
outstanding shares. In certain circumstances, we are required to help you
communicate with other shareholders about the removal of a board member. A
special meeting also may be called by the board in its discretion. For
information regarding voting privileges of Contract Owners, see the insurance
company separate account SAI.

PRINCIPAL SHAREHOLDERS Class 1 and class 2 shares of the fund are sold to and
owned only by insurance company separate accounts to serve as the investment
vehicle for variable annuity and life insurance contracts. Class 3 shares of the
fund are offered as an investment option only to defined contribution plans
participating in Franklin Templeton ValuSelect(R) and certain other qualified
retirement plans that have executed a special agreement with the fund or its
agents.

The insurance companies will exercise voting rights attributable to shares they
own in accordance with voting instructions received by owners of the contracts
issued by the insurance companies. To this extent, the insurance companies do
not exercise control over the trust by virtue of the voting rights from their
ownership of trust shares. Voting rights attributable to shares of the fund
owned by defined contribution plans participating in Franklin Templeton
ValuSelect and other qualified retirement plans will be voted as required by
applicable law and the governing plan documents.

As of the date of this SAI, there are no principal shareholders of the fund,
although there are principal shareholders of other series of the Trust.

PRICING SHARES
- --------------------------------------------------------------------------------
When they buy and sell shares, the trust's shareholders pay and receive the net
asset value (NAV) per share. The value of a mutual fund is determined by
deducting the fund's liabilities from the total assets of the portfolio. The net
asset value per share is determined by dividing the net asset value of the fund
by the number of shares outstanding. The fund follows the procedures described
below.

The fund calculates the NAV per share of each class each business day at the
close of trading on the NYSE (normally 1:00 p.m. pacific time). The fund does
not calculate the NAV on days the NYSE is closed for trading, which include New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

<PAGE>
23

When determining its net asset value, the fund values cash and receivables at
their realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager and subadvisor.

REDEMPTIONS IN KIND In the case of redemption requests, the board reserves the
right to make payments in whole or in part in securities or other assets of the
fund, in case of an emergency, or if the payment of such a redemption in cash
would be detrimental to the existing shareholders of the fund. In these
circumstances, the securities distributed would be valued at the price used to
compute the fund's net assets and you may incur brokerage fees in converting the
securities to cash. The fund does not intend to redeem illiquid securities in
kind. If this happens, however, you may not be able to recover your investment
in a timely manner.

THE UNDERWRITER
- --------------------------------------------------------------------------------

Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the trust's shares.

<PAGE>
24

DISTRIBUTORS is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, except to the
extent these expenses are borne by the insurance companies. These expenses
include advertising expenses and the costs of printing sales material and
prospectuses used to offer fund shares. The trust pays the expenses of preparing
and printing amendments to its registration statements and prospectuses (other
than those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.

Distributors may be entitled to receive payment under the class 2 and class 3
Rule 12b-1 plans, as discussed below. Except as noted below, Distributors
receives no other compensation from the trust for acting as underwriter.

DISTRIBUTION AND SERVICE (12B-1) FEES The fund's class 2 and class 3 shares each
have a separate distribution or "rule 12b-1" plan. Under each plan, the fund may
pay up to a maximum of 0.25% per year of the average daily net assets
attributable to its class. These fees may be used to compensate Distributors,
insurance companies, dealers, 401(k) plan record keeping and servicing agents,
or others for distribution and related services and as a servicing fee.

The terms and provisions of the plans, including terms and provisions relating
to required reports, term, and approval, are consistent with Rule 12b-1.

In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.

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

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

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

<PAGE>
25

PERFORMANCE
- --------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the fund are
based on the standardized methods of computing performance mandated by the SEC.
If a rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the fund to compute or express performance follows.

Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the limited
historical period used.

AVERAGE ANNUAL RETURN is determined by finding the average annual rates of
return over the periods indicated below that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes income dividends and capital gain distributions are reinvested at net
asset value. The quotation assumes the account was completely redeemed at the
end of each period and the deduction of all applicable fund charges and fees. It
does NOT however, include any fees or sales charges imposed by the variable
insurance contract for which the fund's class 1 and class 2 shares are
investment options or plan administration expenses imposed on retirement plans
for which the fund's Class 3 shares are an investment option. If they were
included, performance would be lower.

These figures are calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period

CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are reinvested
at NAV, the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. Cumulative total return, however,
is based on the actual return for a specified period rather than on the average
return over the periods indicated above.

From time to time, the fund may publish its current yield. The current yield
will be calculated by dividing the annualization of the income earned by the
fund during a recent 30-day period by the net asset value per share at the end
of such period. In addition, aggregate, cumulative and average total return
information for the fund over different periods of time may also be advertised.
Except as stated above, the fund will use the same methods for calculating its
performance.

<PAGE>
26

A distribution rate for the fund may also be published in communications
preceded or accompanied by a copy of the fund's current prospectus. The fund's
current distribution rate will be calculated by dividing the annualization of
the total distributions made by the fund during the most recent preceding fiscal
quarter by the net asset value per share at the end of such period. The current
distribution rate may differ from current yield because the distribution rate
will be for a different period of time and may contain items of capital gain and
other items of income, while current yield reflects only earned income.
Uniformly computed yield and total return figures for the fund will also be
published along with publication of its distribution rate.

VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of the fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of NAV or total return around an
average over a specified period of time. The idea is that greater volatility
means greater risk undertaken in achieving performance.

COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:

o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the NYSE. The average is
a combination of the Dow Jones Industrial Average (30 blue-chip stocks that
are generally leaders in their industry), the Dow Jones Transportation
Average (20 transportation stocks), and the Dow Jones Utilities Average (15
utility stocks involved in the production of electrical energy).
o The NYSE composite or component indices - an unmanaged index of all
industrial, utilities, transportation, and finance stocks listed on the
NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.

<PAGE>
27

o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.

MISCELLANEOUS INFORMATION
- --------------------------------------------------------------------------------

The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services more than 4 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Advisers
organization, known for its value-driven approach to domestic equity investing,
became part of the organization four years later. Together, the Franklin
Templeton Group has over $222 billion in assets under management for more than 7
million U.S. based mutual fund shareholder and other accounts. The Franklin
Templeton Group of Funds offers 110 U.S. based open-end investment companies to
the public. The fund may identify itself by its NASDAQ symbol or CUSIP number.

S&P, a division of The McGraw-Hill Companies, Inc. does not sponsor, endorse,
sell, or promote the fund. S&P makes no representation or warranty, express or
implied, to the owners of the fund or any member of the public regarding the
advisability of investing in securities generally or in the fund particularly or
the ability of the S&P 500 Index to track general stock market performance.
S&P's only relationship to the fund is the licensing by Distributors of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to the fund or Distributors. S&P
has no obligation to take the needs of Distributors or the owners of the fund
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of the fund or the timing of the issuance or sale of the fund
or in the determination or calculation of the equation by which the fund is to
be converted into cash. S&P has no obligation or liability in connection with
the administration, marketing or trading of the fund.

<PAGE>
28

S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE FUND, OR ANY OTHER
PERSON OR ENTITY FROM USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P
MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO
THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING THE FOREGOING,
IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.

DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------

CORPORATE BOND RATINGS

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

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

Ca: Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.

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

<PAGE>
29

S&P

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

A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.

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

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

COMMERCIAL PAPER RATINGS

MOODY'S

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

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

S&P

<PAGE>
30

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

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

<PAGE>

FRANKLIN SRATEGIC INCOME INVESTMENTS FUND - CLASS 1 & 2
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000

[Insert Franklin Templeton Ben Head]

777 MARINERS ISLAND BLVD. P.O. BOX 7777 SAN MATEO, CA 94403-7777 1-800/342-3863

For a free copy of a current prospectus or annual report contact your investment
representative or call 1-800/774-5001.

CONTENTS PAGE

Goals and Strategies
Securities and Investment Techniques, Generally
Risks
Investment Restrictions
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Pricing Shares
The Underwriter
Performance
Financial Statements
Miscellaneous Information
Description of Ratings

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

<PAGE>

GOALS AND STRATEGIES

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

Under normal market conditions, the fund will invest primarily in U.S. and
non-U.S. debt securities, government securities, mortgage securities,
asset-backed securities, convertible securities, and preferred stock. The fund
may invest up to 35% of its total assets in common stocks.

MORTGAGE SECURITIES The fund may invest in mortgage securities issued or
guaranteed by Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC"), adjustable rate mortgage securities ("ARMs"),
collateralized mortgage obligations ("CMOs"), and stripped mortgage-backed
securities, any of which may be privately issued.

DEBT SECURITIES The fund may invest in debt securities in any rating category,
including high yield, lower-rated debt securities ("junk bonds"), or in unrated
debt securities. Ratings assigned by the rating agencies are based largely on
the issuer's historical financial condition and the rating agencies' investment
analysis at the time of the rating. The fund may also buy defaulted debt
securities if, in the opinion of the manager, it appears the issuer may resume
interest payments or other advantageous developments appear likely in the near
future.

DERIVATIVE INVESTMENTS The fund may invest limited amounts in various derivative
investments, which carry high risk. Such derivatives could include: stripped
mortgage-backed securities (including Interest Only or Principal Only
securities); CMOs; options on securities, on securities indices, on futures
contracts, and financial futures contracts; interest rate swap agreements; and
mortgage dollar rolls. The fund may only buy options on securities and
securities indices if the total premiums paid for such options is 5% or less of
total assets. The fund may not commit more than 5% of its total assets to
initial margin deposits on futures contracts.

CURRENCY HEDGING The fund may also use the following currency hedging
techniques: investments in foreign currency futures contracts, options on
foreign currencies or currency futures, forward foreign currency exchange
contracts ("forward contracts"), and currency swaps.

INDEBTEDNESS AND PARTICIPATIONS The fund may invest in secured or unsecured
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 the 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. There are no established
markets for indebtedness, making them less liquid than other securities.
Purchasers of participations must rely on the financial institution issuer to
assert any rights against the borrower with respect to the underlying
indebtedness.

2
<PAGE>

INVERSE FLOATERS The fund may invest up to 5% of its total assets in inverse
floaters, which are instruments with floating or variable interest rates that
move in the opposite direction, usually at an accelerated speed, to short-term
interest rates or interest rate indices.

OTHER INVESTMENT POLICIES The fund may also:

o lend its portfolio securities up to one-third of the value of its total
assets;

o borrow up to one-third of the value of its total assets; and

o enter into repurchase or reverse repurchase agreements.

Please see " Securities and Investment Techniques" and "Risks" below, for more
information.

SECURITIES AND INVESTMENT TECHNIQUES, GENERALLY

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

All policies and percentage limitations are considered at the time of purchase
of an investment and refer to a fund's total assets, unless another purpose is
indicated. The fund will not necessarily use the strategies described to the
full extent permitted unless the managers believe that doing so will help the
fund reach its goals. Further, not all instruments or strategies will be used at
all times.

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

The fund is also subject to investment restrictions that are described under the
heading "Investment Restrictions" in this SAI. The investment goal of the fund
and its listed investment restrictions are "fundamental policies" of the fund,
which means that they may not be changed without a majority vote of shareholders
of the fund. With the exception of the fund's investment goal and those
restrictions specifically identified as fundamental, all investment policies and
practices described in the prospectus and in this SAI are not fundamental, which
means that the Board of Trustees may change them without shareholder approval.

DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay the bondholder, both to repay a loan of money at a
future date and generally to pay interest. These securities include bonds,
notes, debentures, and commercial paper, which differ in the

3
<PAGE>

length of the issuer's payment schedule, with bonds carrying the longest
repayment schedule and commercial paper the shortest.

The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
During periods of rising interest rates, the value of such securities generally
declines. These changes in market value of securities owned by the fund will be
reflected in the fund's net asset value per share.

RATINGS. Various investment services publish ratings of some of the debt
securities in which the fund may invest. Higher yields are ordinarily available
from securities in the lower rating categories, such as securities rated Ba or
lower by Moody's or BB or lower by S&P or from unrated securities deemed by the
fund's manager to be of comparable quality. These ratings represent the opinions
of the rating services with respect to the issuer's ability to pay interest and
repay principal. They do not purport to reflect other risk, such as the risk of
fluctuations in market value and are not absolute standards of quality. However,
lower rated securities typically are riskier than investment grade securities.
Bonds which are rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are securities on
which no interest is being paid. Please see the appendix for a discussion of the
ratings.

MORTGAGE-BACKED SECURITIES

ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). The fund may invest in ARMS. ARMS,
like traditional mortgage securities, are interests in pools of mortgage loans.
The interest rates on the mortgages underlying ARMS are reset periodically. The
adjustable interest rate feature of the mortgages underlying the mortgage
securities in which the fund invests generally will act as a buffer to reduce
sharp changes in the fund's net asset value in response to normal interest rate
fluctuations. As the interest rates are reset, the yields of the securities will
gradually align themselves to reflect changes in market rates so that their
market value will remain relatively stable compared to fixed-rate securities. As
a result, the fund's net asset value should fluctuate less significantly than if
the fund invested in more traditional long-term, fixed-rate securities. During
periods of extreme fluctuation in interest rates, however, the fund's net asset
value will fluctuate.

Because the interest rates on the mortgages underlying ARMS are reset
periodically, the fund may participate in increases in interest rates, resulting
in both higher current yields and lower price fluctuations. This differs from
fixed-rate mortgages, which generally decline in value during periods of rising
interest rates. The fund, however, will not benefit from increases in interest
rates to the extent that interest rates exceed the maximum allowable annual or
lifetime reset limits (or

4
<PAGE>

"cap rates") for a particular mortgage security. Since most mortgage securities
held by the fund will generally have annual reset limits or caps of 100 to 200
basis points, short-term fluctuations in interest rates above these levels could
cause these mortgage securities to "cap out" and behave more like long-term,
fixed-rate debt securities. If prepayments of principal are made on the
underlying mortgages during periods of rising interest rates, the fund generally
will be able to reinvest these amounts in securities with a higher current rate
of return.

During periods of rising interest rates, changes in the interest rates on
mortgages underlying ARMS lag behind changes in the market rate. This may result
in a lower net asset value until the interest rate resets to market rates. Thus,
you could suffer some principal loss if you sell your shares of the fund before
the interest rates on the underlying mortgages in the underlying portfolio reset
to market rates. Also, the fund's net asset value could vary to the extent that
current yields on mortgage-backed securities are different from market yields
during interim periods between coupon reset dates. A portion of the ARMS in
which the fund may invest may not reset for up to five years.

During periods of declining interest rates, the interest rates may reset
downward, resulting in lower yields to the fund. As a result, the value of ARMS
is unlikely to rise during periods of declining interest rates to the same
extent as the value of fixed-rate securities. As with other mortgage-backed
securities, declining interest rates may result in accelerated prepayments of
mortgages, and the fund may have to reinvest the proceeds from the prepayments
at the lower prevailing interest rates.

For certain types of ARMS, the rate of amortization of principal, as well as
interest payments, change in accordance with movements in a pre-specified,
published interest rate index. The amount of interest due to an ARMS holder is
calculated by adding a specified additional amount, the "margin," to the index,
subject to limitations or "caps" on the maximum and minimum interest that is
charged to the mortgagor during the life of the mortgage or to maximum and
minimum changes to that interest rate during a given period.

Mortgage loan pools offering pass-through investments in addition to those
described above may be created in the future. The mortgages underlying these
securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may differ from customary long-term, fixed-rate mortgages. As new types
of mortgage securities are developed and offered to investors, the fund may
invest in them if they are consistent with the fund's goal, policies, and
quality standards.

ADJUSTABLE RATE SECURITIES ("ARS"). The fund will invest in ARS. ARS are debt
securities with interest rates that are adjusted periodically pursuant to a
pre-set formula and interval. Movements in the relevant index on which
adjustments are based, as well as the applicable spread relating to the ARS,
will affect the interest paid on ARS and, therefore, the current income earned
by the fund by investing in ARS. (See "Resets.")

The interest rates on ARS are readjusted periodically to an amount above the
chosen interest rate index. These readjustments occur at intervals ranging from
one to sixty months. The degree of volatility in the market value of the
securities held by the fund and of the net asset value of the fund's shares will
be a function primarily of the length of the adjustment period and the degree of

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volatility in the applicable indices. It will also be a function of the maximum
increase or decrease of the interest rate adjustment on any one adjustment date,
in any one year, and over the life of the securities. These maximum increases
and decreases are typically referred to as "caps" and "floors," respectively.
The fund does not seek to maintain an overall average cap or floor, although the
manager will consider caps or floors in selecting ARS for the fund.

While investing in ARS the fund does not attempt to maintain a stable net asset
value per share, during periods when short-term interest rates move within the
caps and floors of the securities held by the fund, the fluctuation in market
value of the ARS held by the fund is expected to be relatively limited, since
the interest rates on the ARS generally adjust to market rates within a short
period of time. In periods of substantial short-term volatility in interest
rates, the value of the fund's holdings may fluctuate more substantially because
the caps and floors of its ARS may not permit the interest rates to adjust to
the full extent of the movements in the market rates during any one adjustment
period. In the event of dramatic increases in interest rates, the lifetime caps
on the ARS may prevent the securities from adjusting to prevailing rates over
the term of the loan. In this case, the market value of the ARS may be
substantially reduced, with a corresponding decline in the fund's net asset
value.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"), REAL ESTATE MORTGAGE INVESTMENT
CONDUITS (REMICS), AND MULTI-CLASS PASS-THROUGHS. The fund may invest in debt
obligations that are collateralized by mortgage loans or mortgage pass-through
securities. These obligations may be issued and guaranteed by U.S. Government
agencies or instrumentalities or issued by certain financial institutions and
other mortgage lenders. CMOs and REMICs are debt instruments issued by special
purpose entities and are secured by pools of mortgages backed by residential and
various types of commercial properties. Multi-class pass-through securities are
equity interests in a trust composed of mortgage loans or other mortgage-backed
securities.

CMOs are debt instruments that are collateralized by pools of mortgage loans
created by commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other issuers in the U.S. Principal
and interest on the underlying collateral are paid to the issuer of the CMOs to
make required payments on these securities. In effect, CMO's "pass-through" the
monthly payments made by individual borrowers on their mortgage loans. Timely
payment of interest and principal (but not market value) of these pools is
supported by various forms of insurance or guarantees issued by U.S. Government
agencies, private issuers, and mortgage poolers; however, the obligations itself
is not guaranteed.

A CMO is a mortgage-backed security that separates mortgage pools into short-,
medium-, and long-term components. Each component pays a fixed rate of interest
to security holders at regular intervals. These components enable an investor,
such as the fund, to predict more accurately the pace at which principal is
returned.

CMOs and REMICs purchased by the fund may be:

(1) collateralized by pools of mortgages in which each mortgage is guaranteed as
to payment of principal and interest by an agency or instrumentality of the U.S.
Government; or

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<PAGE>

(2) collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer, an entity specifically created for this
purpose, and the guarantee is collateralized by U.S. Government securities.

If the collateral securing the obligations is insufficient to make payment on
the obligation, a holder could sustain a loss. In addition, the fund may buy
CMOs without insurance or guarantees if, in the opinion of the manager, the
sponsor is creditworthy. The ratings of the CMOs will be consistent with the
ratings criteria of the fund. Prepayments of the mortgages included in the
mortgage pool may influence the yield of the CMO. Prepayments usually increase
when interest rates are decreasing, thereby decreasing the life of the pool.

RESETS. The interest rates paid on CMOs generally are readjusted at intervals of
one year or less to an increment over some predetermined interest rate index,
although some securities in which the fund may invest may have intervals as long
as five years. There are three main categories of indices: those based on LIBOR,
those based on U.S. Treasury securities, and those derived from a calculated
measure such as a cost of fund index or a moving average of mortgage rates.
Commonly used indices include:

o the one-, three-, and five-year constant-maturity Treasury rates;

o the three-month Treasury bill rate;

o the 180-day Treasury bill rate;

o rates on longer-term Treasury securities;

o the 11th District Federal Home Loan Bank Cost of Funds; the National Median
Cost of Funds;

o the one-, three-, six-month, or one-year LIBOR; the prime rate of a specific
bank; or

o commercial paper rates.

Some indices, such as the one-year constant-maturity Treasury rate, closely
mirror changes in market interest rate levels. Others, such as the 11th District
Federal Home Loan Bank Cost of Funds, tend to lag behind changes in market
interest rate levels and tend to be somewhat less volatile.

CAPS AND FLOORS. The underlying mortgages that collateralize CMOs will
frequently have caps and floors that limit the maximum amount by which the loan
rate to the borrower may change up or down (a) per reset or adjustment interval
and (b) over the life of the loan. Some residential mortgage loans restrict
periodic adjustments by limiting changes in the borrower's monthly principal and
interest payments rather than limiting interest rate changes. These payment caps
may result in negative amortization.

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<PAGE>

STRIPPED MORTGAGE SECURITIES. The fund may invest in stripped mortgage
securities, which are derivative multi-class mortgage securities. The stripped
mortgage securities in which the fund may invest will only be issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. Stripped
mortgage securities have greater market volatility than other types of mortgage
securities in which the fund invests.

Stripped mortgage securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security has one
class that receives some of the interest and most of the principal from the
mortgage assets, while the other class receives most of the interest and the
remainder of the principal. In the most extreme case, one class receives all of
the interest (the interest-only or "IO" class), while the other class receives
the entire principal (the principal-only or "PO" class). The yield to maturity
on an IO class is extremely sensitive not only to changes in prevailing interest
rates but also to the rate of principal payments (including prepayments) on the
underlying mortgage assets. A rapid rate of principal payments may have a
material adverse effect on the yield to maturity of any IO class held by the
fund. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the fund may fail to recoup its initial investment
fully, even if the securities are rated in the highest rating categories, AAA or
Aaa, by S&P or Moody's, respectively.

Stripped mortgage securities are purchased and sold by institutional investors,
such as the fund, through several investment banking firms acting as brokers or
dealers. These securities were only recently developed, and traditional trading
markets have not yet been established for all stripped mortgage securities.
Accordingly, some of these securities may be illiquid. The staff of the SEC has
indicated that only government-issued IO or PO securities that are backed by
fixed-rate mortgages may be deemed to be liquid, if procedures with respect to
determining liquidity are established by the fund's board. The Board may, in the
future, adopt procedures that would permit the fund to acquire, hold, and treat
as liquid government-issued IO and PO securities. At the present time, however,
all such securities will continue to be treated as illiquid and will, together
with any other illiquid investments, not exceed 10% of the fund's net assets.
This position may be changed in the future, without notice to shareholders, in
response to the SEC staff's continued reassessment of this matter, as well as to
changing market conditions.

ASSET-BACKED SECURITIES. The fund may invest in asset-backed securities,
including adjustable-rate asset-backed securities that have interest rates that
reset at periodic intervals. Asset-backed securities are similar to
mortgage-backed securities. The underlying assets, however, may include
receivables on home equity and credit card loans, and automobile, mobile home,
and recreational vehicle loans and leases. Asset-backed securities are issued in
either a pass-through structure (similar to a mortgage pass-through structure)
or a pay-through structure (similar to a CMO structure). There may be other
types of asset-backed securities that are developed in the future in which the
fund may invest. In general, collateral supporting asset-backed securities has
shorter maturities than mortgage loans and historically has been less likely to
experience substantial prepayment.

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<PAGE>

to ten years) and U.S. Treasury bonds (generally original maturities of greater
than ten years); and (2) obligations issued or guaranteed by U.S. Government
agencies and instrumentalities such as the Government National Mortgage
Association, the Export-Import Bank and the Farmers Home Administration. Some of
the fund's investments will include obligations that are supported by the full
faith and credit of the U.S. Government. In the case of U.S. Government
securities that are not backed by the full faith and credit of the U.S.
Government (e.g., obligations of the Federal National Mortgage Association
(FNMA) or a Federal Home Loan Bank), the fund must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment and may not
be able to assert a claim against the U.S. itself in the event the agency or
instrumentality does not meet its commitments.

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS ("GINNIE MAES"). The
Government National Mortgage Association's guarantee of payment of principal and
interest on Ginnie Maes is backed by the full faith and credit of the U.S.
Government. The Government National Mortgage Association may borrow U.S.
Treasury funds to the extent needed to make payments under its guarantee.

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

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<PAGE>

dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.

EQUITY SECURITIES represent ownership interests in individual companies and give
shareholders a claim in the company's earnings and assets. Equity securities
generally take the form of common stock or preferred stock, as well as
securities convertible into common stocks. Equity securities may also include
warrants, or rights. Warrants or rights give the holder the right to buy a
common stock at a given time for a specified price.

FOREIGN SECURITIES AND DEPOSITARY RECEIPTS

DEPOSITARY RECEIPTS. American Depositary Receipts (ADRs) are typically issued by
a U.S. bank or trust company and evidence ownership of underlying securities
issued by a foreign corporation. European Depositary Receipts (EDRs) and Global
Depositary Receipts (GDRs) are typically issued by foreign banks or trust
companies, although they may be issued by U.S. banks or trust companies, and
evidence ownership of underlying securities issued by either a foreign or a U.S.
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and depositary receipts in bearer form are
designed for use in securities markets outside the U.S. Depositary Receipts may
not necessarily be denominated in the same currency as the underlying securities
into which they may be converted.

Depositary Receipts may be issued by sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs, and there may not be a correlation
between the availability of such information and the market value of the
Depositary Receipts.

Depositary Receipts also involve the same risks as direct investments in foreign
securities. For purposes of the fund's investment policies, the fund will
consider its investments in Depositary Receipts to be investments in the
underlying securities.

EMERGING MARKETS. Emerging market countries include: (i) countries that are
generally considered low or middle income countries by the International Bank
for Reconstruction and Development

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<PAGE>

(commonly known as the World Bank) and the International Finance Corporation; or
(ii) countries that are classified by United Nations or otherwise regarded by
their authorities as emerging, or (iii) countries with a stock market
capitalization of less than 3% of the Morgan Stanley Capital World Index.

LOAN PARTICIPATIONS AND DEFAULTED DEBT SECURITIES Loan participations are
interests in floating or variable rate senior loans to U.S. corporations,
partnerships and other entities. Generally, these instruments are sold without a
guarantee by the lending institution, and are subject to the credit risks of
both the borrower and the lending institution. While loan participations
generally trade at par value, the fund will also be able to acquire loan
participations that sell at a discount because of the borrower's credit
problems. To the extent the borrower's credit problems are resolved, such loan
participations may appreciate in value. The manager may acquire loan
participations for the fund when it believes that over the long term
appreciation will occur. Most loan participations in which the fund intends to
invest are illiquid and, to that extent, will be included in the fund's
limitation on illiquid investments described under "Illiquid securities." The
fund will buy defaulted securities, if in the manager's opinion, it appears the
issuer may resume interest payments or other advantageous developments appear
likely in the near future. An investment in loan participations carries
substantially the same risks as those for defaulted debt securities. Interest
payments on these securities may be reduced, deferred, suspended or eliminated
and principal payments may likewise be reduced, deferred, suspended or canceled,
causing the loss of the entire amount of the investment.

REPURCHASE AGREEMENTS The fund will generally have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements. Under
a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the fund's
custodian securities with an initial market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price.

Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. The fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk or becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.

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<PAGE>

market value of the loaned securities. The fund retains all or a portion of the
interest received on investment of the cash collateral or receives a fee from
the borrower. The fund also continues to receive any distributions paid on the
loaned securities. The fund may terminate a loan at any time and obtain the
return of the securities loaned within the normal settlement period for the
security involved.

BORROWING The fund may borrow money for investment or other purposes. Borrowings
will not exceed the percentage amounts listed in the fund's investment policies,
above, and are limited by fundamental restrictions which may not be changed
without shareholder approval. See "Investment Restrictions" for more information
about the fund's policies with respect to borrowing.

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

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

If the fund buys securities on a when-issued basis, it will do so for the
purpose of acquiring securities consistent with its investment objective and
polices and not for investment leverage. The fund may sell securities purchased
on a when-issued basis before the settlement date, however, if the manager
believes it is advisable to do so.

MORTGAGE DOLLAR ROLLS The fund may enter into mortgage "dollar rolls" in which
the fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (name, type,
coupon, and maturity) securities on a specified future date. During the period
between the sale and repurchase (the "roll period"), the fund forgoes principal
and interest paid on the mortgage-backed securities. The fund is compensated by
the difference between the current sales price and the lower forward price for
the future purchase (often referred to as the "drop"), as well as by the
interest earned on the cash proceeds of the initial sale. A "covered roll" is a
specific type of mortgage dollar roll for which there is an offsetting cash
position or a cash equivalent security position which matures on or before the

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<PAGE>

forward settlement date of the dollar roll transaction and is maintained in a
segregated account. The fund will not enter into any dollar rolls that are not
covered rolls. The fund could suffer a loss if the contracting party fails to
perform the future transaction, with the result that the fund may not be able to
buy back the mortgage-backed securities it initially sold. The fund intends to
enter into mortgage dollar rolls only with government securities dealers
recognized by the Federal Reserve Board or with member banks of the Federal
Reserve System.

DERIVATIVE INVESTMENTS are those securities whose values are dependent upon the
performance of one or more securities or indices. Derivatives are used for
"hedging", which means that they help manage risks relating to interest rates,
currency fluctuations and other market factors. They may also be used to
increase liquidity or to invest in a particular stock or bond in a more
efficient or less expensive way.

CURRENCY TECHNIQUES AND HEDGING The fund may enter into forward currency
exchange contracts ("forward contracts") and currency futures contracts and
options on these futures contracts, although the fund has no present intention
of using any of these techniques except forward contracts. The fund typically
engages in these practices for hedging purposes, or in other words for the
purpose of protecting against declines in the value of the fund's portfolio
securities and the income on these securities. The fund will normally conduct
its foreign currency exchange transactions either on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies.

FORWARD CURRENCY EXCHANGE CONTRACTS. The fund may enter into forward currency
exchange contracts to attempt to minimize the risk to the fund from adverse
changes in the relationship between currencies or to enhance income. A forward
contract involves an obligation to buy or sell a specific currency at a future
date, that may be any fixed number of days from the date of the contract agreed
upon by the parties, at a price set at the time of the contract. These contracts
are traded in the interbank market conducted directly between currency traders
(usually large commercial banks).

The fund may either accept or make delivery of the currency specified at the
maturity of a forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. Closing
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract.

The fund may construct an investment position by combining a debt security
denominated in one currency with a forward contract calling for the exchange of
that currency for another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security coupled with a
forward contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.

The fund may engage in cross-hedging by using forward contracts in one currency
to hedge against fluctuations in the value of securities denominated in a
different currency, if the manager determines that there is a correlation
between the two currencies.

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<PAGE>

The fund may also enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of that security.
Additionally, for example, when the fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell an amount of that foreign currency approximating the
value of some or all of the fund's portfolio securities denominated in such
foreign currency. Similarly, when the fund believes that the U.S. dollar may
suffer a substantial decline against a foreign currency, it may enter into a
forward contract to buy that foreign currency for a fixed dollar amount.

The fund sets aside or segregates sufficient cash, cash equivalents, or readily
marketable debt securities held by its custodian bank as deposits for
commitments created by open forward contracts. The fund will cover any
commitments under these contracts to sell currency by owning or acquiring the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market daily. The ability of the fund to
enter into forward contracts is limited only to the extent forward contracts
would, in the opinion of the manager, impede portfolio management or the ability
of the fund to honor redemption requests.

Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between foreign
currencies. Unanticipated changes in currency exchange rates also may result in
poorer overall performance for the fund than if it had not entered into such
contracts.

The fund generally will not enter into a forward contract with a term of greater
than one year.

CURRENCY FUTURES CONTRACTS. The fund may enter into currency futures contracts
traded on regulated commodity exchanges, including non-U.S. exchanges. A
currency futures contract is a standardized contract for the future delivery of
a specified amount of currency at a future date at a price set at the time of
the contract. The fund may use currency futures contracts to hedge against
anticipated future changes in exchange rates which otherwise might adversely
affect the value of the fund's portfolio securities or adversely affect the
prices of securities that the fund intends to purchase at a later date.

The fund may either accept or make delivery of the currency specified at the
maturity of a currency futures contract or, prior to maturity, enter into a
closing transaction involving the purchase or sale of an offsetting contract.
Closing transactions with respect to currency futures contracts are effected on
the exchange on which the contract was entered into (or on a linked exchange).

OPTIONS ON FOREIGN CURRENCIES. The fund may buy and write put and call options
on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter)
for hedging purposes to protect against declines in the U.S. dollar value of
foreign portfolio securities and against increases in the U.S. dollar cost of
foreign securities or other assets to be acquired. As in the case of other kinds
of options, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received. The
fund could be required to buy or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against fluctuations

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<PAGE>

in exchange rates although, in the event of rate movements adverse to the fund's
position, the fund may lose the entire amount of the premium plus related
transaction costs.

CURRENCY RATE SWAPS The fund may participate in currency rate swaps. A currency
rate swap is the transfer between two counterparties of their respective rights
to receive payments in specified currencies.

INTEREST RATE SWAPS The fund may participate in interest rate swaps. A swap is
an agreement between two parties to exchange sets of cash flows over a period in
the future. Most corporate and government bonds pay fixed coupons, and are
exposed to the risk of rising interest rates. Swapping fixed payments for
floating payments, an interest rate swap is a vehicle to hedge interest rate
risk.

An example of an interest rate swap might be where one obligation has an
interest rate fixed to maturity while the other has an interest rate that
changes with changes in a designated benchmark, such as the London Interbank
Offered Rate ("LIBOR"), prime, commercial paper, or other benchmarks. The
obligations to make repayment of principal on the underlying securities are not
transferred. Similarly, the right to receive such payments is not transferred.
These transactions generally require the participation of an intermediary,
frequently a bank. The entity holding the fixed rate obligation will transfer
the obligation to the intermediary, and the entity will then be obligated to pay
to the intermediary a floating rate of interest, generally including a
fractional percentage as a commission for the intermediary. The intermediary
also makes arrangements with a second entity that has a floating-rate obligation
that substantially mirrors the obligation desired by the first entity. In return
for assuming a fixed obligation, the second entity will pay the intermediary all
sums that the intermediary pays on behalf of the first entity, plus an
arrangement fee and other agreed upon fees.

The fund intends to participate in interest rate swaps involving obligations
held in the fund's portfolio on which it is receiving payments of principal and
interest. The fund might do this, for example, in order to gain or reduce its
exposure to fixed interest rate payments under certain market conditions. To the
extent, however, the fund does not own the underlying obligation, the fund will
maintain, in a segregated account with its custodian bank, cash or marketable
securities with an aggregate value equal to the amount of the fund's outstanding
swap obligation.

Interest rate swaps permit the party seeking a floating rate obligation the
opportunity to acquire the obligation at a lower rate than is directly available
in the credit market, while permitting the party desiring a fixed rate
obligation the opportunity to acquire a fixed rate obligation, also frequently
at a price lower than is available in the capital markets. The success of the
transaction depends in large part on the availability of fixed rate obligations
at a low enough coupon rate to cover the cost involved.

OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES Although the fund had no
present intention of investing in options, futures and options on financial
futures, the fund has the authority to enter into these transactions. the fund
may write (sell) covered put and call options and buy put and call options on
securities listed on a national securities exchange and in the over-the-counter
("OTC") market. Additionally, the fund may "close out" options it has entered
into.

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<PAGE>

A call option gives the option holder the right to buy the underlying security
from the option writer at the option exercise price at any time prior to the
expiration of the option. A put option gives the option holder the right to sell
the underlying security to the option writer at the option exercise price at any
time prior to the expiration of the option. The OTC market is the
dealer-to-dealer market in securities, in this case, option securities in which
the fund may buy or sell.

WRITING COVERED CALL AND PUT OPTIONS ON SECURITIES. The fund may write options
to generate additional income and to hedge its portfolio against market or
exchange rate movements. The writer of covered calls gives up the potential for
capital appreciation above the exercise price of the option should the
underlying stock rise in value. If the value of the underlying stock rises above
the exercise price of the call option, the security may be "called away" and the
fund required to sell shares of the stock at the exercise price. The fund will
realize a gain or loss from the sale of the underlying security depending on
whether the exercise price is greater or less than the purchase price of the
stock. Any gain will be increased by the amount of the premium received from the
sale of the call; any loss will be decreased by the amount of the premium
received. If a covered call option expires unexercised, the fund will realize a
gain in the amount of the premium received. If, however, the stock price
decreases, the hedging benefit of the covered call option is limited to the
amount of the premium received.

A call option written by the fund is "covered" if:

o the fund owns the underlying security that is subject to the call; or

o the fund has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash consideration
held in a segregated account by its custodian bank) upon conversion or
exchange of other securities held in its portfolio.

A call option is also covered if the fund holds a call on the same security and
in the same principal amount as the call written where the exercise price of the
call held:

(a) is equal to or less than the exercise price of the call written; or

(b) is greater than the exercise price of the call written if the difference in
exercise prices is maintained by the fund in cash and marketable securities in a
segregated account with its custodian bank.

The fund may write options in connection with "buy-and-write" transactions; that
is, the fund may purchase a security and then write a call option against that
security. The exercise price of the call will depend upon the expected price
movement of the underlying security. The exercise price of a call option may be
below ("in-the-money"), equal to ("at-the-money"), or above ("out-of-the-money")
the current value of the underlying security at the time the option is written.

The writer of covered puts retains the risk of loss should the underlying
security decline in value. If the value of the underlying stock declines below
the exercise price of the put option, the security may be "put to" the fund and
the fund required to buy the stock at the exercise price. The fund will incur an
unrealized loss to the extent that the current market value of the underlying
security is less than the exercise price of the put option. However, the loss
will be offset at least in

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part by the premium received from the sale of the put. If a put option written
by the fund expires unexercised, the fund will realize a gain in the amount of
the premium received.

A put option written by the fund is "covered" if the fund maintains cash and
marketable securities with a value equal to the exercise price in a segregated
account with its custodian bank, or else holds a put on the same security and in
the same principal amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written.

The fund will realize a profit from a closing transaction if the cost of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option. The fund will realize a loss from
a closing transaction if the cost of the transaction is more than the premium
received from writing the option. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the closing transaction of a
written call option is likely to be offset in whole or in part by appreciation
of the underlying security owned by the fund.

BUYING CALL AND PUT OPTIONS ON SECURITIES. The premium paid by the buyer of an
option will reflect, among other things, the relationship of the exercise price
to the market price and the volatility of the underlying security, the remaining
term of the option, supply and demand and interest rates.

The fund may buy call options on securities that it intends to buy in order to
limit the risk of a substantial increase in the market price of the security
before the purchase is effected. The fund may also buy call options on
securities held in its portfolio and on which it has written call options.

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The fund may buy put options. As the holder of a put option, the fund has the
right to sell the underlying security at the exercise price at any time during
the option period. The fund may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire.

The fund may buy a put option on an underlying security ("a protective put")
owned by the fund as a hedging technique in order to protect against an
anticipated decline in the value of the security. Such hedge protection is
provided only during the life of the put option when the fund, as the holder of
the put option, is able to sell the underlying security at the put exercise
price, regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in order
to protect unrealized appreciation of a security when the manager finds it
desirable to continue to hold the security because of tax considerations. The
premium paid for the put option and any transaction costs would reduce any
short-term capital gain that may be available for distribution when the security
is eventually sold.

The fund may also buy put options at a time when it does not own the underlying
security. If a fund buys a put option on a security it does not own, the fund
seeks to benefit from a decline in the market price of the underlying security.
If the put option is not sold when it has remaining value, and if the market
price of the underlying security remains equal to or greater than the exercise
price during the life of the put option, the fund will lose its entire
investment in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs, unless the put option is sold in a closing sale transaction.

OVER-THE-COUNTER ("OTC") OPTIONS. The fund may write covered put and call
options and buy put and call options that trade in the OTC market to the same
extent that it may engage in exchange traded options. OTC options differ from
exchange traded options in certain material respects.

OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from market
makers. OTC options are available for a greater variety of securities and in a
wider range of expiration dates and exercise prices, however, than exchange
traded options and the writer of an OTC option is paid the premium in advance by
the dealer.

There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. The fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it. The
fund may suffer a loss if it is not able to exercise or sell its position on a
timely basis. When the fund writes an OTC option, it generally can close out
that option prior to its expiration only by entering into a closing purchase
transaction with the dealer with which the fund originally wrote the option. If
the fund as a covered call option writer is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.

The fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The fund and the manager
disagree with this position. Nevertheless, pending a

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change in the staff's position, the fund will treat OTC options and "cover"
assets as subject to the fund's limitation on illiquid securities.

OPTIONS ON STOCK INDICES. The fund may also buy and sell both call and put
options on stock indices in order to hedge against the risk of market or
industry-wide stock price fluctuations or to increase income to the fund. Call
and put options on stock indices are similar to options on securities except
that, rather than the right to buy or sell stock at a specified price, options
on a stock index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the underlying stock index is
greater (or less, in the case of puts) than the exercise price of the option.
This amount of cash is equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars multiplied by a
specified number. Thus, unlike stock options, all settlements are in cash, and
gain or loss depends on the price movements of the underlying index rather than
the price movements of an individual stock.

When the fund writes an option on a stock index, the fund may cover the option
by owning securities whose price changes, in the opinion of the manager, are
expected to be similar to those of the index, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. The fund may also cover by establishing a
segregated account containing cash or marketable securities with its custodian
bank in an amount at least equal to the market value of the underlying stock
index. The fund will maintain the account while the option is open or it will
otherwise cover the transaction.

FORWARD CONVERSIONS. In a forward conversion, the fund buys securities and
writes call options and buys put options on such securities. By purchasing puts,
the fund protects the underlying security from depreciation in value. By selling
calls on the same security, the fund receives premiums which may offset part or
all of the cost of purchasing the puts while foregoing the opportunity for
appreciation in the value of the underlying security. The fund will not exercise
a put it has purchased while a call option on the same security is outstanding.

Although it is generally intended that the exercise price of put and call
options would be identical, situations might occur in which some option
positions are acquired with different exercise prices. Therefore, the fund's
return may depend in part on movements in the price of the underlying security.

SPREAD AND STRADDLE OPTIONS TRANSACTIONS. In "spread" transactions, the fund
buys and writes a put or buys and writes a call on the same underlying security
with the options having different exercise prices and/or expiration dates. In
"straddles," the fund purchases or writes combinations of put and call options
on the same security. When the fund engages in spread and straddle transactions,
it seeks to profit from differences in the option premiums paid and received and
in the market prices of the related options positions when they are closed out
or sold. Because these transactions require the fund to buy and/or write more
than one option simultaneously, the fund's ability to enter into such
transactions and to liquidate its positions when necessary or deemed advisable
may be more limited than if the fund was to buy or sell a single option.
Similarly, costs incurred by the fund in connection with these transactions will
in many cases be greater than if the fund was to buy or sell a single option.

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FUTURES CONTRACTS. The fund may enter into contracts to buy or sell futures
contracts based upon financial instruments ("financial futures"). Financial
futures contracts are commodity contracts that obligate the purchase or seller
to take or make delivery of a specified quantity of a financial instrument, such
as a security, or the cash value of a securities index during a specified future
period at a specified price. A "sale" of a futures contract means the
acquisition of a contractual obligation to deliver the securities called for by
the contract at a specified price on a specified date. A "purchase" of a futures
contract means the acquisition of a contractual obligation to acquire the
securities called for by the contract at a specified price on a specified date.
Futures contracts have been designed by exchanges that have been designated
"contracts markets" by the Commodity Futures Trading Commission and must be
executed through a futures commission merchant, or brokerage firm, that is a
member of the relevant contract market. Existing contract markets for futures
contracts on debt securities include the Chicago Board of Trade, the New York
Cotton Exchange, the Mid-America Commodity Exchange (the "MCE"), and
International Money Market of the Chicago Mercantile Exchange (the "IMM").
Existing contract markets for futures contracts on currency include the MCE, the
IMM and the London International Financial Futures Exchange. The exchanges
guarantee performance of the contracts as between the clearing members of the
exchange.

The fund may enter into futures contracts on foreign currencies, interest rates,
or on debt securities that are backed by the full faith and credit of the U.S.
Government, such as long-term U.S. Treasury bonds, Treasury notes, Government
National Mortgage Association modified pass-through mortgage-backed securities,
and three-month U.S. Treasury bills. The fund may also enter into futures
contracts on corporate securities and non-U.S. Government debt securities, but
such futures contracts are not currently available.

At the same time a futures contract is purchased or sold, the fund must allocate
cash or securities as a deposit payment ("initial deposit"). The fund may not
commit more than 5% of its total assets to initial margin deposits on futures
contracts. Daily thereafter, the futures contract is valued and the payment of
"variation margin" may be required since each day the fund would provide or
receive cash that reflects any decline or increase in the contract's value.

At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.

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<PAGE>

with the exchange on which the contracts are traded. The fund will incur
brokerage fees when it buys or sells financial futures.

The fund will not engage in transactions in futures contracts for speculation.
Futures contracts will be used as a hedge against changes resulting from market
conditions in the values of its securities or securities that it intends to buy
or to attempt to protect the fund from fluctuations in price of portfolio
securities without actually buying or selling the underlying security. When the
fund buys futures contracts or related call options, marketable instruments
equal to the difference between the fluctuating market value of such futures
contract and the aggregate value of the initial and variation margin payments
made by the fund will be deposited in a segregated account with the custodian
bank to collateralize such long positions.

OPTIONS ON FUTURES CONTRACTS. The fund is permitted to purchase and write
options on futures contracts for hedging purposes only. The purchase of a call
option on a futures contract is similar in some respects to the purchase of a
call option on an individual security or currency. Depending on the price of the
option compared to either the price of the futures contract upon which it is
based or the price of the underlying securities or currency, the option may be
less risky than direct ownership of the futures contract or the underlying
securities or currency. As with the purchase of futures contracts, when the fund
is not fully invested, it may purchase a call option on a futures contract to
hedge against a market advance due to declining interest rates or appreciation
in the value of a foreign currency against the U.S. dollar.

If the fund writes a call option on a futures contract and the futures price at
expiration of the option is below the exercise price, the fund will retain the
full amount of the option premium, which may provide a partial hedge against any
decline that may have occurred in the value of the fund's holdings. If the
futures price at expiration of the option is higher than the exercise price, the
fund will retain the full amount of the option premium, which may provide a
partial hedge against any increase in the price of securities that the fund
intends to purchase. If a put or call option the fund has written is exercised,
the fund will incur a loss that will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, The
fund's losses from existing options on futures may be affected by changes in the
value of its portfolio securities.

BOND INDEX FUTURES AND OPTIONS ON SUCH FUTURES The fund may buy and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The fund reserves the right to conduct futures and options
transactions based on an index that may be developed in the future to correlate
with price movements in certain categories of debt securities. The fund's
investment strategy in employing futures contracts based on an index of debt
securities may be similar to that used by it in other financial futures
transactions. The fund may also buy and write put and call options on such index
futures and enter into closing transactions with respect to such options.

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<PAGE>

The fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset a possible decrease in market value of its
equity securities. When the fund is not fully invested in stocks and anticipates
a significant market advance, it may buy stock index futures in order to gain
rapid market exposure that may in part or entirely offset increases in the cost
of common stocks that it intends to buy.

OPTIONS ON STOCK INDEX FUTURES. The fund may buy and sell call and put options
on stock index futures to hedge against risks of market price fluctuations. The
need to hedge against these risks will depend on the extent of diversification
of the fund's common stock portfolio and the sensitivity of such investments to
factors influencing the stock market as a whole.

Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy or sell stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the writer of the option will deliver to the holder of
the option the accumulated balance in the writer's futures margin account
representing the amount that the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised on the last trading day before the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing price of the futures contract on
the expiration date.

INTEREST RATE FUTURES AND RELATED OPTIONS. The fund may buy and sell interest
rate futures contracts and options on these futures contracts. The fund will
enter into interest rate futures contracts in order to protect its portfolio
securities from fluctuations in interest rates without necessarily buying or
selling the underlying fixed-income securities.

The fund may also buy and write put and call options on interest rate futures
and enter into closing transactions with respect to such options.

ILLIQUID SECURITIES

The fund may invest in securities that cannot be offered to the public for sale
without first being registered under the Securities Act of 1933 ("restricted
securities"), or in other securities which, in the opinion of the Board, may be
illiquid. No restricted or illiquid securities will be acquired by the fund if
such acquisition would cause the aggregate value of illiquid assets to exceed
the limit prescribed by the SEC, which is up to 15% of net assets.

Illiquid securities are generally securities that cannot be sold within seven
days in the normal course of business at approximately the amount at which the
fund has valued them. Subject to the percentage limitation on illiquid
securities, the Board has authorized the fund to invest in restricted securities
where such investment is consistent with the fund's investment goal. The Board
has authorized these securities to be considered liquid to the extent the
investment manager determines on a daily basis that there is a liquid
institutional or other market for such securities - for example, restricted
securities which may be freely transferred among qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended, and for
which a liquid institutional market has developed. In spite of the managers'
determinations in this regard, the Board will remain responsible for such
determinations and will consider appropriate action,

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<PAGE>

consistent with the fund's goals and policies, if the security should become
illiquid after purchase. In determining whether a restricted security is
properly considered a liquid security, the investment manager and the Board will
take into account, among others, the following factors: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers;
(iii) dealer undertakings to make a market in the security; and (iv) the nature
of the security and the nature of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of transfer). To the extent the fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the fund may be increased if
qualified institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts.

TEMPORARY INVESTMENTS

When the manager believes that the securities trading markets or the economy
are experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist, it may invest the fund's portfolio in a temporary
defensive manner. Under such circumstances, the fund may invest up to 100% of
assets in short-term debt instruments. The fund may also invest cash, including
cash resulting from purchases and sales of fund shares, temporarily in
short-term debt instruments. Short-term debt instruments include high-grade
commercial paper, repurchase agreements, and other money market equivalents. To
the extent permitted by exemptions granted under the 1940 Act and the fund's
other investment policies and restrictions, the fund may also invest in shares
of one or more money market funds managed by Franklin Advisers, Inc. or its
affiliates.

RISKS

DEBT SECURITIES

GINNIE MAE yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. Government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value of a
Ginnie Mae will generally decline. In a period of declining interest rates, it
is more likely that mortgages contained in Ginnie Mae pools will be prepaid,
thus reducing the effective yield. This potential for prepayment during periods
of declining interest rates may reduce the general upward price increases of
Ginnie Maes as compared to the increases experienced by noncallable debt
securities over the same periods. In addition, any premium paid on the purchase
of a Ginnie Mae will be lost if the obligation is prepaid. Of course, price
changes of Ginnie Maes and other securities held by the fund will have a direct
impact on the net asset value per share of the fund.

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<PAGE>

INTEREST RATE To the extent the fund invests in debt securities, changes in
interest rates in any country where the fund is invested will affect the value
of the fund's portfolio and its share price. Rising interest rates, which often
occur during times of inflation or a growing economy, are likely to have a
negative effect on the value of the fund's shares. Of course, interest rates
throughout the world have increased and decreased, sometimes very dramatically,
in the past. These changes are likely to occur again in the future at
unpredictable times.

LOWER-RATED SECURITIES The fund may invest in non-investment grade securities,
including such securities issued by foreign companies and governments. Because
the fund may invest in securities below investment grade, an investment in the
fund is subject to a higher degree of risk than an investment in the fund that
invests primarily in higher-quality securities. You should consider the
increased risk of loss to income and principal that is present with an
investment in higher risk securities, such as those in which the fund may
invest. Accordingly, an investment in the fund should not be considered a
complete investment program and should be carefully evaluated for its
appropriateness in light of your overall investment needs and goals.

The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.

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

Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.

The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's net asset value. Defaulted securities tend
to lose much of their value before they default. Thus, the fund's net asset
value may be adversely affected before an issuer defaults. In addition, the fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.

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<PAGE>

High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, the manager may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more difficult
for the fund to manage the timing of its income. To generate cash for
distributions, the fund may have to sell portfolio securities that it otherwise
may have continued to hold or use cash flows from other sources, such as the
sale of fund shares.

Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the fund's portfolio.

The fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The fund may also incur special costs in disposing of restricted securities,
although the fund will generally not incur any costs when the issuer is
responsible for registering the securities.

The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any other
person concerning the acquisition of these securities.

The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993 depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to factors such as these, the ultimate price of any security
generally reflects the true operating results of the issuer. Factors adversely
impacting the market value of high yield securities may lower the fund's net
asset value. The fund relies on the manager's judgment, analysis and experience
in evaluating the creditworthiness of an issuer. In this evaluation, the manager
takes into consideration, among other things, the issuer's financial

25
<PAGE>

resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.

The credit risk factors above also apply to lower-quality zero coupon, deferred
interest and pay-in-kind securities. These securities have an additional risk,
however, because unlike securities that pay interest throughout the time until
maturity, the fund will not receive any cash until the cash payment date. If the
issuer defaults, the fund may not obtain any return on its investment.

Zero coupon or deferred interest securities are debt securities that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face amount
or par value. The discount varies depending on the time remaining until maturity
or the cash payment date, as well as prevailing interest rates, liquidity of the
security, and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, typically decreases as the
final maturity or cash payment date approaches.

The value of zero coupon securities is generally more volatile than the value of
other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a greater
degree than other fixed-income securities having similar maturates and credit
quality.

Certain of the high yielding, fixed-income securities in which the fund may
invest may be purchased at a discount. When held to maturity or retired, these
securities may include an element of capital gain. Capital losses may be
realized when securities purchased at a premium, that is, in excess of their
stated or par value, are held to maturity or are called or redeemed at a price
lower than their purchase price. Capital gains or losses also may be realized
upon the sale of securities.

FOREIGN SECURITIES

The value of foreign (and U.S.) securities is affected by general economic
conditions and individual company and industry earnings prospects. While foreign
securities may offer significant opportunities for gain, they also involve
additional risks that can increase the potential for losses in the fund. These
risks can be significantly greater for investments in emerging markets.
Investments in depositary receipts also involve some or all of the risks
described below.

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<PAGE>

settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. 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
domestic issuers in U.S. courts.

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

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

<PAGE>

without adequate compensation, and there can be no assurance that such
expropriation will not occur in the future. In the event of expropriation, the
fund could lose a substantial portion of any investments it has made in the
affected countries. Further, no accounting standards exist in certain emerging
countries. Finally, even though the currencies of some emerging countries, such
as certain Eastern European countries may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to the fund's shareholders. Repatriation, that is, the return to an
investor's homeland, of investment income, capital and proceeds of sales by
foreign investors may require governmental registration or approval in some
developing countries. Delays in or a refusal to grant any required governmental
registration or approval for such repatriation could adversely affect the fund.
Further, the economies of emerging countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.

CURRENCY Many of the investments in the fund are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value of
what the fund owns, and the fund's share price. In addition, changes in foreign
currency exchange rates will affect the fund's income and distributions to
shareholders. To the extent that the manager intends to hedge currency risk in
the fund, the fund endeavors to buy and sell foreign currencies on as favorable
a basis as practicable. Some price spread in currency exchange (to cover service
charges) may be incurred, particularly when the fund changes investments from
one country to another or when proceeds of the sale of shares in U.S. dollars
are used for the purchase of securities in foreign countries. Some countries may
adopt policies that would prevent the fund from transferring cash out of the
country or withhold portions of interest and dividends at the source.

The fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Certain
currencies may not be internationally traded.

Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which the fund's portfolio
securities are denominated may have a detrimental impact on the fund. Where the
exchange rate for a currency declines materially after the fund's income has
been accrued and translated into U.S. dollars, the fund may need to redeem
portfolio securities to make required distributions. Similarly, if an exchange
rate declines between the time the fund incurs expenses in U.S. dollars and the
time such expenses are paid, the fund will have to convert a greater amount of
the currency into U.S. dollars in order to pay the expenses.

Through the fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the fund's investments.

28
<PAGE>

The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.

The Board of Trustees consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions that would
affect the liquidity of the fund's assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed.

The Board also considers the degree of risk involved through the holding of
portfolio securities in domestic and foreign securities depositories. However,
in the absence of willful misfeasance, bad faith, or gross negligence on the
part of the fund's manager, any losses resulting from the holding of the fund's
portfolio securities in foreign countries and/or with securities depositories
will be at the risk of the shareholders. No assurance can be given that the
board of trustees' appraisal of the risks will always be correct or that such
exchange control restrictions or political acts of foreign governments might not
occur.

DERIVATIVE SECURITIES

The fund's transactions in options, futures, and options on futures involve
certain risks. These risks include, among others, the risk that the
effectiveness of a transaction depends on the degree that price movements in the
underlying securities, index, or currency correlate with price movements in the
relevant portion of the fund's portfolio. The fund bears the risk that the
prices of its portfolio securities will not move in the same amount as the
option or future it has purchased, or that there may be a negative correlation
that would result in a loss on both the underlying securities and the derivative
security.

Similarly, there can be no assurance that a continuous liquid secondary market
will exist for any particular OTC option at any specific time. Consequently, the
fund may be able to realize the

29
<PAGE>

value of an OTC option it has purchased only by exercising it or by entering
into a closing sale transaction with the dealer that issued it. When the fund
writes an OTC option, it generally can close out that option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the fund originally wrote it.

EURO RISK

On January 1, 1999, the European Monetary Union (EMU) introduced a new single
currency, the euro, which will replace the national currency for participating
member countries. The transition and the elimination of currency risk among EMU
countries may change the economic environment and behavior of investors,
particularly in European markets. While the implementation of the euro could
have a negative effect on the fund, the fund's manager and its affiliated
services providers are taking steps they believe are reasonably designed to
address the euro issue.

INVESTMENT RESTRICTIONS

The fund has adopted the following restrictions as fundamental policies. This
means they may only be changed if the change is approved by (i) more than 50% of
the fund's outstanding shares or (ii) 67% or more of the fund's shares present
at a shareholder meeting if more than 50% of the fund's outstanding shares are
represented at the meeting in person or by proxy, whichever is less.

The fund may not:

2. act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares;

3. make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance
with its investment objectives and policies, and (c) to the extent the
entry into a repurchase agreement is deemed to be a loan. The fund may
also make loans to affiliated investment companies to the extent
permitted by the 1940 Act or any exemptions therefrom which may be
granted by the U.S. Securities and Exchange Commission;

30
<PAGE>

6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than secutities issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities or securities of other investment companies.)

OFFICERS AND TRUSTEES

The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.

Frank H. Abbott, III (79)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE

President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and

31
<PAGE>

FORMERLY, Director, MotherLode Gold Mines Consolidated (gold mining) (until
1996) and Vacu-Dry Co. (food processing) (until 1996).

Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE

Edward J. Bonach (46)
Allianz Life Insurance Company, 1750 Hennepin Avenue
Minneapolis, MN 55403-2195
TRUSTEE

Robert F. Carlson (72)
2120 Lambeth Way, Carmichael, CA 95608
TRUSTEE

S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE

Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 49 of the investment companies in the Franklin Templeton
Group of Funds.

*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE

32
<PAGE>

officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies
in the Franklin Templeton Group of Funds.

*Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE

*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE

Frank W.T. LaHaye (71)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE

Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE

33
<PAGE>

*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT

Martin L. Flanagan (6/28/60)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY

Edward V. McVey (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT

Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.

34
<PAGE>

*This board member is considered an "interested person" under federal securities
laws.

Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.

The Trust pays noninterested board members $675 per month plus $550 per meeting
attended. Board members who serve on the audit committee of the Trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the Trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members may also serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the Trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the Trust and by
the Franklin Templeton Group of Funds.

NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
NAME TRUST1 ($) FUNDS2 ($) EACH SERVES3
- --------------------------------------------------------------------------------

Frank H. Abbott 156,060 27
Harris Ashton 363,165 47
Robert F. Carlson 89.690 9
S. Joseph Fortunato 363.238 49
Frank W.T. LaHaye 138,700 27
Gordon Macklin 363,165 47

1. For the fiscal year ended December 31, 1999.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 53 registered investment companies, with approximately 155 U.S. based
funds or series.

35
<PAGE>

Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.

MANAGEMENT AND OTHER SERVICES

MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
(Advisers), a wholly owned subsidiary of Franklin Resources, Inc. (Resources), a
publicly owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Templeton Investment Counsel, Inc. is the fund's
subadviser.

36
<PAGE>

MANAGEMENT FEES The fund pays the manager a fee equal an annual rate of:

o 0.425% of the value of net assets up to and including $500 million;

o 0.325% of the value of net assets over $500 million up to and including $1
billion;

o 0.280% of the value of net assets over $1 billion up to and including $1.5
billion;

o 0.235% of the value of net assets over $1.5 billion up to and including $6.5
billion;

o 0.215% of the value of net assets over $6.5 billion up to and including
$11.5 billion;

o 0.200% of the value of net assets over $11.5 billion up to and including
$16.5 billion;

o 0.190% of the value of net assets over $16.5 billion up to and including $19
billion;

o 0.180% of the value of net assets over $19 billion up to and including $21.5
billion; and

o 0.170% of the value of net assets in excess of $21.5 billion.

The fee is computed according to the terms of the management agreement. Each
class of the fund's shares pays its proportionate share of the fee.

ADMINISTRATION FEES The fund pays FT Services a monthly fee equal to an annual
rate of 0.20% of the average daily net assets of the fund during the preceding
month.

CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.

37
<PAGE>

PORTFOLIO TRANSACTIONS

The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.

38
<PAGE>

unless it is determined that a better price or execution may be obtained by
using the services of a broker.

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

DISTRIBUTIONS AND TAXES

EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses

39
<PAGE>

realized by the fund on the sale of debt securities are generally treated as
ordinary losses by the fund. These gains when distributed will be treated as
ordinary dividends, and any losses will reduce the fund's ordinary income
otherwise available for distribution. This treatment could increase or reduce
the fund's ordinary income distributions, and may cause some or all of the
fund's previously distributed income to be classified as a return of capital.

The fund may be subject to foreign withholding taxes on income from certain of
its foreign securities.

ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS

40
<PAGE>

shareholder liability is limited to the unlikely circumstance in which both
inadequate insurance exists and the fund itself is unable to meet its
obligations.

The fund currently offers two classes of shares, class 1 and class 2. Additional
classes of shares may be offered in the future. The full title of each series
and class is:

Franklin Strategic Income Securities Fund - Class 1
Franklin Strategic Income Securities Fund - Class 2

Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the Trust for matters that affect the Trust as a whole. Additional series may be
offered in the future.

The Trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.

The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help shareholders communicate with other shareholders about the removal of a
board member. A special meeting may also be called by the board in its
discretion. For information regarding voting privileges of Contract Owners, see
the insurance company separate account SAI.

As of February 1, 2000, Board members and officers, as a group, owned less than
1%, of record or beneficially, of the outstanding shares of the Trust.

PRICING SHARES
- --------------------------------------------------------------------------------

When they buy and sell shares, the Trust's shareholders pay and receive the net
asset value (NAV) per share.

The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.

41
<PAGE>

THE UNDERWRITER

Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.

DISTRIBUTORS is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of

42
<PAGE>

printing sales material and prospectuses used to offer shares to the public. The
fund pays the expenses of preparing and printing amendments to its registration
statements and prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.

Distributors may be entitled to reimbursement under the rule 12b-1 plans, as
discussed below. Except as noted, Distributors receives no other compensation
from the fund for acting as underwriter.

DISTRIBUTION AND SERVICE (12B-1) FEES The board has adopted a plan pursuant to
rule 12b-1 for the fund's class 2. The plan is designed to benefit the fund and
its shareholders and thus the fund's contract-owners or plan participants. The
plan is expected to, among other things, increase advertising of the fund,
encourage sales of the fund and service to its shareholders, and increase or
maintain assets of the fund so that certain fixed expenses may be spread over a
broader asset base, resulting in lower per share expense ratios. In addition, a
positive cash flow into the fund is useful in managing the fund because the
manager has more flexibility in taking advantage of new investment opportunities
and handling shareholder redemptions.

The plan has been approved according to the provisions of Rule 12b-1. The terms
and provisions of the plan also are consistent with Rule 12b-1.

PERFORMANCE

43
<PAGE>

are based on the standardized methods of computing performance mandated by the
SEC. Performance figures reflect rule 12b-1 fees from the date of the plan's
implementation. An explanation of these and other methods used by the fund to
compute or express performance follows.

Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the limited
historical period used.

P(1+T)n = ERV

where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period

44
<PAGE>

value per share at the end of such period. In addition, aggregate, cumulative
and average total return information for the fund over different periods of time
may also be advertised. Except as stated above, the fund will use the same
methods for calculating its performance.

o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.

45
<PAGE>

o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.

o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.

o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.

o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.

o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.

o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.

o Bond Buyer 20 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.

46
<PAGE>

o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance
statistics over specified time periods.

o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P

MISCELLANEOUS INFORMATION
- --------------------------------------------------------------------------------

47
<PAGE>

The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services approximately 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $[___] billion in assets under management for more than [_] million U.S.
based mutual fund shareholder and other accounts. The Franklin Templeton Group
of Funds offers [___] U.S. based open-end investment companies to the public.
The fund may identify itself by its NASDAQ symbol or CUSIP number.

DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------

PREFERRED STOCKS RATINGS

STANDARD & POOR'S RATINGS GROUP (S&P(R) )

AAA: This is the highest rating that may be assigned by S&P to a preferred stock
issue and indicates an extremely strong capacity to pay the preferred stock
obligations.

48
<PAGE>

these issues will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.

CC: The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.

C: A preferred stock rated C is a non-paying issue.

D: A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.

NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.

CORPORATE BOND RATINGS

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

Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very

49
<PAGE>

moderate and, thereby, not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.

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

Ca: Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.

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

S&P

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

A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.

50
<PAGE>

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

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

COMMERCIAL PAPER RATINGS

MOODY'S

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

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

S&P

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

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

<PAGE>

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
(formerly Franklin Valuemark Funds)
File Nos. 33-23493 & 811-5583

FORM N-1A
PART C
OTHER INFORMATION

ITEM 23. EXHIBITS

The following exhibits are incorporated by reference to the previously filed
documents indicated below, except as noted:

(a) Articles of Incorporation.

(i) Agreement and Declaration of Trust dated April 20,
1988
Filing: Post-Effective Amendment No. 16 to
Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment of Agreement and Declaration
of Trust dated October 21, 1988
Filing: Post-Effective Amendment No. 16 to
Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Certificate of Amendment of Agreement and Declaration
of Trust
Filing: Post-Effective Amendment No. 26
File No. 33-23493
Filing Date: November 30, 1998

(b) By-Laws.

(i) By-Laws
Filing: Post-Effective Amendment No. 16 to
Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment of By-Laws dated May 16,
1995
Filing: Post-Effective Amendment No. 16 to
Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995

Not Applicable

(d) Investment Advisory Contracts.

(i) Management Agreement between the Fund and Franklin
Advisers, Inc. dated

1
<PAGE>

January 24, 1989
Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Addendum to Investment Management Agreement dated
March 14, 1989
Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Management Agreement between the Fund, on behalf of
International Equity Fund and Pacific Growth Fund,
and Franklin Advisers, Inc. dated January 22, 1992
Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iv) Sub-Advisory Agreement between Franklin Advisers,
Inc. and Templeton Investment Counsel, Inc. dated
January 1, 1993
Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(v) Management Agreement between the Fund on behalf of
Franklin Rising Dividends Fund, and Franklin Advisory
Services, Inc. dated July 1, 1996
Filing: Post-Effective Amendment No. 20 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(vi) Investment Management Agreement between the Fund, on
behalf of the Templeton Global Global Growth, and
Templeton, Galbraith & Hansberger Ltd. dated March
15, 1994
Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(vii) Sub-Advisory Agreement between Franklin Advisers,
Inc. and Templeton Investment Counsel, on behalf of
Global Income Fund dated August 1, 1994
Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(viii) Investment Management Agreement between the Fund, on
behalf of Templeton Global Asset Allocation Fund, and
Templeton Galbraith & Hansberger, Ltd. dated April
19, 1995
Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ix) Sub-Advisory Agreement between Templeton Galbraith &
Hansberger, Ltd. and Templeton Investment Counsel,
Inc., on behalf of Templeton Global Asset Allocation
Fund dated April 19, 1995

2
<PAGE>

Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(x) Management Agreement between the Fund, on behalf of
Small Cap Fund dated October 11, 1995
Filing: Post-Effective Amendment No. 20 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(xi) Investment Management Agreement between the Fund, on
behalf of Templeton Developing Markets Equity Fund,
dated October 1, 1995
Filing: Post-Effective Amendment No. 17 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: October 27, 1995
(xii) Investment Management Agreement between the Fund, on
behalf of International Smaller Companies Fund and
Templeton Investment Counsel, Inc. dated January 18,
1996
Filing: Post-Effective Amendment No. 18 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 14, 1996
(xiii) Management Agreement between the Fund, on behalf of
Capital Growth Fund and Franklin Advisers, Inc. dated
January 18, 1996
Filing: Post-Effective Amendment No. 18 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 14, 1996
(xiv) Amendment to Management Agreement between the Fund
and Franklin Advisers, Inc. dated August 1, 1995
Filing: Post-Effective Amendment No. 20 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(xv) Management Agreement between the Fund, on behalf of
Mutual Discovery Securities Fund and Mutual Shares
Securities Fund, and Franklin Mutual Advisers, Inc.
dated October 18, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1997
(xvi) Management Agreement between the Fund, on behalf of
Global Health Care Securities Fund dated December 9,
1997
Filing: Post-Effective Amendment No. 23 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1998
(xvii) Management Agreement between the Fund, on behalf of
Value Securities Fund dated December 9, 1997
Filing: Post-Effective Amendment No. 23 to
Registration Statement of Fund on Form N-1A

3
<PAGE>

File No. 33-23493
Filing Date: February 28, 1998
(xviii) Amendment to Investment Management Agreement between
the Fund, on behalf of Templeton Developing Markets
Equity Fund, and Templeton Asset Management Ltd.
dated October 1, 1995
Filing: Post-Effective Amendment No.23 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 12, 1998
(xix) Addendum to Investment Management Agreement between
the Fund, on behalf of Templeton Developing Markets
Equity Fund, and Templeton Asset Management Ltd.
dated December 9, 1997
Filing: Post-Effective Amendment No.24 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 30, 1998
(xx) Investment Advisory Agreement between the Fund, on
behalf of Franklin Aggressive Growth Securities Fund,
and Franklin Advisers, Inc. dated July 15, 1999
Filing: Post-Effective Amendment No. 30 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: July 30, 1999
(xxi) Form of Investment Advisory Agreement between the
Fund, on behalf of Franklin Strategic Income Fund,
and Franklin Advisers, Inc.
Filing: Registration Statement of the Fund on
Form N-14
File No. 33-23493
Filing Date: November 3, 1999
(xxii) Form of Sub-Advisory Agreement between Franklin
Advisers, Inc., on behalf of Franklin Strategic
Income Fund, and Templeton Investment Counsel, Inc.
(xxiii) Form of Investment Advisory Agreement between the
Fund, on behalf of Franklin S&P 500 Index Fund, and
Franklin Advisers, Inc.
Filing: Registration Statement of the Fund on
Form N-14
File No. 33-23493
Filing Date: November 3, 1999
(xxiv) Form of Sub-Advisory Agreement between Franklin
Advisers, Inc., on behalf of Franklin S&P 500 Index
Fund, and State Street Global Advisors, a division of
State Street Bank and Trust Company
(xxv) Form of Investment Advisory Agreement between the
Fund, on behalf of Franklin Technology Securities
Fund, and Franklin Advisers, Inc.

(e) Underwriting Contracts.

(i) Distribution Agreement between the Fund and
Franklin/Templeton Distributors, Inc.
Filing: Post Effective Amendment No.26
File No. 33-23493
Filing Date: November 30, 1998

(f) Bonus Or Profit Sharing Contracts.

Not Applicable

4
<PAGE>

(g) Custodian Agreements.

(i) Foreign Exchange Netting Agreement between Franklin
Valuemark Funds, on behalf of the International
Equity Fund, and Morgan Guaranty Trust Company of New
York, dated March 19, 1992
Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Foreign Exchange Netting Agreement between Franklin
Valuemark Funds, on behalf of the Pacific Growth
Fund, and Morgan Guaranty Trust Company of New York,
dated March 19, 1992
Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Custody Agreement between the Fund, on behalf of the
Templeton Developing Markets Equity Fund and the
Templeton Global Growth Fund, and The Chase Manhattan
Bank, N.A. dated March 15, 1994
Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iv) Master Custody Agreement between the Fund and the
Bank of New York, dated February 16, 1996
Filing: Post-Effective Amendment No. 19 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(v) Terminal Link Agreement between the Fund and Bank of
New York dated February 16, 1996.
Filing: Post-Effective Amendment No. 19 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(vi) Amendment to Global Custody Agreement between the
Fund and The Chase Manhattan Bank, N.A. dated April
1, 1996
Filing: Post-Effective Amendment No. 23 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997
(vii) Amendment to Master Custody Agreement between the
Fund and the Bank of New York, dated April 1, 1996
Filing: Post-Effective Amendment No. 23 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997
(viii) Letter Agreement between the Fund and the Bank of New
York, dated April 22, 1996
Filing: Post-Effective Amendment No. 19 to
Registration Statement of the Fund on Form N-1A

5
<PAGE>

File No. 33-23493
Filing Date: April 24, 1996
(ix) Custody Agreement between the Fund, on behalf of
Mutual Discovery Securities Fund and Mutual Shares
Securities Fund, and the State Street Bank and Trust
Company dated November 8, 1996
Filing: Post-Effective Amendment No. 23 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997

(h) Other Material Contracts.

(i) Fund Administration Agreement between the Fund, on
behalf of International Smaller Companies Fund, and
Franklin Templeton Services, Inc., dated October 1,
1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1997
(ii) Fund Administration Agreement between the Fund, on
behalf of Templeton Global Asset Allocation Fund, and
Franklin Templeton Services, Inc. dated October 1,
1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1997
(iii) Fund Administration Agreement between the Fund, on
behalf of Mutual Discovery Securities Fund and Mutual
Shares Securities Fund, and Franklin Templeton
Services, Inc., dated October 18, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1997
(iv) Fund Administration Agreement between the Fund, on
behalf of Value Securities Fund Dated December 9,
1997
Filing: Post-Effective Amendment No. 23 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1998
(v) Fund Administration Agreement between the Fund, on
behalf of Global Health Care Securities Fund, and
Franklin Templeton Services, Inc. dated December 9,
1997
Filing: Post-Effective Amendment No. 23 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1998
(vi) Fund Administration Agreement between the Fund, on
behalf of Franklin Aggressive Growth Securities Fund,
and Franklin Templeton Services, Inc. dated July 15,
1999
Filing: Post-Effective Amendment No. 30 to
Registration Statement of the Fund on Form N-1A

6
<PAGE>

File No. 33-23493
Filing Date: July 30, 1999
(vii) Fund Administration Agreement between the Fund, on
behalf of Franklin Technology Securities Fund, and
Franklin Templeton Services, Inc.

(i) Legal Opinion.

(i) Legal Opinion, Securities Act of 1933, dated February
5, 1999
Filing: Post Effective Amendment No. 27 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 25, 1999

(j) Other Opinions.

Not applicable

(k) Omitted Financial Statements.

Not Applicable

(l) Initial Capital Agreement.

(i) Letter of Understanding dated April 11, 1995
Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Letter of Understanding dated September 12, 1995
Filing: Post-Effective Amendment No. 17 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: October 27, 1996
(iii) Letter of Understanding dated April 4, 1996
Filing: Post-Effective Amendment No. 19 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(iv) Letter of Understanding dated October 21, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: October 31, 1996
(v) Letter of Understanding dated April 23, 1998
Filing: Post-Effective Amendment No. 24 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 30, 1998

(m) Rule 12b-1 Plan

7
<PAGE>

(i) Class 2 Distribution Plan pursuant to Rule 12b-1for
all series of the Fund
Filing: Post Effective Amendment No.26
File No. 33-23493
Filing Date November 30, 1998
(ii) Class 2 Distribution Plan for Franklin Aggressive
Growth Securities Fund
Filing: Post Effective Amendment No.30
File No. 33-23493
Filing Date July 30, 1999

(o) Rule 18F-3Plan.

(i) Multiple Class Plan for all series of the Fund
Filing: Post Effective Amendment No.26
File No. 33-23493
Filing Date November 30, 1998
(xxvi) Multiple Class Plan for Franklin Aggressive Growth
Securities Fund
Filing: Post-Effective Amendment No. 30 to
Registration Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: July 30, 1999

(ii) (p) Power of Attorney

(i) Power of Attorney dated July 15, 1999
Filing: Post Effective Amendment No. 1 to
Registration Statement of the Fund on Form N-14
File No. 33-23493
Filing Date: December 20, 1999

Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND

None

Item 25. INDEMNIFICATION

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Fund pursuant to the foregoing provisions, or otherwise, the Fund has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Fund of expenses incurred or
paid by a Trustee, officer or controlling person of the Fund in the successful
defense of any action, suit or proceeding) is asserted by such Trustee, officer
or controlling person in connection with securities being registered, the Fund
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court or appropriate jurisdiction the
question whether such indemnification is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.

8
<PAGE>

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER

(i) The officers and directors of the Fund's investment advisers
also serve as officers and/or directors or trustees for (1) the corporate parent
of Franklin Advisers, Inc., ("Advisers") the investment manager of 20 of the
Fund's series, Franklin Resources, Inc. ("Resources"), and/or (2) other
investment companies in the Franklin Templeton Group of Funds. For additional
information, please see Part B and Schedules A and D of Form ADV of Advisers
(SEC File 801-26292), incorporated herein by reference, which sets forth the
officers and directors of Advisers and information as to any business,
profession, vocation or employment of a substantial nature engaged in by those
officers and directors during the past two years.

(ii) Templeton Investment Counsel, Inc.

Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Resources, serves as adviser to the International Smaller
Companies Fund and as sub-adviser to certain of the Funds, furnishing to
Advisers and to Templeton Global Advisers Limited in that capacity portfolio
management services and investment research. For additional information please
see Part B and Schedules A and D of Form ADV of TICI (SEC File 801-15125),
incorporated herein by reference, which set forth the officers and directors of
TICI and information as to any business, profession, vocation of employment of a
substantial nature engaged in by those officers and directors during the past
two years.

(iii) Templeton Global Advisers Limited, formerly known as Templeton
Galbraith and Hansberger Ltd.

Templeton Global Advisers Limited (" Templeton Nassau" ), an indirect, wholly
owned subsidiary of Resources, serves as investment manager to Templeton Global
Growth Fund and Templeton Global Asset Allocation Fund. For additional
information please see Part B and Schedules A and D of Form ADV of Templeton
Nassau (SEC File 801-42343), incorporated herein by reference, which set forth
the officers and directors of Templeton Nassau and information as to any
business, profession, vocation of employment of a substantial nature engages in
by those officers and directors during the past two years.

(iv) Templeton Asset Management Ltd., formerly known as Templeton
Investment Management (Singapore) Pte Ltd.

Templeton Asset Management (" Templeton Singapore" ), an indirect, wholly owned
subsidiary of Resources, serves as investment manager to Templeton Developing
Markets Equity Fund. For information please see Part B and Schedules A and D of
Form ADV of Templeton Singapore (SEC File 801-46997), incorporated herein by
reference, which set forth the officers and directors of Templeton Singapore and
information as to any business, profession, vocation of employment of a
substantial nature engaged in by those officers and directors during the past
two years.

(v) Franklin Advisory Services, LLC, formerly Franklin Advisory
Services, Inc.

Franklin Advisory Services, LLC (" Franklin New Jersey" ), an indirect, wholly
owned subsidiary of Resources, serves as investment manager to the Rising
Dividends Fund and Value Securities Fund. For information please see Part B and
Schedules A and D of Form ADV of Franklin New Jersey (SEC File 801-51967),
incorporated herein by reference, which set forth the officers and directors of
Franklin New Jersey and information as to any business, profession, vocation of
employment of a substantial nature engaged in by those officers and directors
during the past two years.

(vi) Franklin Mutual Advisers, LLC, formerly Franklin Mutual
Advisers, Inc.

Franklin Mutual Advisers, LLC (" Mutual Advisers" ), an indirect, wholly owned
subsidiary of Resources, serves as investment manager to the Mutual Discovery
Growth Fund and the Mutual Series

9
<PAGE>

Securities Fund. For information please see Part B and Schedules A and D of Form
ADV of Mutual Advisers (SEC File 801-53068), incorporated herein by reference,
which set forth the officers and directors of Mutual Advisers and information as
to any business, profession, vocation of employment of a substantial nature
engaged in by those officers and directors during the past two years.

ITEM 27. PRINCIPAL UNDERWRITERS

a) Franklin/Templeton Distributors, Inc., (Distributors) also acts as principal
underwriter of shares of:

Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust Franklin Gold
Fund Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin Mutual Series Fund Inc.
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust Institutional Fiduciary Trust

Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund

10
<PAGE>

(b) The information required by this Item 27 with respect to each director
and officer of Distributors is incorporated by reference to Part B of this N-1A
and schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889).

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

The accounts, books or other documents required to be maintained by
Section 31(a) [15 U.S.C. 80a-30(a)] are kept by the Fund or its shareholder
services agent, Franklin Templeton Investors Services, Inc., both of whose
address is 777 Mariners Island Blvd., San Mateo, CA 94404.

ITEM 29. MANAGEMENT SERVICES

Not Applicable

ITEM 30. UNDERTAKINGS

Not Applicable

11
<PAGE>

SIGNATURES
----------

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of San Mateo and the State of California, on the
16th day of February, 2000.

FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS TRUST
(Fund)

By: /s/ KAREN C. SKIDMORE
-----------------------------
Karen C. Skidmore, Secretary

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:

/s/ CHARLES E. JOHNSON* Principal Executive Officer
- --------------------------- and Trustee
Charles E. Johnson Dated: February 16, 2000

/s/ MARTIN L. FLANAGAN* Principal Financial Officer
- --------------------------- Dated: February 16, 2000
Martin L. Flanagan

Principal Accounting Officer
- --------------------------- Dated:
Kimberly Monasterio

/s/ FRANK H. ABBOTT III* Trustee
- --------------------------- Dated: February 16, 2000
Frank H. Abbott III

/s/ HARRIS J. ASHTON* Trustee
- --------------------------- Dated: February 16, 2000
Harris J. Ashton

Trustee
- --------------------------- Dated: February 16, 2000
Edward J. Bonach

/s/ S. JOSEPH FORTUNATO* Trustee
- --------------------------- Dated: February 16, 2000
S. Joseph Fortunato

/s/ ROBERT F. CARLSON* Trustee
- --------------------------- Dated: February 16, 2000
Robert F. Carlson

/s/ CHARLES B. JOHNSON* Trustee
- --------------------------- Dated: February 16, 2000
Charles B. Johnson

/s/ RUPERT H. JOHNSON, JR.* Trustee
- --------------------------- Dated: February 16, 2000
Rupert H. Johnson, Jr.

/s/ FRANK W.T. LAHAYE* Trustee
- --------------------------- Dated: February 16, 2000
Frank W.T. LaHaye

12
<PAGE>

/s/ GORDON S. MACKLIN* Trustee
- --------------------------- Dated: February 16, 2000
Gordon S. Macklin

*BY /s/ KAREN L. SKIDMORE, ATTORNEY-IN-FACT
- ---------------------------------------------
(Pursuant to Power of Attorney previously filed)

13
<PAGE>

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX

<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION LOCATION
- ---------- ----------- --------
<S> <C> <C>
EX-99.a(i) Agreement and Declaration of Trust *
dated April 20, 1988

EX-99.a(ii) Certificate of Amendment of Agreement and *
Declaration of Trust dated October 21, 1988

EX-99.a(iii) Certificate of Amendment of Agreement *
and Declaration of Trust

EX-99.b(i) By-Laws *

EX-99.b(ii) Certificate of Amendment of By-Laws dated *
May 16, 1995

EX-99.d(i) Management Agreement between *
the Fund and Franklin Advisers, Inc. dated
January 24, 1989

EX-99.d(ii) Addendum to Investment Management *
Agreement dated March 14, 1989

EX-99.d(iii) Management Agreement between the Fund, *
on behalf of International Equity and Pacific
Growth Fund, and Franklin Advisers, Inc. dated
January 22, 1992

EX-99.d(iv) Sub-Advisory Agreement between Franklin *
Advisers, Inc. and Templeton Investment
Counsel, Inc. dated January 1, 1993

EX-99.d(v) Management Agreement between the Fund on *
behalf of Franklin Rising Dividends Fund, and
Franklin Advisory Services, Inc. dated July 1,
1996

EX-99.d(vi) Investment Management Agreement between *
the Fund, on behalf of the Templeton Global
Growth Fund, and Templeton, Galbraith &
Hansberger Ltd., dated March 15, 1994

EX-99.d(vii) Sub-Advisory Agreement between Franklin *

<PAGE>

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX

Advisers, Inc. and Templeton Investment
Counsel, on behalf of Global Income Fund dated
August 1, 1994

EX-99.d(viii) Investment Management Agreement between *
the Fund, on behalf of Templeton Global
Asset Allocation Fund, and Templeton, Galbraith
& Hansberger Ltd. dated April 19, 1995

EX-99.d(ix) Sub-Advisory Agreement between Templeton, *
Galbraith & Hansberger Ltd and Templeton
Investment Counsel, Inc. on behalf of Templeton
Global Asset Allocation Fund dated April 19, 1995

EX-99.d(x) Management Agreement between the Fund, *
on behalf of Small Cap Fund dated October 11, 1995

EX-99.d(xi) Investment Management Agreement between the Fund, *
on behalf of Templeton Developing Markets Equity Fund,
dated October 1, 1995

EX-99.d(xii) Investment Management Agreement between *
the Fund, on behalf of International Smaller
Companies Fund and Templeton Investment
Counsel, Inc.
dated January 18, 1996

EX-99.d(xiii) Management Agreement between the Fund, *
on behalf of Capital Growth Fund and
Franklin Advisers, Inc. dated January 18, 1996

EX-99.d(xiv) Amendment to Management Agreement between *
the Fund and Franklin Advisers, Inc. dated August 1, 1995

EX-99.d(xv) Management Agreement between the Fund, on *
behalf of Mutual Discovery Securities Fund and
Mutual Shares Securities Fund, and Franklin Mutual
Advisers, Inc. dated October 18, 1996

EX-99.d(xvi) Management Agreement between the Fund, on *
behalf of Global Health Care Securities Fund
dated December 9, 1997

EX-99.d(xvii) Management Agreement between the Fund, on *
behalf of Value Securities Fund, and Franklin
Advisers, Inc. dated December 9, 1997

EX-.d(xviii) Amendment to Investment Management Agreement *

2
<PAGE>

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX

between the Fund, on behalf of Templeton Developing
Markets Equity Fund, and Templeton Asset Management
Ltd. dated October 1, 1995

EX-99.d(xix) Addendum to Investment Management Agreement *
between the Fund, on behalf of Templeton Developing
Markets Equity Fund, and Templeton Asset
Management Ltd. dated December 9, 1997

EX-99.d(xx) Investment Advisory Agreement between the Fund, on *
behalf of Franklin Aggressive Growth Securities
Fund; and Franklin Advisers, Inc. dated July 15, 1999

EX-99.d(xxi) Form of Investment Advisory Agreement between *
the Fund, on behalf of Franklin Strategic Income
Fund, and Franklin Advisers, Inc.

EX-99.d(xxii) Form of Sub-Advisory Agreement between Franklin Attached
Advisers, Inc., on behalf of Franklin Strategic Income
Fund, and Templeton Investment Counsel, Inc.

EX-99.d(xxiii) Form of Investment Advisory Agreement between the Fund, *
on behalf of Franklin S&P 500 Index Fund, and Franklin
Advisers, Inc.

EX-99.d(xxiv) Form of Sub-Advisory Agreement between Franklin Attached
Advisers, Inc., on behalf of Franklin S&P 500
Index Fund, and State Street Global Advisors,
a division of State Street Bank and Trust Company

EX-99.d(xxv) Form of Investment Advisory Agreement between Attached
the Fund, on behalf of Franklin Technology Securities
Fund, and Franklin Advisers, Inc.

EX-99.e(i) Distribution Agreement between the Fund and *
Franklin Templeton Distributors, Inc.

EX-99.g(i) Foreign Exchange Netting Agreement between *
Franklin Valuemark Funds, on behalf of the
International Equity Fund, and Morgan Guaranty
Trust Company of New York, dated March 19, 1992

EX-99.g(ii) Foreign Exchange Netting Agreement between *
Franklin Valuemark Funds, on behalf of the
Pacific Growth Fund, and Morgan Guaranty Trust
Company of New York, dated March 19, 1992

3
<PAGE>

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX

EX-99.g(iii) Custody Agreement between the Fund, on *
behalf of the Templeton Developing Markets
Equity Fund and the Templeton Global Growth
Fund, and the Chase Manhattan Bank, N.A. dated
March 15, 1994

EX-99.g(iv) Master Custody Agreement between the *
Fund and the Bank of New York, dated
February 16, 1996

EX-99.g(v) Terminal Link Agreement between the Fund *
and Bank of New York, dated February 16, 1996

EX-99.g(vi) Amendment to Global Custody Agreement between *
the Fund and the Chase Manhattan Bank, N.A. dated
April 1, 1996

EX-99.g(vii) Amendment to Master Custody Agreement *
between the Fund and the Bank of New York,
dated April 1, 1996

EX-99.g(viii) Letter of Agreement between the Fund and the *
Bank of New York, dated April 22, 1996

EX-99.g(ix) Custody Agreement between the Fund, on *
` behalf of Mutual Discovery Securities Fund
and Mutual Shares Securities Fund, and the
State Street Bank and Trust Company dated
November 8, 1996

EX-99.h(i) Fund Administration Agreement between the Fund, *
on behalf of International Smaller Companies Fund,
and Franklin Templeton Services, Inc. dated
October 1, 1996

EX-99.h(ii) Fund Administration Agreement between the Fund, *
on behalf of Templeton Global Asset Allocation Fund,
and Franklin Templeton Services, Inc. dated
October 1, 1996

EX-99.h(iii) Fund Administration Agreement between the Fund, *
on behalf of Mutual Discovery Securities Fund,
and Mutual Shares Securities Fund and Franklin Templeton
Services, Inc. dated October 18, 1996

EX-99.h(iv) Fund Administration Agreement between the Fund, *
on behalf of Value Securities Fund. and Franklin
Templeton Services, Inc. dated December 9, 1997

4
<PAGE>

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX

EX-99.h(v) Fund Administration Agreement between the Fund, *
on behalf of Global Health Care Securities Fund, and
Franklin Templeton Services, Inc. dated December 9, 1997

EX-99.h(vi) Fund Administration Agreement between the Fund, *
on behalf of Franklin Aggressive Growth Securities
Fund and Franklin Templeton Services, Inc. dated
July 15, 1999

EX-99.h(vii) Form of Fund Administration Agreement between Attached
the Fund, on behalf of Franklin Technology
Securities Fund, and Franklin Templeton Services, Inc.

EX-99.i(i) Legal Opinion Securities Act of 1933 *
dated February 5, 1999

EX-99.l(i) Letter of Understanding dated April 11, 1995 *

EX-99.l(ii) Letter of Understanding dated September 12, 1995 *

EX-99.l(iii) Letter of Understanding dated April 4, 1996 *

EX-99.l(iv) Letter of Understanding dated October 21, 1996 *

EX-99.l(v) Letter of Understanding dated April 23, 1998 *

EX-99.m(i) Class 2 Distribution Plan Pursuant to Rule 12b-1 *
for all series of the Fund

EX-99.m(ii) Class 2 Distribution Plan for Franklin Aggressive *
Growth Securities Fund

EX-99.o(i) Multiple Class Plan for all series of the Fund *

EX-99.o(ii) Multiple Class Plan for Franklin Aggressive Growth
Securities Fund

EX-99.p(i) Power of Attorney from Officers and *
Trustees of the Registrant
</TABLE>

* Incorporated by reference to previous filings

EXHIBIT 99.(d)(xxii)
FORM OF
SUBADVISORY AGREEMENT

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
(on behalf of the Franklin Strategic Income Securities Fund)

THIS SUBADVISORY AGREEMENT made as of the ____________2000 by and
between FRANKLIN ADVISERS, INC., a corporation organized and existing under the
laws of the State of California (hereinafter called "FAI"), and TEMPLETON
INVESTMENT COUNSEL, INC., a Florida corporation (hereinafter called "TICI").

W I T N E S S E T H

WHEREAS, FAI and TICI are each registered as an investment adviser
under the Investment Advisers Act of 1940 (the "Advisers Act"), and engaged in
the business of supplying investment advice, and investment management services,
as an independent contractor; and

WHEREAS, FAI has been retained to render investment advisory services
to Franklin Strategic Income Securities Fund (the "Fund"), a series of Franklin
Templeton Variable Insurance Products Trust (the "Trust"), an investment
management company registered with the U.S. Securities and Exchange Commission
(the "SEC") pursuant to the Investment Company Act of 1940 (the "1940 Act"); and

WHEREAS, FAI desires to retain TICI to render investment advisory,
research and related services to the Fund pursuant to the terms and provisions
of this Agreement, and TICI is interested in furnishing said services.

NOW, THEREFORE, in consideration of the covenants and the mutual
promises hereinafter set forth, the parties hereto, intending to be legally
bound hereby, mutually agree as follows:

1. FAI hereby retains TICI and TICI hereby accepts such engagement, to
furnish certain investment advisory services with respect to the assets of the
Fund, as more fully set forth herein.

(a) Subject to the overall policies, control, direction and
review of the Trust's Board of Trustees (the "Board") and to the instructions
and supervision of FAI, TICI will provide a continuous investment program for
the Fund, including allocation of the Fund's assets among the various securities
markets of the world and, investment research and advice with respect to
securities and investments and cash equivalents in the Fund. So long as the
Board and FAI determine, on no less frequently than an annual basis, to grant
the necessary delegated authority to TICI, and subject to paragraph (b) below,
TICI will determine what securities and other investments will be purchased,
retained or sold by the Fund, and will place all purchase and sale orders on
behalf of the Fund except that orders regarding U.S. domiciled securities and
money market instruments may also be placed on behalf of the Fund by FAI.

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<PAGE>

(b) In performing these services, TICI shall adhere to the
Fund's investment objectives, policies and restrictions as contained in its
Prospectus and Statement of Additional Information, and in the Trust's
Declaration of Trust, and to the investment guidelines most recently established
by FAI and shall comply with the provisions of the 1940 Act and the rules and
regulations of the SEC thereunder in all material respects and with the
provisions of the United States Internal Revenue Code of 1986, as amended, which
are applicable to regulated investment companies.

(c) Unless otherwise instructed by FAI or the Board, and
subject to the provisions of this Agreement and to any guidelines or limitations
specified from time to time by FAI or by the Board, TICI shall report daily all
transactions effected by TICI on behalf of the Fund to FAI and to other entities
as reasonably directed by FAI or the Board.

(d) TICI shall provide the Board at least quarterly, in
advance of the regular meetings of the Board, a report of its activities
hereunder on behalf of the Fund and its proposed strategy for the next quarter,
all in such form and detail as requested by the Board. TICI shall also make an
investment officer available to attend such meetings of the Board as the Board
may reasonably request.

(e) In carrying out its duties hereunder, TICI shall comply
with all reasonable instructions of the Fund or FAI in connection therewith.
Such instructions may be given by letter, telex, telefax or telephone confirmed
by telex, by the Board or by any other person authorized by a resolution of the
Board, provided a certified copy of such resolution has been supplied to TICI.

2. In performing the services described above, TICI shall use its best
efforts to obtain for the Fund the most favorable price and execution available.
Subject to prior authorization of appropriate policies and procedures by the
Board, TICI may, to the extent authorized by law and in accordance with the
terms of the Fund's Prospectus and Statement of Additional Information, cause
the Fund to pay a broker who provides brokerage and research services an amount
of commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting that
transaction, in recognition of the brokerage and research services provided by
the broker. To the extent authorized by applicable law, TICI shall not be deemed
to have acted unlawfully or to have breached any duty created by this Agreement
or otherwise solely by reason of such action.

3. (a) TICI shall, unless otherwise expressly provided and
authorized, have no authority to act for or represent FAI or the Fund in any
way, or in any way be deemed an agent for FAI or the Fund.

(b) It is understood that the services provided by TICI are
not to be deemed exclusive. FAI acknowledges that TICI may have investment
responsibilities, or render investment advice to, or perform other investment
advisory services, for individuals or entities, including other investment
companies registered pursuant to the 1940 Act, ("Clients") which may invest in
the same type of securities as the Fund. FAI agrees that TICI may give advice or

2
<PAGE>

exercise investment responsibility and take such other action with respect to
such Clients which may differ from advice given or the timing or nature of
action taken with respect to the Fund.

4. TICI agrees to use its best efforts in performing the services to be
provided by it pursuant to this Agreement.

5. FAI has furnished or will furnish to TICI as soon as available
copies properly certified or authenticated of each of the following documents:

(a) the Trust's Declaration of Trust, as filed with the
Secretary of State of the Commonwealth of Massachusetts on May 23, 1988, and any
other organizational documents and all amendments thereto or restatements
thereof;

(b) resolutions of the Trust's Board of Trustees authorizing
the appointment of TICI and approving this Agreement;

(c) the Trust's original Notification of Registration on Form
N-8A under the 1940 Act as filed with the SEC and all amendments thereto;

(d) the Trust's current Registration Statement on Form N-1A
under the Securities Act of 1933, as amended and under the 1940 Act as filed
with the SEC, and all amendments thereto, as it relates to the Fund;

(e) the Fund's most recent Prospectus and Statement of
Additional Information; and

(f) the Investment Advisory Agreement between the Fund and
FAI.

FAI will furnish TICI with copies of all amendments of or supplements to the
foregoing documents.

6. TICI will treat confidentially and as proprietary information of the
Fund all records and other information relative to the Fund and prior, present
or potential shareholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Fund, which
approval shall not be unreasonably withheld and may not be withheld where TICI
may be exposed to civil or criminal contempt proceedings for failure to comply
when requested to divulge such information by duly constituted authorities, or
when so requested by the Fund.

7. (a) FAI shall pay a monthly fee in cash to TICI of 25% of the
investment advisory fee paid to FAI by the Fund, which fee shall be payable on
the first business day of each month in each year as compensation for the
services rendered and obligations assumed by TICI during the preceding month.
The advisory fee under this Agreement shall be payable on the first business day
of the first month following the effective date of this Agreement, and shall be
reduced by the amount of any advance payments made by FAI relating to the
previous month.

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<PAGE>

(b) FAI and TICI shall share equally in any voluntary
reduction or waiver by FAI of the management fee due FAI under the Investment
Advisory Agreement between FAI and the Fund.

(c) If this Agreement is terminated prior to the end of any
month, the monthly fee shall be prorated for the portion of any month in which
this Agreement is in effect which is not a complete month according to the
proportion which the number of calendar days in the month during which the
Agreement is in effect bears to the total number of calendar days in the month,
and shall be payable within 10 days after the date of termination.

8. Nothing herein contained shall be deemed to relieve or deprive the
Board of its responsibility for and control of the conduct of the affairs of the
Fund.

9. (a) In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of its obligations or duties hereunder on the
part of TICI, neither TICI nor any of its directors, officers, employees or
affiliates shall be subject to liability to FAI or the Fund or to any
shareholder of the Fund for any error of judgment or mistake of law or any other
act or omission in the course of, or connected with, rendering services
hereunder or for any losses that may be sustained in the purchase, holding or
sale of any security by the Fund.

(b) Notwithstanding paragraph 9(a), to the extent that FAI is
found by a court of competent jurisdiction, or the SEC or any other regulatory
agency to be liable to the Fund or any shareholder (a "liability"), for any acts
undertaken by TICI pursuant to authority delegated as described in Paragraph
1(a), TICI shall indemnify and save FAI and each of its affiliates, officers,
directors and employees (each a "Franklin Indemnified Party") harmless from,
against, for and in respect of all losses, damages, costs and expenses incurred
by a Franklin Indemnified Party with respect to such liability, together with
all legal and other expenses reasonably incurred by any such Franklin
Indemnified Party, in connection with such liability.

(c) No provision of this Agreement shall be construed to
protect any director or officer of FAI or TICI, from liability in violation of
Sections 17(h) or (i), respectively, of the 1940 Act.

10. During the term of this Agreement, TICI will pay all expenses
incurred by it in connection with its activities under this Agreement other than
the cost of securities (including brokerage commissions, if any) purchased for
the Fund. The Fund and FAI will be responsible for all of their respective
expenses and liabilities.

11. This Agreement shall be effective as of the date given above, and
shall continue in effect for two years. It is renewable annually thereafter for
successive periods not to exceed one year each (i) by a vote of the Board or by
the vote of a majority of the outstanding voting securities of the Fund, and
(ii) by the vote of a majority of the Trustees of the Trust who are not parties
to this Agreement or interested persons thereof, cast in person at a meeting
called for the purpose of voting on such approval.

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<PAGE>

12. This Agreement may be terminated at any time, without payment of
any penalty, by the Board or by vote of a majority of the outstanding voting
securities of the Fund, upon sixty (60) days' written notice to FAI and TICI,
and by FAI or TICI upon sixty (60) days' written notice to the other party.

13. This Agreement shall terminate automatically in the event of any
transfer or assignment thereof, as defined in the 1940 Act, and in the event of
any act or event that terminates the Investment Advisory Agreement between FAI
and the Fund.

14. In compliance with the requirements of Rule 31a-3 under the 1940
Act, TICI hereby agrees that all records which it maintains for the Fund are the
property of the Fund and further agrees to surrender promptly to the Fund, or to
any third party at the Fund's direction, any of such records upon the Fund's
request. TICI further agrees to preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1
under the 1940 Act.

15. This Agreement may not be materially amended, transferred,
assigned, sold or in any manner hypothecated or pledged without the affirmative
vote or written consent of the holders of a majority of the outstanding voting
securities of the Fund and may not be amended without the written consent of FAI
and TICI.

16. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule, or otherwise, the remainder of this Agreement
shall not be affected thereby.

17. The terms "majority of the outstanding voting securities" of the
Fund and "interested persons" shall have the meanings as set forth in the 1940
Act.

18. This Agreement shall be interpreted in accordance with and governed
by the laws of the State of California of the United States of America.

19. TICI acknowledges that it has received notice of and accepts the
limitations of the Trust's liability as set forth in its Agreement and
Declaration of Trust. TICI agrees that the Trust's obligations hereunder shall
be limited to the assets of the Fund, and that TICI shall not seek satisfaction
of any such obligation from any shareholders of the Fund nor from any trustee,
officer, employee or agent of the Trust.

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<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers.

FRANKLIN ADVISERS, INC.

By:
------------------------------

TEMPLETON INVESTMENT COUNSEL, INC.

By:
------------------------------

Franklin Strategic Income Securities Fund hereby acknowledges and agrees to the
provisions of paragraphs 9(a) and 10 of this Agreement.

FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
on behalf of
FRANKLIN STRATEGIC INCOME SECURITIES FUND

By: _____________________________________

EXHIBIT 99.(d)(xxiv)

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
ON BEHALF OF
FRANKLIN S&P 500 INDEX FUND
FORM OF
SUBADVISORY AGREEMENT

This Agreement is entered into as of ______________, 2000, by and between
Franklin Advisers, Inc., a California corporation (the "Manager"), and State
Street Global Advisors, , a Massachusetts trust company (the "Subadvisor")

WHEREAS, Franklin S&P 500 Index Fund (the "Fund") is a series of Franklin
Templeton Variable Insurance Products Trust (the "Trust"), an investment company
registered with the U.S. Securities and Exchange Commission ("SEC") pursuant to
the Investment Company Act of 1940 (the "1940 Act"); and

WHEREAS, Manager is registered as an investment adviser under the Investment
Advisers Act of 1940 (the "Advisers Act"), and Subadvisor is a "bank" as defined
in the Advisors Act and both are engaged in the business of supplying, among
other things, investment advice and investment management services to investment
companies and other investment counseling clients; and

WHEREAS, Manager has been retained to render investment advisory services to the
Fund pursuant to an Investment Advisory Agreement (the "Management Contract"),
and Manager desires to retain Subadvisor to render investment advisory, research
and related services to the Fund pursuant to this Agreement, and Subadvisor is
willing to provide such services; and

WHEREAS, the Trust's board of trustees (the "Board"), including a majority of
trustees who are not "interested persons" (as defined below) of any party to
this Agreement, have consented to such an arrangement.

NOW, THEREFORE, in consideration of the covenants and mutual promises contained
herein, the parties hereto, intending to be legally bound hereby, mutually agree
as follows:

I. APPOINTMENT OF SUBADVISOR; COMPENSATION

1.1 Appointment of Subadvisor.

Subject to and in accordance with the provisions hereof, Manager hereby appoints
Subadvisor as investment subadvisor to provide the various investment advisory
and other services to the Fund set forth herein and, subject to the restrictions
set forth herein, and hereby delegates to Subadvisor the authority vested in
Manager pursuant to the Management Contract to the extent necessary to enable
Subadvisor to perform its obligations under this Agreement. Subadvisor accepts
such appointment for the compensation herein provided and agrees to use its best
efforts in performing the services to be provided pursuant to this Agreement.
Manager shall continue to have responsibility for all services to be provided to
the Fund pursuant to the Management Contract and shall oversee and review the
Subadvisor's performance of its duties under this Agreement.

1.2 Scope of Investment Authority.

(a) Subadvisor is hereby authorized, on a discretionary basis, to manage the
investments and determine the composition of the assets of the Fund,
subject at all times to (i) the supervision and control of the Board, (ii)
the investment objectives, policies and limitations, as contained in the
Fund's current Prospectus and Statement of Additional Information and other
governing documents, including the Trust's Declaration of Trust and
By-laws, and (iii) such instructions, policies and limitations relating to
the Fund as the Board or Manager may from time to time adopt and
communicate in writing to Subadvisor. Notwithstanding anything herein to
the contrary, Subadvisor is not authorized to take any

1
<PAGE>

action, including the purchase and sale of Fund securities, in
contravention of any restriction, limitation, objective, policy or
instruction described in the previous sentence.

(b) It is understood and agreed that, for so long as this Agreement shall
remain in effect, Subadvisor shall, subject to Section 1.2(a) hereof,
retain discretionary investment authority over the manner in which the
Fund's assets are invested, provided that the Board and Manager shall at
all times have the right to monitor the Fund's investment activities and
performance, require Subadvisor to make reports and give explanations as to
the manner in which the Fund's assets are being invested, and, should
either Manager or the Board become dissatisfied with Subadvisor's
performance in any way, terminate this Agreement in accordance with the
provisions of Section 8.2 hereof.

1.3 Independent Contractor.

Notwithstanding anything herein to the contrary, Subadvisor shall be an
independent contractor and will have no authority to act for or represent the
Trust, the Fund or Manager in any way or otherwise be deemed an agent of any of
them, except to the extent expressly authorized by this Agreement or in writing
by the Trust or Manager.

1.4 Compensation.

Subadvisor shall be compensated for the services it performs on behalf of the
Fund in accordance with the terms set forth in Appendix A to this Agreement.

II. SERVICES TO BE PERFORMED BY SUBADVISOR

2.1 Investment Advisory Services.

(a) In fulfilling its obligations to manage the assets of the Fund, Subadvisor
will:

(i) provide the Fund with such investment research, advice and
supervision as the Board and Manager may from time to time consider
necessary for the proper management of the assets of the Fund;

(ii) formulate and implement a continuous investment program for the
Fund;

(iii) take whatever steps are necessary to implement these investment
programs by the purchase and sale of securities and other
investments, including the selection of brokers or dealers, the
placing of orders for such purchases and sales in accordance with
the provisions of paragraph (b) below and the affirming of such
purchases and sales with counterparties and clearing agents and
ensuring that such purchases and sales are properly settled and
cleared in a timely manner;

(iv) provide to Manager, the Fund's custodian and/or to such other
entities as Manager shall request, such information and reports
with respect to the implementation of the Fund's investment
program as Manager shall request, including daily reporting of
all transactions effected by Subadvisor on behalf of the Fund and
daily reporting of pricing and all other information sufficient
to enable the Fund to comply with Rule 22c-1 under the 1940 Act.
Subadvisor shall promptly forward to Manager and the Fund's
custodian copies of all brokerage or dealer confirmations for
each transaction effected for the Fund and shall as soon as is
practicable provide Manager and the Fund's custodian with copies
of the trade blotter for each such transaction;

(v) provide the Board in advance of the Board's regular and special
meetings and at such other times as may be reasonably requested
by the Board, a report of its activities hereunder on behalf of
the Fund and its proposed strategy, and such other periodic or
special reports as the

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<PAGE>

Board or Manager may reasonably request, all in such form and
detail as requested by the Board, and make an investment officer
available to attend such meetings as the Board may request.
Subadvisor shall also provide the Board and Manager with copies of
Subadvisor's quarterly compliance reports prepared in connection
with Subadvisor's code of ethics adopted in compliance with Rule
17j-1 of the 1940 Act promptly after such reports are available;
and

(vi) provide advice and assistance to Manager as to the determination of
the fair value of certain securities where market quotations are
not readily available for purposes of calculating net asset value
of the Fund in accordance with valuation procedures and methods
established by the Board.

(b) Subadvisor shall place all orders for the purchase and sale of portfolio
securities for the Fund's account with brokers, dealers, futures commission
merchants or banks selected by Subadvisor. Subadvisor shall use its best
efforts to obtain for the Fund the most favorable net price and execution
available. Subject to the policies and procedures adopted by the Board,
Subadvisor may, to the extent authorized by law and in accordance with the
Fund's Prospectus and Statement of Additional Information, cause the Fund
to pay a broker or dealer who provides brokerage and research services (as
defined in Section 28(e) of the Securities Exchange Act of 1934) an amount
of commission for effecting a portfolio investment transaction in excess of
the amount of commission another broker or dealer would have charged for
effecting that transaction, in recognition of the brokerage and research
services provided by the broker or dealer. To the extent authorized by
applicable law, Subadvisor shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of such action. The Board shall periodically review the commissions
paid by the Fund to determine if the commissions paid over representative
periods were reasonable in relation to the benefits to the Fund. Subject to
applicable law and the policies and procedures adopted by the Board,
Subadvisor may select brokers or dealers that are affiliated with
Subadvisor in executing purchases and sales of securities for the Fund.

2.2 Administrative and Other Services.

(a) Facilities and Personnel.

Subadvisor will, at its expense, furnish (i) all necessary investment and
management facilities, including salaries of personnel required for it to
execute its duties faithfully under this Agreement, and (ii) administrative
facilities, including bookkeeping, clerical personnel and equipment
necessary for the efficient conduct of the investment affairs of the Fund
(excluding determination of net asset value and shareholder accounting
services).

(b) Maintenance of Books and Records.

Subadvisor agrees to maintain, in the form and for the period required by
Rules 31a-1 and 31a-2 under the 1940 Act, all accounts, books and records
with respect to the Fund as are required to be maintained pursuant to the
1940 Act. Subadvisor agrees that such accounts, books and records are the
property of the Trust and will be surrendered to the Trust or Manager (or
any other party at the Trust's direction) promptly upon request. Subadvisor
agrees to provide copies of such accounts, books and records to Manager and
the Fund's accountants and auditors promptly upon request. Subadvisor shall
timely furnish to Manager all information relating to Subadvisor's services
under this Agreement needed by Manager to keep the other books and records
of the Fund required by Rule 31a-1 under the 1940 Act. Subadvisor further
agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940
Act any such records as are required to be maintained by it pursuant to
this Agreement.

Subadvisor shall provide such information as is necessary to enable the
Trust and Manager to prepare and update the Trust's registration statement
(and any supplement thereto), the Fund's financial

3
<PAGE>

statements and any other periodic financial reports or other documents
required to be filed with the SEC and any other regulatory entity.
Subadvisor understands that the Trust and Manager will rely on such
information in the preparation of the Trust's registration statement, the
Fund's financial statements and other reports and documents, and hereby
covenants that any such information provided by Subadvisor expressly for
use in such registration statements, financial statements and/or other
reports or documents shall be true and complete in all material respects.
Subadvisor agrees to provide such other information as the Fund or Manager
may reasonably request for use in the preparation of other materials
necessary or helpful for the underwriting and distribution of the Fund's
shares.

(d) Exercise of Voting Rights for Investments.

Manager hereby delegates to Subadvisor discretionary authority to determine
the manner in which any voting rights, rights to consent to corporate
action and any other rights pertaining to the Fund's investment securities
shall be exercised. Subadvisor shall use its best good faith judgment to
exercise such rights in a manner which best serves the interests of the
Fund and its shareholders. Subadvisor shall promptly notify Manager and the
Fund's custodian of corporate actions and shall notify Manager of Proxy
votes in the event Subadvisor exercises any such rights with respect to the
Fund's investment securities. Upon written notice to Subadvisor, the Board
or Manager may at any time withdraw the authority granted to Subadvisor
pursuant to this Section to perform any or all of the voting services
contemplated hereby.

III. EXPENSES

During the term of this Agreement, Subadvisor will pay all expenses incurred by
it in connection with its activities under this Agreement other than the cost of
securities (including brokerage commissions, if any) purchased for the Fund. The
Fund and Manager will be responsible for their respective expenses and
liabilities.

IV. COMPLIANCE WITH APPLICABLE LAWS AND GOVERNING DOCUMENTS;
CONFIDENTIALITY

4.1 Compliance with Applicable Laws and Governing Documents.

Subadvisor will comply with (i) all applicable state and federal laws and
regulations governing the performance of Subadvisor's duties hereunder, (ii) the
investment objective, policies and limitations, as provided in the Fund's
current Prospectus, Statement of Additional Information and other governing
documents, and (iii) such instructions, policies and limitations relating to the
Fund as the Board or Manager may from time to time adopt and communicate to
Subadvisor. Without limiting the generality of the foregoing, Subadvisor shall
ensure that (1) the Fund shall comply with Section 817(h) of the Internal
Revenue Code of 1986 and the regulations issued thereunder (the "Code"),
specifically Regulation Section 1.817-5, relating to the diversification
requirements for variable annuity, endowment, and life insurance contracts, and
any amendments or other modifications to such Section or regulations; (2)
Subadvisor's activities do not disqualify the Fund as a regulated investment
company under Subchapter M of the Code or any successor provision; and (3) any
and all applicable state insurance law restrictions on investments that operate
to limit or restrict the investments that the Fund may otherwise make and which
Manager has provided to Subadvisor in writing are complied with as well as any
changes thereto.

Subadvisor shall submit to all regulatory and administrative bodies having
jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may reasonably request or require pursuant to applicable laws and
regulations.

Manager will provide Subadvisor with copies of (i) the Trust's Declaration of
Trust and By-laws, as currently in effect, (ii) the Fund's currently effective
Prospectus and Statement of Additional Information, and all updates thereto, as
set forth in the Trust's registration statement under the 1940 Act and the
Securities Act of 1933, as amended, (iii) any instructions, investment policies
or other restrictions adopted

4
<PAGE>

by the Board or Manager supplemental thereto, and (iv) the Management Contract.
Manager will provide Subadvisor with such further documentation and information
concerning the investment objectives, policies and restrictions applicable to
the Fund, and such other information relating to the business affairs of the
Fund as Subadvisor from time to time reasonably requests in order to discharge
its obligations hereunder. Manager shall provide or cause to be provided timely
information to Subadvisor regarding such matters as inflows to and outflows from
the Fund and the cash requirements of the Fund.

4.2 Confidentiality.

Subadvisor will treat confidentially and as proprietary information of the Fund
all records and other information relative to the Fund and prior, present and
potential shareholders, and will not use such records or information other than
in performance of its responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Fund. The foregoing shall not be
applicable to any information that is publicly available when provided or which
thereafter becomes publicly available other than in contravention of this
Section or which is required to be disclosed by any regulatory authority in the
lawful and appropriate exercise of its jurisdiction, by judicial or
administrative process or otherwise by applicable law or regulation.

Subadvisor agrees not to disclose the existence of this Agreement or the
underlying business relationship without the prior written approval of Manager.

V. ACTIVITIES OF SUBADVISOR AND CONFLICTS OF INTEREST

It is understood that the services provided by Subadvisor are not to be deemed
exclusive. Manager acknowledges that Subadvisor may have investment
responsibilities, or render investment advice to, or perform other investment
advisory services, for individuals or entities, including other investment
companies registered pursuant to the 1940 Act ("Clients"), which may invest in
the same type of securities as the Fund, and Subadvisor is free to render
services to others so long as Subadvisor's services under this Agreement are not
impaired. Manager agrees that Subadvisor may give advice or exercise investment
responsibility and take such other action with respect to Clients which may
differ from advice given or the timing or nature of action taken with respect to
the Fund.

If purchases or sales of securities for the Fund or other Clients of Subadvisor
or its affiliates arise for consideration at or about the same time, Subadvisor
shall make transactions in such securities for the Fund and its other Clients in
a manner deemed equitable to all. It is agreed that, on occasions when
Subadvisor deems the purchase or sale of a security to be in the best interest
of the Fund as well as other Clients, it may, to the extent permitted by
applicable laws or regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Fund and the other Clients in order
to obtain favorable execution and lower brokerage commissions or prices. In that
event, allocation of the securities purchased or sold, as well as the expenses
incurred in the transaction, will be made by Subadvisor in the manner that is
most equitable and consistent with its fiduciary obligations to the Fund and to
such other Clients. In some cases these procedures may adversely affect the size
of the position obtainable for or disposed of by the Fund or have an adverse
effect on price.

It is understood that the trustees, officers, agents and shareholders of the
Trust are or may be interested in Subadvisor as directors, officers,
stockholders or otherwise; that directors, officers, agents and stockholders of
Subadvisor are or may be interested in the Trust as trustees, officers,
shareholders or otherwise; that Subadvisor may be interested in the Trust; and
that the existence of any such dual interest shall not affect the validity of
this Agreement or of any transactions hereunder except as otherwise provided in
the Trust's Declaration of Trust and the declaration of trust of Subadvisor,
respectively, or by specific provisions of applicable law.

No provision of this Agreement shall be construed to protect any director or
officer of Manager or Subadvisor from liability in violation of Sections 17(h)
and (i) of the 1940 Act.

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<PAGE>

VI. REPRESENTATIONS, WARRANTIES AND COVENANTS

6.1 Representations of Manager. Manager represents, warrants and agrees that:

(a) Manager is a corporation organized under the laws of the State of
California;
(b) Manager is and shall remain duly registered as an "investment adviser"
under the Advisers Act;
(c) Manager has been duly appointed by the Board to provide investment services
to the Fund as contemplated by the Management Contract;
(d) the execution, delivery and performance of this Agreement are within
Manager's powers, have been and remain duly authorized by all necessary
corporate action and will not violate or constitute a default under any
applicable law or regulation or of any decree, order, judgment, agreement
or instrument binding on Manager;
(e) no consent (including, but not limited to, exchange control consents) of
any applicable governmental authority or body is necessary, except for such
consents as have been obtained and are in full force and effect, and all
conditions of which have been duly complied with; and
(f) this Agreement constitutes a legal, valid and binding obligation
enforceable against Manager.

6.2 Representations of Subadvisor. Subadvisor represents, warrants and agrees
that:

(a) Subadvisor is a Massachusetts trust company established pursuant to the
laws of the Commonwealth of Massachusetts;
(b) Subadvisor is registered as an "investment adviser" under the Advisers Act
or is not required to register as an "investment adviser" thereunder;
(c) Subadvisor has filed a notice of exemption pursuant to Rule 4.14 under the
Commodity Exchange Act with the Commodities Futures Trading Commission and
the National Futures Association, or is not required to file such
exemption;
(d) the execution, delivery and performance of this Agreement are within
Subadvisor's powers, have been and remain duly authorized by all necessary
corporate action and will not violate or constitute a default under any
applicable law or regulation or of any decree, order, judgment, agreement
or instrument binding on Subadvisor;
(e) no consent (including, but not limited to, exchange control consents) of
any applicable governmental authority or body is necessary, except for such
consents as have been obtained and are in full force and effect, and all
conditions of which have been duly complied with;
(f) this Agreement constitutes a legal, valid and binding obligation
enforceable against Subadvisor; and
(g) the total fee to be paid by Manager to Subadvisor pursuant to this
Agreement is not higher than the total fee, determined on a percentage of
assets basis and including the total fee payable after any reduction or
waiver of fees by Subadvisor or its affiliates (the "Total Fee"), paid as
of the effective date of this Agreement, and shall be no higher than the
Total Fee that may be paid in the future, by any investment manager,
registered investment company (or series thereof), separate account or
other entity to Subadvisor (and its affiliates) in connection with the
provision of investment management or subadvisory investment management
services by Subadvisor (and its affiliates) to any registered investment
company (or series thereof), separate account or other investment vehicle
which has (i) as its principal investment strategy tracking or replicating
the total return performance of the S&P 500 Composite Stock Price Index,
(ii) total net assets less than $1 billion dollars, and (iii) a
substantially similar relationship with a subadvisor (including
non-investment management services) (each, an "Equivalent Client").

(1) In the event Subadvisor (or any affiliate of Subadvisor) enters into
any arrangement with an Equivalent Client where the Total Fee to be
paid to Subadvisor (or its affiliates) by such Equivalent Client is
less than the fee payable to Subadvisor under this Agreement (a
"Lesser Fee"), Subadvisor agrees to promptly notify Manager of such
arrangement and shall agree to promptly amend this Agreement so that
the total fees payable hereunder are at most equal to the Lesser Fee
payable to Subadvisor (or its affiliates) by any Equivalent Client.

6
<PAGE>

(2) To the extent that a delay occurs between (i) the date Subadvisor
(or any affiliate of Subadvisor) enters into any arrangement with an
Equivalent Client under which such Equivalent Client is to pay a
Lesser Fee, and (ii) the date Subadvisor notifies Manager of such
arrangement, then (iii) Manager shall receive a corresponding credit
against its Total Fee based on the difference between the Lesser Fee
and the Total Fee paid by Manager during the period of the delay.

6.3 Covenants of Subadvisor.

(a) Notification Regarding Certain Events Affecting Subadvisor.

Subadvisor will promptly notify the Trust and Manager in writing of the
occurrence of any event that could have a material impact on the
performance of its obligations pursuant to this Agreement, including
without limitation: (i) the occurrence of any event which could disqualify
Subadvisor from serving as an investment adviser of a registered investment
company pursuant to Section 9(a) of the 1940 Act or otherwise; (ii) any
material change in Subadvisor's overall business activities that may have a
material adverse effect on Subadvisor's ability to perform under its
obligations under this Agreement; (iii) any event that would constitute a
change in control of Subadvisor; and (iv) the existence of any pending or
threatened audit, investigation, complaint, examination or other inquiry
(other than routine regulatory examinations or inspections) relating to the
Fund conducted by any state or federal governmental regulatory authority.

(b) Code of Ethics.

Subadvisor will adopt a written code of ethics complying with the
requirements of Rule 17j-1 under the 1940 Act and will provide the Trust
and Manager with a copy of such code of ethics, evidence of its adoption
and copies of any supplemental policies and procedures implemented to
ensure compliance therewith. Subadvisor agrees that it will promptly supply
Manager with copies of any material changes to any of the documents
provided by Subadvisor pursuant to this Section.

Subadvisor shall maintain for the duration hereof, with an insurer
acceptable to Manager, a blanket bond and professional liability (errors
and omissions) insurance in amounts reasonably acceptable to Manager.
Subadvisor agrees that such insurance shall be considered primary and
Subadvisor shall assure that such policies pay claims prior to similar
policies that may be maintained by Manager. In the event Subadvisor fails
to have in force such insurance, that failure will not exclude Subadvisor's
responsibility to pay up to the limit Subadvisor would have had to pay had
said insurance been in force.

(d) Year 2000 Compliance.

(i) WARRANTY AND DEFINITION. Subadvisor is taking reasonable and
comprehensive steps to ensure that its products and services (and those of
its third-party suppliers) ("Services") are Year 2000 Compliant. "Year 2000
Compliant" means that:

(aa) Such Services operate correctly with dates on or after January 1,
2000;

(bb) Such Services accurately account for twentieth and twenty-first
century dates; and

(cc) All date-related data fields, user interfaces and data interfaces
include an indication of the century such that such Services accurately
recognize and accommodate the rollover to the Year 2000 (including
processing the fact that Year 2000 is a leap year) without normal operation
being impaired by the advent of the Year 2000.

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<PAGE>

At Manager's request, Subadvisor shall provide test scripts
sufficient to verify the Services' compliance with this Section.

(ii) BREACH OF YEAR 2000 WARRANTY: Upon a breach of this subsection
6.3(d), and in addition to any other remedies available to the Fund, Trust
and Manager hereunder, Subadvisor shall provide correction(s) to the
products and services to make them Year 2000 Compliant within a
commercially reasonable time frame of receiving notice of such
non-compliance. If Subadvisor is unable to supply such correction(s)
within such period, Manager may at its option treat such failure as a
material breach and terminate this Agreement effective thirty (30) days
after Subadvisor's receipt of Manager's notice of non-compliance.
Alternatively, in the event of any breach of this subsection 6.3(d),
Manager may elect immediately to terminate this Agreement for Subadvisor's
material breach without any cure period.

VII. LIABILITY OF SUBADVISOR; INDEMNIFICATION

7.1 Liability of Subadvisor.

(a) Neither Subadvisor, nor any of its directors, officers or employees, shall
be liable to Manager, the Fund or the Trust for any loss resulting from
Subadvisor's acts or omissions as subadvisor to the Fund, except to the
extent any such losses result from (i) Subadvisor's breach of its duties
hereunder, or (ii) bad faith, willful misfeasance, reckless disregard or
gross negligence on the part of Subadvisor in the performance of
Subadvisor's duties and obligations under this Agreement.

(b) Notwithstanding the foregoing, Subadvisor agrees to reimburse the Trust,
the Fund and Manager for any and all costs, expenses, and counsel and
trustees' fees reasonably incurred by the Trust, the Fund and Manger in the
preparation, printing and distribution of proxy statements, amendments to
the Trust's Registration Statement, holdings of meetings of the Trust's
shareholders or trustees, the conduct of factual investigations, any legal
or administrative proceedings (including any applications for exemptions or
determinations by the SEC) which the Trust, the Fund or Manager incurs as
the result of action or inaction of the Subadvisor or any of its affiliates
or any of their officers, directors, employees or stockholders where the
action or inaction necessitating such expenditures (i) is directly or
indirectly related to any transactions or proposed transaction in the stock
or control of Subadvisor or its affiliates (or litigation related to any
pending or proposed or future transaction in such shares or control) which
shall have been undertaken without the prior, express approval of the
Trust's Board of Trustees; or, (ii) is within the control of Subadvisor or
any of its affiliates or any of their officers, directors, employees or
stockholders. So long as this Agreement is in effect, the Subadvisor shall
pay to the Trust and Manager the amount due for expenses subject to this
Section 7.1(b) within 30 days after a bill or statement has been received
by Subadvisor therefor. This provision shall not be deemed to be a waiver
of any claim the Trust, the Fund or Manager may have or may assert against
Subadvisor or others for costs, expenses or damages heretofore incurred by
the Trust, the Fund or Manager or for costs, expenses or damages the Trust,
the Fund or Manager may hereafter incur which are not reimbursable to it
hereunder. The Trust, the Fund, Manager and Subadvisor agree that
Subadvisor's maximum liability under this Section 7.1(b) shall be no more
than the greater of (i) $20,000, or (ii) 20% of the total fee received by
Subadvisor for its services hereunder for the twelve month period
immediately preceding such action or inaction.

7.2 Indemnification.

(a) Subadvisor agrees to indemnify and hold the Trust, the Fund and Manager
harmless from any and all direct or indirect liabilities, losses or damages
(including reasonable attorneys fees) suffered by the Trust, the Fund or
Manager resulting from (i) Subadvisor's breach of its duties hereunder, or
(ii) bad faith, willful misfeasance, reckless disregard or gross negligence
on the part of Subadvisor in the performance of Subadvisor's duties and
obligations under this Agreement, except to the extent such loss results
from the Trust's, the Fund's or Manager's own willful misfeasance, bad
faith, reckless

8
<PAGE>

disregard or negligence in the performance of their respective duties and
obligations under the Management Contract or this Agreement.

(b) Manager hereby agrees to indemnify and hold Subadvisor harmless from any
and all direct or indirect liabilities, losses or damages (including
reasonable attorneys fees) suffered by Subadvisor resulting from (i)
Manager's breach of its duties hereunder, or (ii) bad faith, willful
misfeasance, reckless disregard or gross negligence on the part of Manager
in the performance of Manager's duties and obligations under this
Agreement, except to the extent such loss results from Subadvisor's own
willful misfeasance, bad faith, reckless disregard or negligence in the
performance of Subadvisor's duties and obligations under this Agreement.

VIII. DURATION, TERMINATION AND AMENDMENT OF AGREEMENT

8.1 Effective Date; Duration; Continuance.

(a) This Agreement shall become effective on September 14, 1999, provided that
this Agreement shall not take effect unless it has first been approved (i)
by a vote of a majority of those trustees of the Trust who are not parties
to this Agreement or "interested persons" (as defined in the 1940 Act) of
any such party, and (ii) by vote of a majority of the Fund's outstanding
voting securities.

(b) Subject to prior termination pursuant to Section 8.2 below, this Agreement
shall continue in effect for two (2) years following the effective date,
and indefinitely thereafter, but only so long as the continuance after such
date shall be specifically approved at least annually (i) by vote of the
Board or by a vote of a majority of the outstanding voting securities of
the Fund, and (ii) by the vote of a majority of the trustees of the Trust
who are not "interested persons" (as defined in the 1940 Act) of any party
to this Agreement, cast in person at a meeting called for the purpose of
voting on such approval.

(c) If any continuance of this Agreement is not obtained, Subadvisor will
continue to act as the Fund's investment subadvisor pending the required
approval of the continuance of this Agreement or of a new contract with
Subadvisor or a different subadvisor or other definitive action; provided,
that the compensation received by Subadvisor during such period is in
compliance with Rule 15a-4 under the 1940 Act or any successor provision.

8.2 Termination and Assignment.

(a) Subject to earlier termination as provided pursuant to Section 6.3(d), this
Agreement may be terminated at any time, without the payment of any
penalty, by the Board or the vote of a majority of the outstanding voting
securities of the Fund upon sixty days' written notice to Manager and
Subadvisor, and by Manager or Subadvisor upon sixty days' written notice to
the Trust and the other party.

(b) This Agreement will terminate automatically, without the payment of any
penalty, in the event of its assignment (as defined in the 1940 Act), or in
the event the Management Contract is terminated for any reason.

(c) Notwithstanding the foregoing, this Agreement may be terminated by Manager
upon material breach by Subadvisor of any of the representations and
warranties set forth in this Agreement, if such breach shall not have been
cured within a 20 day period after notice of such breach; or immediately if
Subadvisor becomes unable to discharge its duties and obligations under
this Agreement.

8.3 Amendments.

This Agreement may not be amended without the prior written consent of each of
the parties hereto and unless such amendment is specifically approved (i) if
required by law, by the vote of a majority of the

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<PAGE>

outstanding voting securities of the Fund, and (ii) by the vote of a majority of
the trustees of the Trust who are not interested persons (as defined in the 1940
Act) of any person to this Agreement cast in person at a meeting called for the
purpose of voting on such approval.

8.4 Definitions.

The terms "registered investment company," "vote of a majority of the
outstanding voting securities," "assignment," and "interested persons," when
used herein, shall have the respective meanings specified in the 1940 Act as now
in effect or as hereafter amended, and subject to such orders or no-action
letters as may be granted by the SEC.

IX. MISCELLANEOUS PROVISIONS

9.1 Notices and Instructions.

All notices required to be given pursuant to this Agreement shall be delivered
or mailed to the last known business address of the Trust, Manager or
Subadvisor, as the case may be, in person or by registered mail or a private
mail or delivery service providing the sender with notice of receipt. Notice
shall be deemed given on the date delivered or mailed in accordance with this
Section 9.1. Instructions may be given by letter, telex, telefax or telephone
confirmed by telex, by the Board or by any other person authorized by a
resolution of the Board, provided a certified copy of such resolution has been
supplied to Subadvisor.

9.2 Entire Agreement.

This Agreement contains the entire understanding and agreement of the parties
with respect to the subject hereof.

9.3 Captions.

The headings in the sections of this Agreement are inserted for convenience of
reference only and shall not constitute a part of the Agreement.

9.4 Severability.

If any provision of this Agreement shall be held or made invalid by court
decision, statute, rule or otherwise, this Agreement shall be construed, insofar
as is possible, as if such portion had never been contained herein.

9.5 Governing Law.

The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of California (without giving effect to
the choice of law provisions thereof), or any of the applicable provisions of
the 1940 Act. To the extent that the laws of the State of California, or any of
the provisions in this Agreement, conflict with applicable provisions of the
1940 Act, the latter shall control.

9.6 Counterparts.

This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original, all of which shall together constitute one and the same
instrument.

9.7 Limitation of Liability.

Subadvisor acknowledges that it has received notice of and accepts the
limitations on the Trust's liability as set forth in its Agreement and
Declaration of Trust. Subadvisor agrees that the Trust's obligations hereunder,
if any, shall be limited to the assets of the Fund, and that Subadvisor shall
not seek satisfaction

10
<PAGE>

of any such obligation from any shareholders of the Fund or from any trustee,
officer, employee or agent of the Trust.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.

FRANKLIN ADVISERS, INC.

By:
---------------------------
Name:
Title:

STATE STREET GLOBAL ADVISORS,
a division of State Street Bank and Trust Company

By:
---------------------------
Name:
Title:

Franklin S&P 500 Index Fund hereby acknowledges and agrees to the provisions of
Section 3 and Section 7.1 of this Agreement.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST on behalf of
FRANKLIN S&P 500 INDEX FUND

By:
---------------------------
Name:
Title:

11
<PAGE>

APPENDIX A

Pursuant to Section 1.4 of the Agreement, Manager shall pay a monthly
subadvisory fee in cash to Subadvisor based upon a percentage of the value of
the Fund's net assets, calculated as set forth below, which fee shall be payable
on the first business day of the month in each year as compensation for the
services rendered and obligations assumed by Subadvisor during the preceding
month. The fee shall be payable on the first business day of the first month
following the effective date of the Agreement.

For purposes of calculating such fee, the value of the net assets of the Fund
shall be determined in the same manner as that the Fund uses to compute the
value of its net assets in connection with the determination of the net asset
value of its shares, all as set forth more fully in the Fund's currently
effective Prospectus and Statement of Additional Information. The rate of the
subadvisory fee payable by Manager shall be calculated daily at the following
annual rates:

0.05% of the value of its net assets up to and including
$50,000,000; and

0.04% of the value of its net assets over $50,000,000 up to
and including $100,000,000; and

0.02% of the value of its net assets over $100,000,000.

If the Agreement is terminated prior to the end of any month, the monthly
subadvisory fee shall be prorated for the portion of the month the Agreement is
in effect and shall be payable promptly after the date of the termination.

Subadvisor agrees to look exclusively to Manager, and not to any assets of the
Trust or the Fund, for the payment of Subadvisor's fees arising under the
Agreement.

EXHIBIT 99.(d)(xxv)

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
on behalf of
FRANKLIN TECHNOLOGY SECURITIES FUND
INVESTMENT ADVISORY AGREEMENT

THIS INVESTMENT ADVISORY AGREEMENT made between FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust (the "Trust"),
on behalf of FRANKLIN TECHNOLOGY SECURITIES FUND (the "Fund"), a series of the
Trust, and FRANKLIN ADVISERS, INC., a California corporation (the "Adviser").

WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statement under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment adviser and to have an investment adviser perform
various management, statistical, research, investment advisory and other
services for the Fund; and,

WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
investment advisory, counseling and supervisory services to investment companies
and other investment counseling clients, and desires to provide these services
to the Fund.

NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:

1. EMPLOYMENT OF THE ADVISER. The Trust hereby employs the Adviser to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Adviser
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Fund or the Trust in any way or otherwise be deemed an agent of the Fund or the
Trust.

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<PAGE>

2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISER. The
Adviser undertakes to provide the services hereinafter set forth and to assume
the following obligations:

A. INVESTMENT ADVISORY SERVICES.

(a) The Adviser shall manage the Fund's assets
subject to and in accordance with the investment objectives and policies of the
Fund and any directions which the Trust's Board of Trustees may issue from time
to time. In pursuance of the foregoing, the Adviser shall make all
determinations with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, and shall take such steps as may
be necessary to implement the same. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent to
corporate action and any other rights pertaining to the Fund's investment
securities shall be exercised. The Adviser shall render or cause to be rendered
regular reports to the Trust, at regular meetings of its Board of Trustees and
at such other times as may be reasonably requested by the Trust's Board of
Trustees, of (i) the decisions made with respect to the investment of the Fund's
assets and the purchase and sale of its investment securities, (ii) the reasons
for such decisions, and (iii) the extent to which those decisions have been
implemented.

(b) The Adviser, subject to and in accordance with
any directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Adviser shall seek to
obtain the best net price and execution for the Fund, but this requirement shall
not be deemed to obligate the Adviser to place any order solely on the basis of
obtaining the lowest commission rate if the other standards set forth in this
section have been satisfied. The parties recognize that there are likely to be
many cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish research,
statistical, quotations and other information to the Fund and the Adviser in
accordance with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board of Trustees determines
that the Fund will benefit, directly or indirectly, by doing so, the Adviser may
place orders with a broker who charges a commission for that transaction which
is in excess of the amount of commission that another broker would have charged
for effecting that transaction, provided that the excess commission is
reasonable in relation to the value of "brokerage and research services" (as
defined in Section 28(e)(3) of the Securities Exchange Act of 1934) provided by
that broker.

Accordingly, the Trust and the Adviser agree that the
Adviser shall select brokers for the execution of the Fund's transactions from
among:

2
<PAGE>

(i) Those brokers and dealers who provide quotations
and other services to the Fund, specifically
including the quotations necessary to determine the
Fund's net assets, in such amount of total brokerage
as may reasonably be required in light of such
services; and

(ii) Those brokers and dealers who supply research,
statistical and other data to the Adviser or its
affiliates which the Adviser or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to
securities, actual or potential, of the Fund, or
which place the Adviser in a better position to make
decisions in connection with the management of the
Fund's assets and securities, whether or not such
data may also be useful to the Adviser and its
affiliates in managing other portfolios or advising
other clients, in such amount of total brokerage as
may reasonably be required. Provided that the Trust's
officers are satisfied that the best execution is
obtained, the sale of shares of the Fund may also be
considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio
transactions.

(c) When the Adviser has determined that the Fund
should tender securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as
the "tendering dealer" so long as it is legally permitted to act in such
capacity under the federal securities laws and rules thereunder and the rules of
any securities exchange or association of which Distributors may be a member.
Neither the Adviser nor Distributors shall be obligated to make any additional
commitments of capital, expense or personnel beyond that already committed
(other than normal periodic fees or payments necessary to maintain its corporate
existence and membership in the National Association of Securities Dealers,
Inc.) as of the date of this Agreement. This Agreement shall not obligate the
Adviser or Distributors (i) to act pursuant to the foregoing requirement under
any circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the Trust on behalf of the Fund shall enter
into an agreement with the Adviser and/or Distributors to reimburse them for all
such expenses connected with attempting to collect such fees, including legal
fees and expenses and that portion of the compensation due to their employees
which is attributable to the time involved in attempting to collect such fees.

(d) The Adviser shall render regular reports to the
Trust, not more frequently than quarterly, of how much total brokerage business
has been placed

3
<PAGE>

by the Adviser, on behalf of the Fund, with brokers falling into each of the
categories referred to above and the manner in which the allocation has been
accomplished.

(e) The Adviser agrees that no investment decision
will be made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Adviser's paramount duty to obtain the
best net price and execution for the Fund.

(f) Decisions on proxy voting shall be made by the
Adviser unless the Board of Trustees determines otherwise. Pursuant to its
authority, Adviser shall have the power to vote, either in person or by proxy,
all securities in which the Fund may be invested from time to time, and shall
not be required to seek or take instructions from the Fund with respect thereto.
Adviser shall not be expected or required to take any action other than the
rendering of investment-related advice with respect to lawsuits involving
securities presently or formerly held in the Fund, or the issuers thereof,
including actions involving bankruptcy. Should Adviser undertake litigation
against an issuer on behalf of the Fund, the Fund agrees to pay its portion of
any applicable legal fees associated with the action or to forfeit any claim to
any assets Adviser may recover and, in such case, agrees to hold Adviser
harmless for excluding the Fund from such action. In the case of class action
suits involving issuers held in the Fund, Adviser may include information about
the Fund for purposes of participating in any settlements.

B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF
SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Adviser,
its officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.

C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.

D. DELEGATION OF SERVICES. The Adviser may, at its expense,
select and contract with one or more investment advisers registered under the
Investment Advisers Act of 1940 ("Sub-Advisers") to perform some or all of the
services for the Fund for which it is responsible under this Agreement. The
Adviser will compensate any Sub-Adviser for its services to the Fund. The
Adviser may terminate the services of any Sub-Adviser at any time in its sole
discretion, and shall at such time assume the responsibilities of such
Sub-Adviser unless and until a successor Sub-Adviser is selected and the
requisite approval of

4
<PAGE>

the Fund's shareholders is obtained. The Adviser will continue to have
responsibility for all advisory services furnished by any Sub-Adviser.

3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of
its own expenses other than those expressly assumed by the Adviser herein, which
expenses payable by the Fund shall include:

A. Fees and expenses paid to the Adviser as provided herein;

B. Expenses of all audits by independent public accountants;

C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;

D. Expenses of obtaining quotations for calculating the value
of the Fund's net assets;

E. Salaries and other compensations of executive officers of
the Trust who are not officers, directors, stockholders or employees of the
Adviser or its affiliates;

F. Taxes levied against the Fund;

G. Brokerage fees and commissions in connection with the
purchase and sale of securities for the Fund;

H. Costs, including the interest expense, of borrowing money;

I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the Trust's
legal existence;

J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;

K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Adviser or any of its
affiliates;

L. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any applicable state
laws; including the printing and mailing of prospectuses to its shareholders;

M. Trade association dues;

5
<PAGE>

N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums; and

O. The Fund's portion of the cost of any proxy voting service
used on its behalf.

4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee in
cash to the Adviser based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services rendered
and obligations assumed by the Adviser, during the preceding month, on the first
business day of the month in each year.

A. For purposes of calculating such fee, the value of the net
assets of the Fund shall be determined in the same manner as that Fund uses to
compute the value of its net assets in connection with the determination of the
net asset value of its shares, all as set forth more fully in the Fund's current
prospectus and statement of additional information. The rate of the management
fee payable by the Fund shall be calculated daily at the following annual rates:

0.550% of the value of its net assets up to and including
$500,000,000; and

0.450% of the value of its net assets over $500,000,000 up to
and including $1,000,000,000; and

0.400% of the value of its net assets over $1,000,000,000 up
to and including $1,500,000,000; and

0.350% of the value of its net assets over $1,500,000,000 up
to and including $6,500,000,000; and

0.325% of the value of its net assets over $6,500,000,000 up
to and including $11,500,000,000; and

0.300% of the value of its net assets over $11,500,000,000 up
to and including $16,500,000,000; and

0.290% of the value of its net assets over $16,500,000,000 up
to and including $19,000,000,000; and

0.280% of the value of its net assets over $19,000,000,000 up
to and including $21,500,000,000; and

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<PAGE>

0.270% of the value of its net assets over $21,500,000,000.

B. The advisory fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain costs and expenses incurred in
connection therewith and to the extent necessary to comply with the limitations
on expenses which may be borne by the Fund as set forth in the laws, regulations
and administrative interpretations of those states in which the Fund's shares
are registered. The Adviser may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Adviser shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were full set forth herein.

C. If this Agreement is terminated prior to the end of any
month, the accrued advisory fee shall be paid to the date of termination.

5. ACTIVITIES OF THE ADVISER. The services of the Adviser to the Fund
hereunder are not to be deemed exclusive, and the Adviser and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Adviser or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Adviser or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Adviser or its affiliates may be interested in the Fund as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.

6. LIABILITIES OF THE ADVISER.

A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Adviser, the Adviser shall not be subject to liability to the Trust or
the Fund or to any shareholder of the Fund for any act or omission in the course
of, or connected with, rendering services hereunder or for any losses that may
be sustained in the purchase, holding or sale of any security by the Fund.

B. Notwithstanding the foregoing, the Adviser agrees to
reimburse the Trust for any and all costs, expenses, and counsel and trustees'
fees reasonably incurred by the Trust in the preparation, printing and
distribution of proxy statements, amendments to its Registration Statement,
holdings of meetings of its shareholders or trustees, the conduct of factual
investigations, any legal or administrative proceedings (including any
applications for exemptions or determinations by the Securities and

7
<PAGE>

Exchange Commission) which the Trust incurs as the result of action or inaction
of the Adviser or any of its affiliates or any of their officers, directors,
employees or stockholders where the action or inaction necessitating such
expenditures (i) is directly or indirectly related to any transactions or
proposed transaction in the stock or control of the Adviser or its affiliates
(or litigation related to any pending or proposed or future transaction in such
shares or control) which shall have been undertaken without the prior, express
approval of the Trust's Board of Trustees; or, (ii) is within the control of the
Adviser or any of its affiliates or any of their officers, directors, employees
or stockholders. The Adviser shall not be obligated pursuant to the provisions
of this Subparagraph 6.B., to reimburse the Trust for any expenditures related
to the institution of an administrative proceeding or civil litigation by the
Trust or a shareholder seeking to recover all or a portion of the proceeds
derived by any stockholder of the Adviser or any of its affiliates from the sale
of his shares of the Adviser, or similar matters. So long as this Agreement is
in effect, the Adviser shall pay to the Trust the amount due for expenses
subject to this Subparagraph 6.B. within thirty (30) days after a bill or
statement has been received by the Adviser therefor. This provision shall not be
deemed to be a waiver of any claim the Trust may have or may assert against the
Adviser or others for costs, expenses or damages heretofore incurred by the
Trust or for costs, expenses or damages the Trust may hereafter incur which are
not reimbursable to it hereunder.

C. No provision of this Agreement shall be construed to
protect any trustee or officer of the Trust, or director or officer of the
Adviser, from liability in violation of Sections 17(h) and (i) of the 1940 Act.

7. RENEWAL AND TERMINATION.

A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter for
periods not exceeding one (1) year so long as such continuation is approved at
least annually (i) by a vote of a majority of the outstanding voting securities
of each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a
vote of a majority of the Trustees of the Trust who are not parties to the
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on the Agreement.

B. This Agreement:

(i) may at any time be terminated without the payment
of any penalty either by vote of the Board of Trustees of the Trust or by vote
of a majority of the outstanding voting securities of the Fund on sixty (60)
days' written notice to the Adviser;

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<PAGE>

(ii) shall immediately terminate with respect to the
Fund in the event of its assignment; and

(iii) may be terminated by the Adviser on sixty (60)
days' written notice to the Fund.

C. As used in this Paragraph the terms "assignment,"
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms in the 1940
Act.

D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any office
of such party.

8. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.

9
<PAGE>

9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the ____ day of _______________.

FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
on behalf of FRANKLIN TECHNOLOGY SECURITIES FUND

By
--------------------------------

Title:
--------------------------------

FRANKLIN ADVISERS, INC.

By:
--------------------------------

Title:
--------------------------------

EXHIBIT 99.(h)(vii)

FUND ADMINISTRATION AGREEMENT

AGREEMENT dated as of _______________between FRANKLIN
TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust
("the Investment Company"), on behalf of its series FRANKLIN TECHNOLOGY
SECURITIES FUND (the "Fund") and FRANKLIN TEMPLETON SERVICES, INC. (the
"Administrator").

In consideration of the mutual agreements herein made, the
parties hereby agree as follows:

(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:

(a) providing office space, telephone, office equipment and
supplies for the Fund;

(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;

(d) supervising preparation of periodic reports to Fund
shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
Fund shareholders when asked to do so by the Fund's shareholder servicing agent
or other agents of the Fund;

(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;

(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;

(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the Investment Company
Act of 1940 ("1940 Act"), and the rules and regulations thereunder, supervising
compliance with recordkeeping requirements imposed by state laws or regulations,
and maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);

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<PAGE>

(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code and provisions of the Code applicable to insurance
company separate accounts, and other applicable tax laws and regulations;

(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies funding
variable insurance products; the Fund's investment objectives, policies and
restrictions; and the Code of Ethics and other policies adopted by the
Investment Company's Board of Trustees ("Board") or by the Adviser and
applicable to the Fund;

(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and

(k) preparing regulatory reports, including without
limitation, NSARs, proxy statements and U.S. and foreign ownership reports.

Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.

(2) The Fund agrees to pay to the Administrator as compensation for
such services a monthly fee equal on an annual basis to 0.25% of the average
daily net assets of the Fund during the month preceding each payment.

From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.

(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.

(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved by
the vote of a majority of the Board of the Investment Company in office at the
time or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).

(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder,

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<PAGE>

the Administrator shall not be subject to liability for any act or omission in
the course of, or connected with, rendering services hereunder.

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers.

FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
on behalf of Franklin Technology Securities Fund

By:
------------------------------------------

Title:
------------------------------------------

FRANKLIN TEMPLETON SERVICES, INC.

By:
------------------------------------------

Title:
------------------------------------------